Employer inertia fueling capacity crunch risk

Employers see auto-enrolment as complex. The DWP’s governance and charges rules are welcome, but they are making things even more complicated says Legal & General managing director, distribution and marketing, corporate Helen Buchanan

In March the pensions industry in the UK auto enrolled the 3 millionth new pension scheme member since the first businesses began staging in October 2012. That took 18 months. In the next 2 months, according to TPR predictions, we are likely to auto enrol at least 2 million more, maybe more.

Given a ‘normal ‘run up to staging, I am sure that the industry would take all of this in its stride but, so far this year 2014 has been anything but normal in pension terms. The net effect may be to create even more pressure on smaller employers who are about to implement AE. Given their lesser resource relative to large employers this may be where the ‘capacity crunch’ actually could land. Here’s how…   

Firstly, the excellent “We’re all in!” advertising campaign has done a sterling job of whipping up awareness with employees of the fact that AE is coming their way. Our research shows that 7 out of 10 unpensioned employees are aware of the roll out of AE. We know from initial low opt out rates, that employees are enthusiastically embracing the nudge into pension saving. Some in the industry have predicted that the opt out rate among SMEs would be higher than results so far. But I think the recent budget announcement of greater pensions flexibility in the way people can spend their savings is likely to create even more enthusiasm for being auto enrolled.

The second element is the well-publicised ‘twin peaks’ of businesses staging this month and in July. The Pensions Regulator estimates 28,000 employers with between 62 and 159 members of staff. A conservative estimate gets you north of 2 million new scheme members without too much difficulty. Providers seem well prepared to manage. Perhaps the real issue here is, are employers prepared.

Many businesses we are speaking to have not yet started AE preparations despite being only a few weeks away from their staging date. These employers are now under real pressure to register a scheme provider quickly. But there is no guarantee that their provider of choice is capable or willing to deliver an auto enrolment compliant scheme. The consequence of leaving provider selection and registration so late is likely to create a rush of employers looking for an AE provider. This on its own would not tend to trigger a capacity crunch. There are plenty of experienced AE providers who can step into the breach. After all, how hard can it be to set up a simple, off-the-shelf auto enrolment scheme if the employer is really committed to getting a scheme in place?

There is, however, a third point. On the 27 March the Department of Work and Pensions announced stringent new regulations for AE qualifying default defined contribution (DC) company pension schemes. The employer is responsible for delivering low charges, independent governance, a ban on adviser commission and unfair charging practices. The DWP has made it clear that it expects small businesses to implement value for money and well governed DC schemes. This is clearly the right direction to go, both “protecting savers” and “ensuring good member outcomes”.

But the reason small businesses are already putting off getting on with AE preparations is because they view AE as complex and requiring a great deal of effort. They may struggle to find a pension scheme that will include an IGC and meet the charge cap. They may also be worried that having to implement changes after a scheme has been set up could result in more costs down the line. That could lead to more employers putting off starting AE preparations and lead to possible regulator fines being imposed

As all of these influences come together industry fears of a capacity crunch seem more likely to be realised, not fuelled by lack of provision as so many predicted last year, but driven by employer inertia.