Providers have most to fear from the SME auto-enrolment wave says AECS director Iain Oliver
Auto-enrolment for SME employers is nearly upon us, and paints a daunting prospect for all parts of the industry. But the provider sector has arguably most to fear. Recently hit by the OFT report, and having to face the prospect of a wholesale charging review on their legacy books, providers are ultimately the ones facing the biggest problems in the future if fears are realised.
To predict the future it’s worth establishing some context from the past. Most providers have been working on auto-enrolment since 2011 – some even longer than this. Many produced early IT designs that were catastrophically wrong because of the lack of clarity on how regulations would work in practice, and who they impacted.
As it turned out, although auto-enrolment clearly has some effect on provider processes, the bulk of the regulations have fallen on the employer, impacting one of their most complex, “must go right” processes: payroll.
Some providers developed their solutions to deal with their own narrow set of statutory obligations, doing little to address the substantial number impacting the employer. Attempting to focus exclusively on the business of being a pension provider is understandable: none of us came into the pensions industry to develop our skills in payroll processing. But those providers who have gone the extra mile focusing on their customers and provided more support to employers – especially around payroll – will establish long-term relationships that will be hard to unsettle. The provision of “hub” based solutions that deal with multiple providers and payrolls is the best example of this. These integrate to payroll, prioritising the employers’ problems by addressing the reality that many employers use more than one pension provider. Consequently and not surprisingly the “hub” has won out against the “provider black box” solution. Hub providers are also better placed to deal with their biggest concern; the wave of SMEs from their existing books staging in 2014/15.
So, how do providers go about managing volume and capacity whilst also managing profitability – or rather, ensuring that they don’t get too much of the wrong kind of business?
Most providers will do everything they can to make the pre-staging process a self serve proposition. But it’s inevitable that many employers will need a fair amount of hand-holding. Providers will rightly charge employers if they have to provide these services and advisers should welcome this otherwise they could reasonably complain that providers were under-cutting their fee-charging services.
Providers delivering these services to employers will need to focus on what they include and whether they have the required in-house skills. The bulk of auto-enrolment installation is not about setting up new schemes. It is about project management, payroll processes, data configuration and statutory communications. My sense is that most providers now recognise this but are still considering what to do about it.
And then there’s provider profitability. The main variables generating profit/loss in the post stakeholder pricing world are: scale, operational efficiency, any commission paid, average contribution size, average term to retirement, staff turnover rates and the outlook for scheme retention.
Auto-enrolment should positively affect scale and scheme retention. In reality, it negatively impacts operational efficiency in the short/medium term, where there are average contribution size and staff turnover rates. The negative, unless well managed, significantly outweighs the positive, and paying commission on auto-enrolled members exacerbates this further. This is why many providers have been pushing low paid, short-term workers away toward Nest, Now and the People’s Pension, and why they have also disappointed many advisers with lower than expected new entrant commission levels.
But the commission picture suddenly changed a few weeks ago with the OFT report. This challenged whether any commission should be paid on auto-enrolled members. This is one consequence of the report that some providers might be happy about, although it will no doubt remove advisory capacity from the market. This will put more onus on providers to manage the wave of staging employers alone, requiring careful capacity planning, undoubtedly driving more manual intervention and pushing up costs which may or may not be recouped from the employer.
But the longer-term picture is more positive for providers. If the OFT report drives advisers out of the market, or prompts them to step away from uneconomic staging clients, providers could inherit sizable direct books. This then opens the door to cross-selling of products through the workplace to a much larger post auto-enrolment audience of employees. But cross–selling is not an easy process and many providers do not currently have the expertise to achieve this profitably.
It seems providers will bear a significant short-term burden from auto-enrolment and many will have to sharpen up their service capability to deal with this. But the longer-term rewards could be significant for those who choose the right path and negotiate the pitfalls along the way successfully. As the ancient Chinese curse says “may you live in interesting times”.