The pension revolution means all benefit providers will have to go digital says John Ritchie, chief executive of Ellipse
Way back in October 1998, in the early optimistic years of the new Labour government, Alistair Darling spoke at a conference I helped to set up during my days at Swiss Life UK, called Getting Welfare to Work. He talked about compulsory pensions – indeed he announced the new stakeholder pensions concept at our conference before he told the House of Commons, to much consternation among parliamentarians but much to our delight for the PR it brought us! From his speech, it was clear that the scaling down of final salary pension schemes would accelerate, that Government would impose expense and return levels on providers of compulsory auto-enrolment pensions and that that in turn would lead to huge changes in delivery models. At 30p per member per annum, everything pointed to the web as the only viable delivery mechanism.
Blair, Brown and Darling never quite got pensions policy sorted out in their tenure. It has taken the Liberal Democrats putting in at the top of their negotiating list in the formation of the coalition government to make significant changes happen. We have auto-enrolment starting for the largest employers and, although applying the policy change to SMEs and micro businesses will not happen until after the next election, there is now a political consensus that we must address the issue of an ageing population saving too little for its retirement.
This major structural shift will catch many group life insurers napping as they have not made the investments required to efficiently supply the new platform-based world. Long-term insurers have become decidedly short-term in their strategies, tactics and most importantly in their operational capacity. Healthy margins from group risk business have not been reinvested to enable more efficient operating models. In terms of data integration, we lag PMI and pensions to an extent that is, frankly, embarrassing.
While some regard the advent of auto-enrolment as another example of how our industry is buffeted by changes to the tax and legislative environments, there are massive opportunities opening up to those prepared to grasp them: Auto-enrolment will quicken the pace of all employee benefit programmes being delivered by web platforms. It is already prompting the biggest employers who have previously self-insured to test the insured market for the first time. It is accelerating the process whereby employers are becoming facilitators rather than sponsors. It will drive genuine data integration from payroll through the middleware (platforms hosting flex, auto-enrolment and voluntary benefits) and then on to providers. It will lead to more schemes, but offering shallower benefits with voluntary top-up facilities for employees
The market is now very close to having tools which will enable any adviser to act as an employee benefits consultant. For example, Jargonfreebenefits from the irrepressible Steve Bee running an instance of Staffcare will provide a per employee, pay as you go platform. Through it a total reward, flex, auto-enrolment compliance and salary sacrifice capability will be made available. To establish that without payroll integration at the front will be a mistake. The middleware now becomes the hub of all HR administration, pay and benefit delivery. There is plenty of substandard payroll software out there and businesses of all sizes can be tempted to buy cheap and do the work twice with shadow spreadsheet systems and payroll administrators plugging the gaps in the process that result from not integrating the data properly.
A further development on the horizon adds significantly to the need for efficient systems and processes. In October 2013, HMRC will require Real Time Information–RTI – from every employer. This is simply an obligation on every entity which pays others and deducts income tax and national insurance to send an electronic file detailing those payments whenever the people are paid. For the vast majority of the workforce that is monthly. This one simple, single regulatory change will have huge consequences. HMRC simply aren’t interested in any more end of tax year wash-ups. They want to automate, save cost and drive operational efficiencies just like any other cash handling organisation. So to be legal as an employer you need to ‘get digital’.
Auto-enrolment and the consequent structural shifts simply add momentum to the underlying strong economic trend of businesses shifting longevity, mortality and morbidity risk as far away from their balance sheets as possible. If that isn’t a huge opportunity for the group risk industry short, medium and long-term, I don’t know what is.