Advisers say their businesses are ready to deal with the 2014 wave – provided employers don’t leave it to the last minute. John Lappin reports
Just how equipped are corporate advisers for the 2014 auto-enrolment tsunami? On the outside most corporate intermediaries say they are very well positioned and coping with new and existing clients. But this year marks a leap into the dark on several fronts for advisers and nobody quite knows where the dust will settle or what will happen along the way.
The staging dates are moving rapidly through SMEs with those employing 350 to 499 having staged in January and those with 250 to 349 staging in February before moving to the 50 to 249 employee companies between April 2014 and April 2015.
While things seem to be going to plan so far, there is also some nervousness as to whether the industry as a whole has the capacity to cope.
And while most advisers acknowledge that the various policy debates and changes of tack emanating from the DWP haven’t helped, it has at least led to a cleaner, clearer proposition in terms of what advisers are offering – they must charge fees and, broadly, employers understand that.
Advisers are adopting a range of approaches to this unique market. Some say they are concentrating on existing client relationships, though none had shut the door to further clients, while obviously reserving the right to do so. Bigger consultancies are also moving increasingly moving to an off-the-peg offering for smaller employers.
Jelf head of benefits strategy Steve Herbert sums up the situation.
He says: “Consultations aside – the industry has got itself into a slightly better position to handle the enquiries that come in. The industry has learnt from the early stagers – and a number of lighter-touch offerings specifically to get smaller clients through AE are now appearing, so the industry will be able to help many more clients than would otherwise be expected. Having said this, the number of employers leaving it far too late to take any action, and then turning to the industry with only weeks or days left is increasing, and they may struggle to find assistance.”
Deloitte lead RDR partner Andrew Power says: “This is a new ballgame with companies staging that may not have HR or pensions people. Those companies will be looking for more input from their adviser or pension provider. There will have to be more standard solutions. There will be a certain amount of ‘here is the standard package and we can help you implement that, but we can’t change it much’.
“Most providers have this standard solution, but it is a question of will they stick to their guns with this, because so many are used to tailoring the offering to a specific corporate, but if they go down that route, it will cause problems with service but also with the economics.”
Advisers say the continued tardiness from employers could also potentially collide with capacity issues too.
Hargreaves Lansdown’s head of pension research Tom McPhail says: “We are at a really interesting juncture. So far, nothing’s gone wrong and maybe nothing will. We spend a lot of time talking to insurance companies and some of the organisations that are going to provide significant capacity in the marketplace and there is still a lot of nervousness about whether systems are going to hold up, whether resources are going to be adequate. Just because nothing has fallen over yet, doesn’t mean it isn’t going to. Twelve months from now maybe nothing will have fallen over. We may go through this high volume of staging date and it will have worked, but there is nervousness.”
McPhail also cautions that auto-enrolment could be disrupted by electioneering. “Politicians may not be concentrating on delivering a secure and stable functioning pension system but on getting elected. They will float crazy ideas. All of that will be unsettling. But maybe the problems are hard wired into the system.”
While the delay to the price cap decision has brought uncertainty, at least it won’t be introduced mid-deluge.
“The imposition of a cap, at what would have been very short notice, would have caused many employers who are reaching their automatic enrolment staging dates shortly and who have already agreed the terms of their offering, to have to review their decisions”, says Buck Consultants head of pensions policy Kevin LeGrand.
Institute of Directors senior adviser, pensions policy Malcolm Small is concerned that with a million plus employers to stage, in some cases, there may not be even the infrastructure to support them with a phone call, although he says those with 250 employees or so will get advice ‘boots on the ground’.
He says employers are showing a willingness to pay fees especially when they really understand what is to be done. But he thinks the real capacity issues may start to become evident in the third quarter, at around 60 employees.
Small says IoD research suggests that the employer market divides between those who have a pension scheme and will go to the IFA set up for AE and those typically below 250 employees who will initially go to their accountant or payroll provider.
Small is worried about the number of advisers put off because they either perceive auto-enrolment has “risk all over it”, or because they are not able to charge consultancy fees. He thinks that advisers, including those that would describe themselves as wealth managers, may be missing out on a chance to also advise better off directors.
Small also warns providers and EBCs that by ignoring the micro market, they may miss out on the one potential area of new pensions business – tomorrow’s growth companies. Even if three quarters of new firms fall, the remaining quarter may grow into much bigger operations.
Larger EBCs can point to ways they have adapted to changing market circumstances and employer demand.
JLT employee benefits executive director Mark Pemberthy says: “The challenge is that a lot of companies don’t know what help they need. Even large companies have been loath to commit to end-to-end projects, but they want us on call. So we specifically built our 2014 proposition around exactly that premise. A relatively low cost skeleton project plan on the route to staging, then as they go along, they can buy in extra support as and when they need it.”
He says the system has resonated with the market and it also gives JLT improved scalability, meaning auto-enrolment will still be an opportunity for quite some time yet.
“The core support is fairly standardised but we can do the more involved work where it is required across a larger number of companies.”
He says the challenge is that whole chunks of employers still haven’t really started yet. “The concern is that there are thousands of them. Our priorities are to our existing clients. We are not saying no to them yet, but we are concerned that some companies might leave it too late.”
He says his firm probably won’t have a cut off in terms of employer size for new business. “The size is not that critical. It is more about the workload and whether we can receive a commercial revenue. We see that being relevant through all of 2014, and even into 2015.”
He says JLT made a conscious decision not to use a single provider so that the firm was not caught out by a single provider’s capacity issues.
On the question of the move towards charging fees post-RDR, Power says: “Undoubtedly some employers at the smaller end, will say ‘you are going to charge me £2,000, why don’t I do Nest’, especially an employer without a scheme or a pension restricted to a few employees. If someone has had an adviser, they will carry on with them unless they are not providing value or charging massive fees.”
Master Adviser partner Roy McLoughlin reports that it is now getting through to employers that they will have to pay fees.
“Employers are starting to realise that there are just too many questions being raised, where they are going to need some help and to understand that they are going to have to pay us on an hourly rate”.
But he has found there is wariness because other professionals and media are saying be careful about advice.
“Employers want to know how to you do it, what is your style, are you able to talk to different groups of people,” says McLoughlin.
He adds that employers want to be seen to be proactive yet they are also saying ‘can we use you only when we really need to’.
He says this preparedness to pay fees means his model is being reshaped, though he still has worries about the potential need to rework older commission schemes.
“Some of the schemes I have set up on a commission basis, I know you can hop about asking for fees as much as you want but they won’t want to pay that way. The jury is out on that. We can’t go round in circles worrying about it – you have to see where you are, when they make the decision.”
When asked whether the emerging fee based system will bring repeat business, he says: “If people buy into you, if you do your job properly it will be repeat because employees will want to see you again. If you go in slap dash and do the minimum, then they won’t.”
Power says: “If commission ends up being banned even retrospectively, I think there will be a sunset clause, as they did with platforms and rebates, where they would say in three years time you can’t pay commission on pre-RDR schemes, so it would give people a chance to adapt.”
Will Master Adviser work with micro-employers? McLoughlin says: “The report is about £3,000. But you can’t charge that to someone who has five employees. It will be fine this year, but next year, there will have to be some sort of micro-solution for hundreds of pounds. But the focus this year is 50 to 250 firm.”
He is worried that not enough IFAs will do auto-enrolment advice. “None of us are competitors. There is enough business. If there are roughly 20,000 IFAs, if a quarter are doing AE, I would be amazed.”
However Pemberthy believes we are seeing distribution adapting. He says: “Some providers and organisations have much more scalability. Nest has an online application, Standard Life and some other providers are not dependant on lots of man hours. Most scheme providers are broadly focused on 2014, and though the market has not yet got to grips with 2015 or 2016 stagers, we have a year or two to think about that. When we have learned about the industrialisation of these processes, we can move that forward. It has been a three step approach – big employers, industrialisation and solutions for small employers.”
Yet some smaller IFAs are also rising to the challenge, and individually at least defying predictions that the end of commission and the subsequent banning of consultancy charging would see many such firms exit the market.
Colchester-based Plan Money director Peter Chadborn says his firm, which has four advisers, has already had two cases go through staging, he has done a client presentation for a local accountancy firm and identified the business owners in his own client base and already communicated with them.
“Our AE preparation has been very time-consuming but we are confident that our knowledge is sufficiently comprehensive and our process is robust and clear for clients to understand.”
“AE work has already proven that clients will pay fees in acknowledgement that good financial planning needs to be paid for.”
Indeed all the advisers Corporate Adviser talked to are confident that at least their own client base is in a good position.
Glasgow-based Advanced Retirement Planning’s Ferrier Pryde says: “Even with my small schemes, I have been fairly proactive. They may be legacy schemes that will not be AE compliant. I have been communicating with employers saying your staging date is 2015, but 2015 is going to be hell because there are so many small employers coming on board. Most of them have been proactive to say we will aim to have it up and running or at least converted in the 2014 tax year or end of business year, so we have at least got it all signed off.”
“There are number of schemes where management may be in the scheme and the shop floor have a stakeholder so there are a lot of calculations to help with budgeting. But none of my clients have been unaware of what is happening.”
He says that with new clients, referred from accountants and lawyers, he has made it clear upfront how much he is charging. A few have said they are not willing to pay that. He passes them on to other IFAs.
“Even though my process is pretty efficient, I don’t want unprofitable schemes. Plenty of IFAs have those on their books at present because they have been commissioned based for so long and now have hard questions to answer. All my corporate schemes are nil commission anyway, so those on my books are used to paying me annual fees, fortunately that is how I always approached things from my background as an actuarial consultant. I think employers know there is no such thing as a free lunch.”
He does express frustration with EBCs for not providing advice. “I say to clients I will set the scheme up but my way of working is that you pay me an ongoing fee, I come to workplace once a year and everyone can come and see me. We communicate in a way that the employees know I get paid whether they come and see me or not. They get free advice and then maybe pay for other areas of financial planning.”
He says he has one employer that initially did not want advice but then a couple of director managed to change the firm’s mind.
He says generally four visits are required where the workforce is around 250, two for 50 and less than 50 you need one.
“It has been positive. The employers have seen the benefits and understand if they communicate it properly, it is an added value in terms of the perception of the benefit.”