2014 will see a tidal wave of new business crash onto the industry. John Lappin examines how providers are shaping up for the deluge
As the pension industry braces itself for arguably its greatest ever challenge with the next tranche of auto-enrolment, the new vocabulary from providers is all about standardisation, streamlining, preparation and even industrialisation.
The market very loosely divides into three groups of employers. First came the big players, most of who have already or are in the final phase of staging. Next come the bulk of the SMEs, around 38,000 of which will stage next year – a group that can be divides into two subsets – the advised and the non-advised parts of the market.
Last to stage are the micro employers in their hundreds of thousands who many had thought would be overlooked by life offices, but who may be offered master trust or other solutions, as well as Nest and the super-trusts.
Advisers and providers accept that a capacity squeeze could very easily turn into a capacity crunch.
Buck Consultants head of employer consulting Marcus Hurd says: “At the moment it looks pretty worrying. Some companies are in control, they have engaged with advisers. What worries me is the tranche of smaller employers who think they have got it under control but don’t know how difficult it is to comply with.
“When I meet some of these companies, they say payroll will be ready by such and such a date. But then you ask whether they have thought about secondees or overseas people or summer students. It is almost because they are smaller they haven’t researched this, and they have delegated it to someone who isn’t an expert. It is not easy legislation to comply with.
“It is going to be really difficult. At the bigger staging dates, there will be a lot of demand and limited supply and maybe an employer won’t be able to find a provider or will sign up with one of the weaker ones that will give them a lot more headaches.”
Beaufort Corporate Consulting managing director Robert MacGregor points out that 89 schemes that have already staged have been found wanting by the Pension Regulator.
He says on a rough calculation this suggests this about 7 or 8 per cent of employers have already had problems and these are companies “that have massive resources to throw” into complying. The percentage of the hundreds of thousands of less well resourced employers failing to comply could be far higher.
He says: “The traditional players are choosing which schemes they want to take on because they can. At some stage they can come back and get the business they want so why lose money taking on the rubbish now. Everyone wants contributions above the minima and ideally an employer with something already. Where they take on a scheme, it is either going to add value to the credibility of the business because it is a big name or it has assets or reasonable contributions.”
He says TPR is trying really hard and providing some great material, but based on feedback from his clients its view that an employer should be able to implement auto-enrolment without any advice or help is simply not correct.
He adds: “By 2018 we will undoubtedly have every employer with a qualifying work place pension scheme and the vast majority of employees will have contributions being paid into the scheme. Most of these schemes will be made through the supertrusts and while they will be adequate, will they help to address the key issue in the UK which is to change the culture of how we feel about long term saving, or will everyone just think they are being taxed more.”
Hargreaves Lansdown head of pension research Tom McPhail thinks meltdown is unlikely. There are providers to pick up the very bottom of the market, while other providers including HL will compete above this.
“It may not be perfect or pretty but it should work, though it is possible a load of employers join one scheme and the systems fall over and things take two months to process, because a firm can’t cope. That risk is still quite real.”
He argues the real demand will be for compliance services, an area where he is aware of two planned new launches.
“Existing AE players are going to launch AE compliance services for employers. These will be streamlined, low cost and pitched at medium to small employers and this is the market everyone is worried about. Whether they work or are pitched at the right price remains to be seen.”
Steve Bee, chief executive and founder of Jargonfreebenefits, is bullish about distribution at least. He says he has 200 IFAs and capability of connecting with 8,000 to 10,000 accountants. In turn, they can get to several hundred businesses each or about half the market, he says. “In terms of distribution coverage, I don’t see a problem. But we have middleware, Staffcare at an affordable price for SMEs, and have commoditised our product for the local chip shop. The distribution is in place.”
He says: “The vast majority of employers have fewer than 10 employees. My guess is the high street name providers won’t be there for them. Perhaps the people we thought were the universal pension providers never were. The past is the past and the future is going be to be different.”
“They are running a risk that if a new model develops where pensions are seen as a commodity, what employees look as the product could be the middleware to control their own finances. They are running a risk that the norms could make their business very different.”
Life offices are all approaching the 2014 wave of business in different ways, based on their existing book of business, their product offering, scale and resources and where they see new opportunities.
Scottish Widows head of business development Lynn Graves says the provider has always welcomed smaller schemes. “Our minimum life criteria have been five lives for a long time. It is not new territory.
“We are asking ourselves what bits work, what are the nice to haves, what are the things that are making life hard or easier for employers.
“It has been very time consuming to do the configuring and set up. This is absolutely right for the top end of the market, but is not sustainable moving forward. We will have those bells and whistles for the big schemes, but envisage it will be more streamlined for other employers.
“We will have that ability to industrialise, based on the premise it will free up capacity in our client service area. The reality is that for any provider there is going to be an upper limit. But we are working for that to be as high as we can, so small employers have as much choice as they can.
She adds that because Widows offers a pension through the Federation of Small Businesses, they can see some smaller businesses looking to stage earlier because they are aware of the capacity issues.
Friends Life pensions technical reform manager Dale Critchley says: “It will be a big challenge in the SME market. We have to simplify our propositions and remove an element of choice because it removes the possibility of getting things wrong.
“If your pension scheme meets certain parameters, we are happy to provide you with middle ware and onboard you into Friends Life. If you have introduced the degree of complexity we have seen with some large employers, that requires too much resource from the employer, the adviser and Friends Life. We don’t think smaller employers will want it and will look towards the compliance end of the scale rather than at redesigning their benefits.
“But we can’t write business at a loss, at a high level of charges to employees and we can’t strip support back for employers to such an extent that they make mistakes.”
Aegon head of regulatory strategy Kate Smith says the provider is working with employers and advisers mapping out out what the scheme populations will be. She says
that for the 2014 stagers most employers are planning to extend their existing scheme. But it remains a learning process.
“We had a case recently of an employer who brought their staging date forward by a couple of months. They didn’t inform us. That did cause some problems. We did have the capacity to on board the employer. But if that happened next year, we would not be able to be as helpful.
“Our advised proposition is our there now. We are making that as efficient as possible. This is ‘test and learn’. There will be straight through processing, and things will touch the side less, but it is still early days.
“We think we are all right for 2014. For 2015, problems may hit. Of the small employers, not all will want to go to Nest. Some don’t like a state sponsored scheme. You will see the market evolve to provide some solutions for that market, which work for all parties involved.”
Scottish Life business development manager Jamie Clark says: “People say there might not be enough capacity. Our view is that we can cope if employers prepare early enough for what is going to happen. If the employer doesn’t prepare six months in advance, we don’t think there is any way they are going to be ready.
“There will be a capacity issue, but employers can avoid that, by speaking to a provider before their staging date. A TPR figure said current capacity is about 10,000 a year and with 38,000 staging next year, there could be an issue. We are gearing up for it. We have made everything online and as smooth as possible and we are confident it will work for small employers as well. Where we add a bit of difference is the implementation service we provide. We have ramped up our staffing to deal with that. We will offer an implantation service for any new scheme to help the employer and the adviser. But that takes many months.”
Standard Life head of corporate strategy & propositions Jamie Jenkins says: “Somebody used an interesting phrase about everybody trying to get into Wembley at five minutes to three. It typifies some of the capacity issues. It is important we don’t end up with only a few providers, but to give that some context, the entire industry has taken on 200,000 schemes in 20 years. We are going to take on a million schemes in five.
Standard has redeployed staff and improved its use of technology. “We are increasing the size of our pipes or widening out bandwidth, moving from the ability to process 4,000 new entrants to 60,000 in one go, from 100,000 payments to 350,000 per day. We have put people in different places with more focus on implementation, telephony support, in the roles for on-boarding.”
But, he says, the firm is still working out whether many employers will pay an adviser or accountant or go direct. He has an analogy for how the market will move from dealing with big schemes to smaller ones.
“With the big schemes is it like doing an English exam. It takes time and requires judgment. For small employers seeking to comply, we need to move from English to a simple multiple choice maths exam with an automated way of assessing things.”
Legal & General
Legal & General pensions strategy director Adrian Boulding believes providers will cope by moving towards standardisation for smaller schemes.
“We are heading towards a standardised version. Early employers wanted everything tailor made, something bespoke. We are now able to draw on what we learned to put it into a standardised model. We cannot do a Savile Row suit but we could do a nice quality Marks and Spencer off the peg type. Employers we speak to are welcoming that.
“To a degree, it depends how much hand holding schemes are going to want. We want to hold their hand so they feel confident they are doing the right thing for their staff. But we don’t want to hold their hand on an open ended basis. We have to get the balance right but we need self help on their part.
“I don’t think we are right for everybody. Employers need the right employer for them. In a couple of conversations, it can become apparent. If we set out our stall clearly, the right people will select us.”
Aviva head of policy (pensions and investments) John Lawson says: “Our employer population is medium sized or large. Our capacity has not been tested. But it is taking a lot of manual effort to get people over the line. Quarter two is a big one for our staging with 1,000 schemes. Employers that are beginning to stage now, don’t have massive HR departments. They don’t have big payroll departments in house. They don’t employ lots of consultants. They need a lot of manual effort including ours.
“We have an AE system that takes data out, but if we are going to cope we have to do that almost as a factory operation. If you send us your data we’ll crunch it. But the data has to be received in the right state and that relies on employers and their advisers to start work on cleaning it up now. “