Pension auto enrolment is creating opportunities in the group risk market but at what cost, asks Tim Gillingham, director, Citrus4Benefits
There is no doubt that pension auto-enrolment is a great opportunity for advisers specialising in the corporate market. Over the last few months we have seen a number of situations where we have been appointed to new clients on the back of a pension review or as a result of advisers pulling out of the market. Employers are also seeing this as an opportunity to work with one adviser firm on all their benefits, taking advantage of economies of scale on fees or commission and generally improving the co-ordination of benefit administration and communication.
Taking over a group risk scheme should be a straightforward process. The client completes a provider appointment letter and the scheme gets transferred to the new firm’s agency. It is then a question of asking the insurers to provide scheme information and this is where the fun starts.
We continue to find issues that have been ignored by the previous advisers and which need to be resolved quickly. Trust documentation is very rarely updated and often has the incorrect principal employer details noted. This requires a certain amount of work liaising with the employer and insurer’s documentation area to sort out. Existing documentation usually turns out to be that which was provided by the initial scheme insurer and needs updating. On many occasions the employer has not retained or been provided with a copy of the Trust deed.
Trustee bank accounts are an issue. Very often we see schemes with no Trustee bank account. This can cause a problem in the event of a death claim and could delay payment. To set up an account, the bank will require a copy of the trust documentation, which should accurately reflect the name of the principal employer. Some insurers now adopt a practice of paying any lump sum due direct to the beneficiaries but will usually only do this on the first scheme claim.
When taking over a scheme it is important to check the scheme data. We have recently had a situation where a member was over the scheme’s retirement age and still in service. The employer assumed cover would continue but the scheme retirement age had not been increased to ensure cover for this employee continued.
As to scheme accounts, most employers don’t understand renewal accounts and without an adviser checking the adjustments, premiums could be overpaid.
Compliance with the Pensions Act is also an issue. Insurers spent a lot of time communicating the actions required to comply with the Pensions Act but have passed the responsibility onto the employer/adviser to take the necessary action. How many schemes out there still do not have a PSTR number?
We continue to find issues that have been ignored by the previous advisers and which need to be resolved quickly. Trust documentation is very rarely updated and often has the incorrect principal employer details noted
As to rate reviews, we regularly come across schemes that have remained with the same insurer for a number of years. At each rate review the unit rate has typically increased, with the adviser simply passing on the staff data to the insurer rather than conducting a market review. The dilemma the client faces is will any potential benefit cost saving more than cover the fee charged by the adviser to review the market and make any changes. For a small scheme, a fee of £2,000 will be hard to justify.
The big question is who will pay for this work. Most of the schemes we take on are either charged on a time spent basis or standard 4 per cent commission. The fees charged are usually very low as the previous adviser has not carried out any work. The client may therefore not appreciate the level of work and expertise involved to do the work properly. Where commission is payable the adviser has usually just requested and supplied data to the insurer for the scheme to continue. Support is provided by the insurer but our experience is mixed. Most insurers still seem to focus on new business and struggle to support existing legacy business. Employers are often unaware of these concerns and will be reluctant to pay additional fees over and above those agreed for taking on the business.
What happens in practice is that we find ourselves dealing with the issues and making a long-term investment in relation to our time knowing that we are doing a good job.
But I am not sure what approach insurers will take for the increasing number of clients who will end up on their books as orphan clients. This is a future issue for the group risk market but also for the pensions market as advisers segment their client base following RDR and pension auto enrolment.