The end of commission has changed the GPP rebroking market forever. But that does not mean a secondary market will not persist and continue to evolve. JOHN LAPPIN reports
The sun coming down on commission for group personal pensions may have the effect of restricting the number of scenarios where employers are switching provider, but that does not mean a secondary market for auto-enrolment will not develop.
Such was the view of delegates at last month’s Corporate Adviser roundtable event in London entitled Lisas, Pensions and The Auto-Enrolment Secondary Market.
Delegates at the event argued the ending of commission, the third-year anniversary for re-auto-enrolment and the raised profile of governance as IGC reports hit the UK’s doormats were unlikely to be factors leading to a vibrant secondary auto-enrolment market. Nor, said delegates, would a lack of suitable decumulation options. But bad experiences with administration could be enough to push employers to switch scheme, and managing the workforce into retirement could become a driver in the longer term.
Aon head of auto-enrolment Clare Abrahams suggested that one big cause of dissatisfaction was the end of commission. “A lot of people were put in with the provider they were already with.
Advisers didn’t want to move because they were already getting commission payments. But it may be causing administration troubles now.”
She added that smaller schemes in particular that had gone for the low-cost option were unlikely to actively seek to change things, but, where problems were causing big headaches, employers may be prepared to go through the upheaval of switching.
Jelf head of benefits strategy Steve Herbert added that without commission, moving schemes represents a very big cost that employers have typically not been used to paying.
Secondsight partner Darren Laverty said: “They have got to be in severe pain. They are not going to do it for nice reasons. They are going to do it for bad ones.”
LEBC consultant Chris Brown added that the other driver could be the loss of active member discounts. “There are a huge number of schemes that were written on that basis and the holding provider hasn’t been particularly generous.”
Abrahams argued that in the longer term it will not be auto-enrolment that drives change but decumulation and member communications, although attitudes and awareness will vary significantly between employers.
Johnson Fleming senior consultant Robert Kingston agreed. “It is going to be governance and the decumulation options that individuals have that determine the sorts of schemes employers want.”
He believes that the market may be shaken up in part by changes to adviser remuneration and suggests advisers may struggle to “justify, articulate and document” exactly what their services are in the new world.
He added: “For the people going through re-auto-enrolment, it is typically your larger employers, so they have been used to doing a three- or five-year review. It may be a review of provider and adviser, although not necessarily at the same time. I don’t think auto-enrolment is the driver in the current round of re-auto-enrolment. It is being promised something that hasn’t been delivered either by the adviser or by the provider or a combination of the two.”
He added it was vitally important that employers identify where administration of pension schemes sits.
He said: “How much falls on payroll, how much falls on providers and how much on an intermediary of some description? The vast majority of large, medium and small advisers don’t do the administration for AE that helps you comply with your duties.”
Abrahams added: “I would almost go the opposite way. AE actually could stop the market moving because your scheme is set up across the whole workforce, including the lower-paid.”
Such schemes, she said, might not be of interest to other providers, where average contributions work out low, although Kingston added that such schemes could be of more interest, even with such a workforce profile, when contribution levels get to 8 per cent and when minimum wage increases contributions further.
Delegates were not persuaded that the advent of IGC reports, and the under-the-bonnet scrutiny they deliver, would contribute to a significant shift in business.
But Herbert argued that such governance factors would become an increasingly influential factor in provider selection.
He said: “When we finally get to a level playing field and get firm steerage on governance and we know what governance is going to look like, then more employers will get interested in making sure the provider is at the top of their game.
Eventually it will come.”
Delegates broadly thought that while reviewing would be good practice, it was unlikely to become compulsory.
The panel also debated the risk of smaller master trusts being unable to cope. Overall, it was felt that while trusts might fail, they would be likely to be absorbed by bigger providers, without serious detriment to members, but potentially with some admin hassles for employers.
Herbert said: “Generally the money will be safe and generally speaking they will just be absorbed. I don’t think the money will be lost.”
For all the noise around performance of defaults, delegates argued that, for new AE schemes at least, the returns delivered were not going to be a significant factor for moving schemes.
Certainly in the short to medium term, contributions and pots are likely to be so low that the impact better or worse returns can make is unlikely to make much difference.
Kingston said that, for the segment of employers that simply want to comply at the cheapest cost, it was unlikely to be a driver. But he did believe that, for employers that are taking pensions seriously, performance could be a significant driver, particularly where employers realised that staff at 60 or 65 years of age would need sufficient funds to retire now the default retirement age had gone.
Abrahams questioned whether for some sections of the market, the employer or the employees are even aware of performance issues and statistics about it. She also said that a lot of investment strategies are to minimise downside risk.
Kingston added: “While 2 per cent of qualifying earnings are going in, it is not really a significant issue. But if there is a review of a DC pension scheme and transfers get pushed across from one provider to another, investment performance is going to be important because you are comparing.”
Herbert said: “If you have done a scheme as the path of least resistance and lowest cost, then unless your company is significantly growing or senior people are throwing money into pensions, only then would you look at it. The secondary market is a long way off for many firms.”
Delegates also debated the extent to which a trend towards bespoke defaults is developing for the general DC market.
Herbert said it was a matter of guidance on governance catching up. “There is no real answer at the moment about how you should build a fund that works for pension freedoms.”
Abrahams added the advice on investment strategies and defaults was no good if it was one-off.
Kingston added: “You almost need an employee engagement and financial education process that doesn’t start with talking about retirement but that makes sure they understand when they get to the end of their working life they have three options – annuitisation, flexi-drawdown and the cash option.”
“Financial education via the employer works,” said Brown, although delegates agreed human intervention would, for today’s workers, always achieve more than purely web-based solutions.
Royal London business development manager Jamie Clark said: “The obvious way to deal with the demand for information is to put in place financial education systems that people access cheaply, easily and efficiently. But I do not think that this achieves the same level of
engagement as a personal one-to-one conversation.”
Financial education would not be funded by the Government, so it would fall to employers, providers or advisers, said delegates, leading to some scepticism about providers then directing employees to their own solutions.
But delegates expressed a clear sense of satisfaction with providing financial education. Laverty said: “The feedback when you do it well is what this job is all about. Get up in the morning, do a session and change some lives.”
While technology was seen as a must-have, Brown suggested the percentage of members logging on is still in single digits.
Herbert said: “You need to have the technology, but the engagement piece to present to people makes such a difference.”
But Abrahams added that everybody needs access and that technology would prove to be a huge driver.
Kingston argued that advisers will only get the employer to facilitate education when they recognise the benefit themselves. He said there needs to be more focus on ensuring employers are helped to understand employees with big enough pots to retire are a business benefit too.
It was also noted that in terms of recommending products, the FAMR is going to increase the scope of what providers can do. But panellists wondered if providers’ different approaches to advice or guided outcomes of scheme members would really drive employer decisions.
Abrahams said: “There is a win at the end for providers with education. But for employers, unless they appreciate things, looking at one provider that does advice, one that doesn’t, it doesn’t factor into their decision.”