Auto-enrolment staging is gaining serious momentum just as advisers are coming to terms with the end of commission. So, asks John Lappin, how much of an adviser opportunity do the smaller employers present?
The auto-enrolment pension reforms are entering the home straight, extending coverage across the nation’s workforce. So as the size of employer staging becomes ever smaller, what part are advisers expected to play and can they do so profitably?
There is no doubt about the means by which advisers can be remunerated – the sun finally sets on commission this month, meaning anyone addressing the small end of the AE market will have to do so on a fee basis.
The employers now staging may be smaller but they will still need help. Master Adviser partner Roy McLoughlin says: “Small employers are realising it is better to get someone else to do all the donkey work for them. Some employers I know have gone away to do it themselves, done some research and realised they would be better off getting an IFA to do it because it takes resources. It is also the skillset of the adviser.”
Assessing the scale of the challenge, Jargonfree Benefits director Steve Bee says: “The best way to get to large numbers of small employers is through accountants. But our best way to get to accountants is through advisers.
“We have a practice-wide system so, with a typical accountant, they would have between 250 and 300 end-clients. A big chunk of them, maybe 80 or so, would be exempted because they have no real workers.
“Our IFA firm would bring in an accountancy practice and give it a system to manage all 300 clients.
“Our system puts all the clients in staging date emails, with the accountant’s name so no one can accuse that accountant of not informing all of their clients in good time for their staging date. It also checks if clients are still exempted.
“Using a system like that, an accountant or bunch of accountants can manage their entire books, even the very small ones.
“My view is that, if you don’t help accountants to do it this way, it won’t work. One-on-one won’t work because there are not enough IFAs and there is not enough time. It really is a tsunami now.”
“If you can’t do it for the whole of their backlist, if you haven’t got a piped deadline approach, then my view is you are wasting your time.
“The clients are wary of cherrypickers; they get that all the time. Anyone will have their good clients but what about everyone else?”
Standard Life head of pensions strategy Jamie Jenkins says: “It is not like the employer has a choice of going to another adviser, who can fund things from commission. If the employer values the service, it will pay something for it.
“A lot of advisers I have spoken to over the past two or three years, or even four or five years, had already moved to ongoing fees for their services and therefore haven’t had much of a transition to make when talking to new clients.
“Only advisers who left it to the last minute with no prior discussion would be facing a challenge.”
Transferring the adviser’s business model is not, Jenkins says, a simple matter of converting a fee to the amount that was paid under commission.
“A lot of advisers have said ‘We can’t base the income on what it would have been under commission, on a per capita based on premiums or on funds under management.’
“A lot of the conversations are: ‘What do we charge per hour for the work that we do? What are the incumbent costs and overheads that we incur? What do we build in as a margin for profit? So this is what we charge as a fee.’”
Jenkins says that, although it may feel like an awkward conversation for advisers after years of commission-based payments that were not an upfront cost to employers, with many businesses it should be a normal discussion.
Jenkins points to a wide variety of scenarios where smaller employers are seeking advice. In some cases, advisers are referring businesses to accountants.
McLoughlin notes that advisers also have an opportunity to sell other services such as business protection and relevant life. He says some accountants are finding AE a pain and are looking to IFAs to take that pain away.
But the whole process is also helping advisers to beef up their professional connections.
In terms of payments, Jenkins adds: “Accountants aren’t free either. Most accountants charge on a time cost basis so an adviser doing the same thing wouldn’t be an alien concept.”
He adds: “People who know I work in pensions come up to me and say ‘I am going to have to involve my accountant or my adviser and pay someone hundreds or thousands of pounds.’ They have no expectation that it will be free.
“Some smaller businesses will pay someone to do it because they value their time. Others will do it themselves and just work longer hours.”
Cervello financial planning director and AEinabox founder Chris Daems says even if all advisers were doing lots of consultancy business they would not make a huge dent in the 1.8 million employers involved.
But the sheer numbers mean there will be demand for both full consultancy and lower-cost solutions.
He adds: “Micro-employers still have a challenge. They are asking ‘How do we get support and do we want to pay consultancy fees? Where do we go if we don’t think we need bespoke support?’
“A lot of employers will do it themselves; some will go for options that sound like they are free, such as smaller master trust arrangements, although there are questions about whether all these master trusts are sustainable.”
Finance & Technology Research Centre director Ian McKenna says the solution for advisers may be to deliver services with a lighter touch, whether as large consultants or as smaller firms.
He says: “Traditional advisers have never been busier in a market where there is recognition that the model is broken in terms of serving large numbers of clients. Then again, to what extent can you say that when there is more demand for advice than we have ever had?”
McKenna thinks advisers should take advantage of this profitable period and invest those profits in reaching a new type of customer.
“Advisers’ revenue per customer will be lower but their cost of delivery will be lower too. It gives them the chance to build digital relationships with customers.
“If you can build a business with recurring low-cost income streams, that is not high touch but it is a real opportunity for advisers to build value into their business.
“If you look at how Facebook is valued, it is on relationships. If you can have more relationships that pay you money, overall it should be a net positive situation.”
McKenna says regulatory developments may also help advisers. Although ministers do not want to rock the boat because of the big numbers staging, at the same time they are beginning to question the fact that advice to employers on choosing a pension scheme is not regulated – a point made by pensions minister Ros Altmann in a recent interview.
McKenna says employers that choose a pension scheme based simply on how it fits with payroll may not produce the best outcome for employees and could come under scrutiny.
But whether or not regulations change, advisers have a great opportunity if they can build good, ongoing relationships with members of schemes that are profitable, McKenna says.
He adds: “Systems are being built now to help advisers deliver advice to consumers at a lower cost. An adviser can choose to benefit and make a very good long-term strategic investment in their business. The alternative is to stay analogue and not choose this.”
Bee says the other big challenge besides staging date is to answer employees’ questions.
He says this is not something that accountants or advisers want to do and employers cannot answer a lot of the questions. This is all despite the fact that a lot of AE legislation is based on communications.
He says: “You have to write to employees – but what if they write back? All of our large clients’ problems started once they had written out.
“Who replies? The employer? The accountant? The IFA?”
Bee says his own product provides a solution through Expert Chat, which has pensions experts to answer queries and which provides a transcript for both employee and employer. This prevents IFAs from being deluged with questions.
Bee says the solution to this problem must be to commoditise, because there are relatively slim pickings otherwise.
“The industry has been very good at one-to-one sales but that isn’t going to scratch the surface here. If you want to make a dent in this market, you have to do the kinds of things we are doing.”
How profitable can auto-enrolment be? Cazalet’s view
Insurance industry analyst Ned Cazalet has done a huge amount of work on life office profitability and, when it comes to the AE market, he foresees far more questions than answers for providers.
He says: “The thing that strikes me about auto-enrolment is: can the charges stack up? It looks pretty skinny on both margin and profitability. Some businesses have said ‘It is fine for those at the top but we may stay out of the way of the mad rush.’”
He says one of the big issues is frictional, getting stuff on the books but also dealing with administrative tasks. “If you get the first billion from large employers, does it work with the smaller employers? Is the next billion a scale advantage or an admin problem?”
Cazalet finds the wide range of approaches interesting, from L&G largely singing a happy song to Prudential deciding not to play in the market.
The overall response, he says, is a raised eyebrow. For example, is the timescale of 30 years realistic?
A lot will depend, as always, on optouts. Previous work, admittedly in an era of commission, showed insurers depending to a great extent on markets going up. The slightest movement can put a lot of calculations out.
He says: “When you get the smaller employers coming aboard, does all this end up with Nest and, if so, what are you ending up with in terms of quality of business? We have never had this system before of compelling Mrs Miggins to have a pension for her nanny. Do you end up with a lot of cost, if the quality is poor, and what do you do about it? This has never really been asked publicly.”