The pensions industry’s ability to offer support services to employers will hit full capacity in May, and demand will be seven times normal capacity by the end of this year, according to research from Towers Watson.
Capacity issues could lead to providers bringing down the shutters, putting up prices, reducing ancillary services and cherry-picking new clients, says the report.
Towers Watson modelled pressures on pension providers by comparing the number of employers that will pass through staging in 2013, taking account of the pre- and post-staging date provider support that employers may require and assumed that only 50 per cent of employers will need external assistance. It measured this against the number of projects that DC pension providers are likely to be able to handle based on data supplied to Towers Watson for its research. It has also built into the analysis the planned recruitment that providers intend to make to these teams over the coming months.
It identified three different pension provider business models – corporate specialists, mass market providers and retail market providers, each facing different challenges.
The research describes corporate specialist providers as having generally been selective around the sort of clients that they have added to their books, ‘cherry picking’ larger employers in industries that typically have higher levels of take up amongst their employees. They also tend to have a relatively large pool of specialist implementation and project management resource to service their clients. These providers are likely to have some challenges resulting from a concentration of employers staging during the first half of 2013, but the scale of those projects may be less severe. Towers Watson predicts the minimum conditions that they apply around new business enquiries will continue or may harden further.
Mass market providers are predicted to face more of a challenge. They are likely to have a large number of employers with low pension scheme take up on their books and the volume of employees being auto-enrolled will, predicts Towers Watson, present a material challenge to the capacity of their systems. The research, which was first published in January, found these providers are already pulling back on some of the support services they offer.
Providers that operate more in the retail market, who tend to have relatively few large employer schemes may face the issue that employers will be more reliant on their provider for hand holding. Nest is not immune to the capacity issues being experienced by other providers and faces the additional risk that employers who have left themselves insufficient time to implement the auto-enrolment rules properly may use Nest to try to achieve a ‘quick fix’, says the report.
Towers Watson senior consultant Rudi Smith says: “Our research shows that by the middle of the year the number of organisations needing services will outweigh supply. To protect the services that they are able to deliver to their existing client base, providers may have no alternative but to temporarily close to new business and may even have to scale back the level of service that they are able to provide to existing clients.”
Aviva managing director, corporate benefits John Lawson says: “ We will be selective and concentrate on our existing book first, who we feel we will be able to handle comfortably. “Thereafter we will look at quality business and will be able to pick and choose.
“Any capacity crunch is likely to end up at Nest’s door. And the industry may end up having to ask for breathing space, although that would not look good.
“Could this capacity issue push up prices? Prices have been rock bottom for too long. So they may return to healthy levels.”
Nest managing director of product and operations Helen Dean says : “Increasing demand as staging progresses may create pressure on market capacity by the end of the year. Nest is prepared and has been designed specifically for automatic enrolment, and for scale. If wider market capacity starts to dry up, it has to be true that with Nest’s public service obligation more business may come our way. We are prepared for that. We expect employers that use Nest to be able to ‘self-service’ by using online services and tools we are developing for these customers. Our delegated access feature will also mean that employers can also get support from third parties.”