With auto-enrolment now two months old, employers are not short of options for their workplace pension schemes. Nest was first into the market and is firmly established while Now: Pensions and The People’s Pensions have also launched pensions targeting the many employers who do not yet have a pension scheme in place.
Many traditional pension providers have also revamped their offering to use the advent of auto-enrolment to boost their market share. This all means there is no shortage of options in the market.
However, The Pensions Trust has shown it thinks there is still a gap in the market by providing a service tailored to the needs of a specialist sector.
Rather than take on the mass market, The Pensions Trust offers pension schemes only to the charities and not-for-profit organisations and its auto-enrolment launch, SmarterPensions, is also aimed at this specific area.
However, the organisation’s experience has lessons for the whole market.
The Pensions Trust has made the charity and not-for-profit sector its own since its launch in 1946. It now looks after the pensions of over 2,400 organisations with a combined membership of 153,000. It has assets under management of
£5bn and is currently the 34th largest pension scheme in the UK.
SmarterPensions is due to launch in March next year and rather than develop a new product, The Pensions Trust has created an online portal to provide simplified access to its existing pension scheme options.
The Pensions Trust chief executive Stephen Nichols says it is very important to build an alternative specifically for their sector rather than “off-the-shelf” products from Nest or Now: Pensions.
Nichols says: “This is a very flexible platform that will drive up 21st Century DC solutions. The main thing is that it will enable employers to operate in an auto-enrolment-compliant atmosphere.”
SmarterPensions will provide employers with support in their efforts to embed auto-enrolment within their organisation and the platform will provide an automated administration system.
Scheme members will be able to access information on their pension with 24-hour real-time access to member information and investment information through the website.
Members will also receive an integrated annuity service.
The Pensions Trust had been looking to embark on this project for some time but was unable to launch anything in-house because of the time it would take and the cost, predicted to reach in excess of £10m.
Nichols says the launch of Nest and auto-enrolment was a key indicator that the business could deliver a newstrategy.
He says: “We thought we could offer something decent for a low cost as many organisations began developing their administration systems and investment solutions.
“So we found we could team up with two external organisations. One to provide the investments and one to provide straight through processing and administration.”
The choice of investment strategy is normally a difficult one for mass market pension schemes but SmarterPensions have adopted a similar approach to Nest by opting for target date funds as the default option for scheme members.
SmarterPensions has teamed up with asset management company AllianceBernstein to provide its target date funds.
And to take account of the interests of its target market it will also be offering ethical target date funds.
Nichols believes target date funds are the way forward for mass market DC schemes.
He says: “The beauty of target date funds is that members are just in one fund for the duration and that fund changes over time.
“You’ve got someone professionally managing that fund and the mixed asset categories depending on the time from the current date until that target date, when it is expected to be moved in to an annuity.
“It’s a step change from life styling and it much better matches the needs of our members.”
These funds are not a one-size-fits-all solution, though, and The Pensions Trust will be offering employers the ability to make these funds bespoke in future as they gain a better understanding of the behaviour of
In addition, Nichols says that SmarterPensions will offer a “typical range of stand-alone” funds which will enable members to self-select their funds if they wish to do so.
Although Nichols is proud of the investments options being offered, he believes it is SmarterPensions’ pricing that is encouraging so much interest.
At present, The Pensions Trust flagship defined contribution scheme, the Flexible Retirement Plan runs at an annual management charge of 60 basis points but it recently announced that this will reduce to 50 basis points pending the launch of Smarter-Pensions.
Nest is currently offering 30 basis points but takes a contribution charge of 1.8 per cent. SmarterPensions will charge 45 basis points.
Nichols says that he believes that within two to three years subject to trustee approval, SmarterPensions will begin to provide administrative rebates which he says will be around 18 basis points on funds in excess of £10,000, and the
AMC for funds in excess of £10,000 could drop below 30 basis points.
The business is linking up with adviser firm JLT in order to provide support and auto-enrolment tools for employers, which will be included within the overall cost.
Nichols says: “It’s actually quite a considerable saving to employers.
“When they start looking under the hood of what we have got here, they will then see that it is a good product and that it stacks up well.”
Nichols says a sign of the quality of the Pensions Trust’s offering is the fact it is having to turn away business from commercial businesses that want to use its offering.
But he says it is important for the organisation to remain focused on its target market. And as a not-for-profit organisation itself, Nichols says The Pensions Trust is uniquely placed to understand the needs of its target market.
He says: “All the work we do is done for the benefit of our members and employers.”
Despite its narrow focus, some issues are applicable to all pension providers.
Nichols says it is very important to be actively managing members’ expectations by trying to understand what they are trying to achieve in terms of the monthly income they would like to receive come retirement.
He says: “If they say that £1,000 a month is the absolute minimum but they want to retire at 50 and only pay 2 per cent contribution, we’ve got to manage expectations and say they are not going to be able to do that.”
He says the pensions industry often starts looking at this problem from the wrong end by looking at how much is being invested and where rather than what the desired outcome should be.
“We are not trying to direct them from one fund to another. We are saying to them: these are the most appropriate funds for you and we want to make sure you are in the right vintage and paying the right contribution to deliver that.
It’s that sort of output and outcome focus. The others seem to be more input and process focused and that is just looking at the wrong end of things.”
Nichols also says education and engagement is necessary for younger employees to get them to understand the benefits of pension saving.
“It’s important that we engage younger people and make pensions attractive to them and encourage them to start saving.
“They are the ones that are most likely to opt out but are the ones who stand to benefit the most.”
So what does Nichols believe is the future for SmarterPensions?
By 2017 he expects to have a minimum of 100,000 members and says the extra 50,000 could easily come from existing members who transfer to SmarterPensions.
He says they have already received a lot of interest from major PLC firms, which they have had to turn away as the firms do not operate in their sector. “We’re not introducing any new schemes. We’ve got existing schemes that are already running. We’ve already got 50,000 members and £0.5bn within investments in DC arrangements so we have already started off.
“Our niche market is just a small proportion of the overall market, but we expect to have our lions share of the target market.”
Overall, Nichols predicts auto-enrolment will be a success and plays down the fears that many people will be opt out. He is also against any suggestion of any automatic transfer between small pots.
He says: “The Pensions Trust has not been supportive of pot fellows member. We’re happy for the pots to stay where they are or go in to some collective scheme.”
Stephen Nichols on
“The sheer volume of people that are not currently saving will mean that this is going to be a success.
“It’s important that we engage younger people and make pensions attractive to them and encourage them to start saving. They are the ones that are most likely to opt-out but are the ones who stand to benefit the most.”
“The pensions trust have not been supportive of pot follows member. We are happy for the pots to stay where they are or go in to some collective scheme that takes all these things out.
“Why have somebody forced to move their benefits from a well-run, low-cost, good investment to something that is completely the opposite?”
Workplace pension contributions:
“There isn’t anything stopping employers paying in more and many do. Should the minimum be set higher? I think it is inevitable that these levels will creep up.”
Confidence in pension saving:
“It is not at a high at the moment and will only get worse if pensions keep getting bashed by the legislators and that will have a knock-on effect with the people that do need to be joining.”