Advisers’ new duty on AE provider recommendations

The onus is on advisers to ensure their AE selection process is robust, says F&TRC director Ian McKenna

The onus is on advisers to ensure their AE selection process is robust, says F&TRC director Ian McKenna

One of the hallmarks of the auto-enrolment market has been the constant state of change and the next few months look likely to see further significant evolution of market dynamics. From October we get into the small and micro employers and in November we will have the first re-enrolment activity.

But possibly an even bigger development than either of these is a subtle change in positioning from The Pensions Regulator. It is now clearly stating an expectation that, where a professional adviser puts forward a single provider solution, they must clearly inform the employer that there may be another pension provider that might offer a more suitable pension, unless the adviser has conducted a clear selection process.

TPR applies a very wide definition to the term ‘professional adviser’, including accountants and any other business agents making pension recommendations, so this expectation applies not only to regulated firms.

I do not foresee many adviser firms feeling comfortable about making a statement to their clients that there may be a better alternative elsewhere to the one they are offering. Consequently, I predict a significant increase in the use of specialist research systems and it will be important for such offerings to include as wide a range of market participants as possible. This development will almost certainly put pressure on those distribution businesses that have developed vertically integrated solutions to conduct some form of better-than-best comparison, especially if they are a regulated firm.

Last month in this column, I looked at how Nest was working to achieve streamlined movement of key data from payroll software systems to pension providers. At the same time, it opened Nest Connect to enable a wide range of professional advisers to act as employers’ agents in helping it. It is not alone in this; both Now: Pensions and The People’s Pension are working towards strengthening their offering in each of these areas.

Smaller employers will in many ways find AE a bigger burden than will the larger firms that have greater internal resource. For this reason I fully expect to see payroll integration, or a lack of it, as one of the major priorities for small organisations. At this end of the market, identifying
the payroll software or bureau used by an employer will be one of the first questions to discuss.

Very few advisers will understand the niceties of the different ways of sharing data between payroll and pension provider systems. But there is a clear hierarchy of types of integration that anyone looking to write any volume of AE business would be well advised to become familiar with.

Another key issue that will be a major factor influencing the selection of pension provider is the level of employer charges. As we move to the micro end of the market, there will be far less scope for the number of members and overall contribution level to offset the need for a charge.

Not all employers are seeking the same thing in a pension. At the micro end, many are inevitably looking to keep their costs to a minimum, so those pension providers that are imposing charges on employers will need to articulate very clearly what the benefits are of an employer being prepared to pay a monthly charge.

The market seems to be splitting between employers that want the minimum offering that will keep them legal and those prepared to pay a premium for a wider range of services and support.

As the master trust community begins to beef up its offerings, the pressure on traditional providers to clearly demonstrate the value of any extras they are offering will greatly increase.

This takes us back to the secondary market in cases where employers are having to re-enrol. Some pension providers clearly struggled when the largest firms staged originally and many have addressed such challenges in the meantime. It will be fascinating to see if firms reviewing their options make decisions based on the service they are getting now or on their previous experiences.