There are lots of reasons why employers may want to change their workplace scheme provider, potentially creating a rebroking AE market to run in parallel with first-time staging. But do they outweigh the reasons to stay put? John Lappin investigates
Anyone who thinks the extension of the Retail Distribution Review will kill off the workplace pension review market should think again.
The final removal of commission from next year will be a clear driver of scheme review as employers face bills for both advice and scheme administration. And the re-enrolment three-year anniversary, service and functionality capability, pension freedoms and increased governance standards are all fuelling the development of a secondary market for auto-enrolment schemes.
But opinions are divided over the timescale and the extent to which schemes put in to meet employer duties in the past three years will be switched to a different provider.
Activity to come
PTL managing director Richard Butcher thinks the number of new master trust launches shows the pensions industry is anticipating a substantial secondary market.
He says: “There was a feeling that employers were saying ‘Look, we’ll tick the compliance box in order to get through auto-enrolment using existing schemes that were to hand.’ Once everyone is through this period of activity, they may look at another provider.
“From spring next year, we will see more noise in this area. We are seeing huge numbers of master trusts being launched despite the fact there are large numbers out there already – Towers Watson, Mercer, Aon and others. They all anticipate movement.
“That said, I am not convinced everyone will be doing it. It is no small task. There is a significant cost and you have to be absolutely satisfied that there is a material benefit.”
Independent pension consultant Rachel Vahey believes a substantial secondary market will appear.
She says: “I think it’s natural that, as any market starts to mature – as the auto-enrolment one is doing – we see a secondary market emerging.
“This is partly because advisers, employers and employer associations are gaining experience of how the market works. They now understand more clearly the practical implications of the providers’ propositions. Plus they now have experience of the administration of schemes and the level of support that is offered to the employer, for example with payroll integration. With this background, it’s natural we see movement from the poorer-performing schemes to the ones that offer better support.”
Lift-Financial head of corporate pensions Noel Birchall says: “Various providers are saying there will be a strong secondary market. From our point of view, with our size of employer, we have no one coming up to their third anniversary yet. But we have had a couple of clients with significant ongoing problems running AE with the same provider. So far, their decision has been to tough it out and get it right. Changing providers in an AE environment is more onerous but the third anniversary seems like an obvious break point if you were fed up.”
Frying pan into fire?
Barnett Waddingham partner and head of DC Mark Futcher advises employers that a wholesale switch may not always be the answer.
He says: “Companies are reviewing providers of their pension arrangements on an ongoing basis. The problem is that almost all parts of the auto-enrolment/pension solution will have suffered in some aspect of their offering over the past three years. Making a change solely down to a blip in service is not wise, especially at the moment when there is so much upheaval – out
of the frying pan and into the fire springs to mind.
“Yet it is fair to say that many companies are reviewing their pension arrangements from an efficiency point of view. Many were forced to use traditional pension providers or specialist third-party software to assess and calculate the amounts due under the auto-enrolment legislation. This should have always been payroll territory and we are seeing a shift here as payroll companies launch services. This itself brings problems, such as record-keeping and transition of data.
“It has also been a massive time of change since auto-enrolment was introduced and we have seen providers merging and new propositions launched. Legislative caps have put pressure on charges but commissions have been removed that paid for many restructures. There are lots of issues to review and resolve but a wholesale switch of provider is not always the ideal solution.”
Aegon managing director, workplace solutions Angela Seymour-Jackson is convinced, based on her conversations with advisers and employers, that a secondary market will develop.
“We expect a secondary market and always have done,” she says.
“A number of employers didn’t have a positive experience from auto-enrolment, certainly for the first six months or so. But however painful it is, assuming you get through it, nobody at that point is going to say ‘Well, I’ll just change it’ and go through an upheaval again. But we know there are employers that have said pretty consistently: ‘We are not happy. This isn’t where we are going to end up. We are going to come back and deal with this, maybe at the point of re-enrolment.’
“They may also have had a poor experience with ongoing service and support. Re-enrolment is a trigger and, from a governance perspective, it is a good opportunity to look at what is on offer around the market.”
Seymour-Jackson says the removal of commission is also set to be a trigger, although some employers may leave it until 2016. “I was surprised by the number of employers that said ‘I don’t want to move away from a commission basis because I hadn’t budgeted for it, so I am going to wait till 2016.’
“We expect to see things picking up in Q4 this year and then more in Q1 next year. We are seeing a pick-up in terms of our pipeline of tenders, some linked to employers having had a bad experience. But I wouldn’t say that is a flood.”
She says Aegon is one of several providers that have transformed their proposition with a much improved digital offering to employers and employees, which will also drive change.
“Employers are also thinking about pension flexibility with the freedoms and many will be with providers whose approach may not work that well. If I was an employer, I would be thinking that if I am going to change things, I want to solve more than one problem.”
Towers Watson AE consulting lead Rudi Smith is reluctant to suggest there is a secondary AE market.
He says: “There is increasing activity among employers in terms of reviewing service providers in the insurance market. But I would hesitate to call it a secondary auto-enrolment market.
“The drivers aren’t AE but other changes in the pension landscape, with the charge cap, the cessation of commission and AMDs, although with large employers it is less of an issue.
“A big driver has been what services they get in exchange for the charges they pay. There is increased responsibility to review that has been crystallised within the DC code of practice. They will always have reviewed things, but may now be taking a more formal approach. There is pressure put on providers with increased demand at the same time as a squeeze on what they can charge.”
Smith points out that, with pension flexibilities, there are differentials between providers. He says many employers will have made initial decisions but the services are changing, the pricing may change and employees are requesting, or even demanding, help with the pension flexibilities, all of which may lead employers to look at their arrangements.
In terms of AE specifically, he adds: “Some providers have coped better than others. It may not be AE itself but its knock-on effect on admin support services that has caused some employers to think about change. And change has, in many ways, made some providers’ platforms last year’s platforms.”
Re-enrolment will provide an opportunity to review things, yet Smith says reviews may also be prompted by increases in contributions. The differentials between the AE contribution and the contributions to what may be the main scheme are set to narrow and may prompt employers to look at the overall design and how it is supported. For bigger providers, that may mean reviewing processes they have built themselves, so it does not necessarily mean simply reviewing providers.
Premier senior consultant John Reeve thinks some employers that extended an existing trust-based scheme to AE may decide to review the arrangement. He says: “There are signs that these people may have exposed some inadequacies because of the high level of processing and the need for engagement. It has created a focus and caused some people to review schemes.
“With the schemes set up specifically for AE, I haven’t seen them wanting to move, although there may be some who were at the very bleeding edge who are looking at what is on offer.”
Reeve says he believes a decision to move scheme or adviser can be made too quickly and his instinct would be to explore whether it were possible to fix things first.
Of course, corporate advisers are not the only intermediaries having an impact on the market. Plan Money director Peter Chadborn believes that it could be accountants grappling with the requirements of AE for smaller employers that provoke transfers.
He says: “It could be driven by the accountants, not the employers themselves. The likelihood of an employer wanting to revisit auto-enrolment is quite low, particularly if they have set it up themselves. They see it as a tick in the box, job done, and don’t want to be bothered with it again.
“But it could be driven by the accountants, who are offering the payroll services and who will have to deal with inefficient systems on top of the payroll, for which they are charging only a few pounds a month per employee. If the software compatibility between the AE scheme provider and payroll is not super-efficient, it is a huge inconvenience. There will be a market for advisers approaching accountants and saying ‘Do you have a problem? Can we help?’
“This is not without employers’ agreement, of course, but they may agree if it can be demonstrated that the new scheme is appropriate and the whole process is a lot smoother.
That could drive change.”
When the commission tap is turned off
Roger Sanders, Employee benefits managing director, Lighthouse Group
Lighthouse Group employee benefits managing director Roger Sanders is convinced that the commission and consultancy charging ban is sending shockwaves through the market.
He says: “There has been a lot of talk of the market coming alive with the third anniversary.
“As a company, we have had talks with large employers – 600 or 700 lives or more. They may have had a group scheme and, taking the line of least resistance, used that for AE.
“But the trap for employers and their advisers is that it needed consultancy charging and commission to pay for this. The clock is ticking very loudly for the April cut-off and some providers are turning off the tap, although some are going to the end of March next year.”
He says: “The advisory firm is saying it needs to charge typically £5,000 a month for 600 employees. You can imagine finance directors collectively having a sharp intake of breath. The benefit for them is marginal when the AMC is now 75 bps when it might have been 85bps or 100bps.
“They are looking at £50,000 or £60,000 in expenses and that is the cost of one or two members of staff, depending where the firm is based. This is adding to HR and pension costs in a substantial way and didn’t feature in forward budgeting for phasing contributions. You then have a complication about the middleware from the provider, or the adviser, which has all the human resources records of opt-ins and opt-outs and the audit trail. If the employer is moving to a cheaper solution, it is the devil’s own task to break free of the middleware. It is the admin tail wagging the pension dog.”
Sanders says it is almost impossible to make that jump without planning months in advance, although Lighthouse offers an unbundled trust with separate middleware.
“Most modern models are similar but 2012/13 systems are inclusive, vertical and bundled,” he says.
“There isn’t a happy ending. The employer either pays up or runs the scheme itself – but needs an extra member of staff – or it bites the bullet, changes companies, changes the middleware and has a special implementation project that will manage the migration of data.
“At the present, that is where the larger employers are – they haven’t made the jump yet, but they may decide to.”