It is often said that if you ask three professionals a question you get three different answers. Well, the automatic enrolment market is no different.
The industry is engulfed in dealing with the three key spikes of 2014, with around 30,000 SME employers staging in April, May or July. After that it will be the turn of hundreds of thousands of smaller companies and eventually micro-employers. Capacity in the industry is being tested, as advisers and providers prepare to help these employers through to compliance. At the same time, the Department for Work and Pensions has announced a charge cap of 0.75 per cent will be in place for auto-enrolment schemes from April 2015. So how is the industry responding?
Some pension providers may simply decide not to play in the smaller end of the market, offering terms only to larger employers where economies of scale keep costs below the charge cap. For those who remain open to the smallest firms – more specifically companies with fewer than 50 employees – three main approaches are emerging:
Low-cost, minimum compliance, member charge only
Some providers are offering a single, fund-based charge for members which is well within the charge cap. But this approach does not give the provider much to work with. If average contributions start at £25 per month in a scheme of 30 members, the total charges revenue in the first full year would likely be around £50 for a 0.5 per cent fund charge. This will build over time, but not rapidly. To make this low-cost model work, providers may choose to cut back on investment options, engagement material and employer support.
Multiple charges for members
The DWP’s recent paper allowed for different combinations of member charges and it is likely more providers will use this option. Similar to the charging structures most prevalent in the 1990s, this model lets providers match the timing of their revenue with their costs and so arguably provide keener terms overall than for a single charge product. This is, of course, Nest’s approach where a 0.3 per cent fund charge is accompanied by a 1.8 per cent contribution deduction. Some other providers apply a per member fee in addition to a fund charge.
The advantage of this design is it enables providers to offer more upfront services. But the downside is the impact of charges on some members can be much greater than on others. For example, those investing in a scheme for a short time will feel the impact of a 1.8 per cent contribution charge much more than the benefit of a low fund charge. Those with small pots could see their funds depleted by member fees.
Shared cost between member and employer
This is the route we have chosen for the smallest schemes – those with fewer than 50 employees, mainly staging after summer 2015. It is an option that is becoming increasingly common in the market. The employer meets some of the scheme cost – either with an upfront fee or a smaller ongoing amount – in conjunction with a fund charge paid by the member.
While this introduces some additional cost to the employer, we believe it enables a higher quality proposition to be offered at a relatively low member charge. Using this model, providers can offer innovative investment and comprehensive engagement options, which are crucial in delivering good member outcomes. And it enables a more inclusive auto-enrolment proposition with better employer support, for example avoiding additional costs associated with middleware. An employee who happens to work for a small business can receive the same high quality pension as one who works for a FTSE 100 employer, without the scheme running costs being a barrier. It also avoids potential disparity between different members in the scheme.
Whatever the charging structure, it is important to weigh up a scheme’s value for money for what best suits the employer’s needs.
Alan Ritchie is head of SME proposition at Standard Life