By next July more than 25,000 employers will be required to find a workplace pension scheme from a market stretched to near breaking point.
Pensions auto-enrolment is being phased in gradually, starting with the very biggest employers and the smallest firms not coming on board until 2017. So while 1.7 million employees have been auto-enrolled in this first 12 months of the process, they come from only 2,000 employers.
But the sheer volume of employers going through pension scheme providers’ doors is set to soar. Between now and April 2014, a further 5,000 employers will set up schemes.
However, the real surge in demand takes place between May and July 2014, when more than 20,000 employers, with between 62 and 159 employees, will be required to implement auto-enrolment. That means ten times as many employers as have set up their schemes in the last year will have to do so in a period of just three months.
Malcolm Small, senior policy adviser on pensions at the Institute of Directors, says: “I am starting to worry about both capacity and employer readiness. Many employers are in the position where they are thinking auto-enrolment won’t apply to them. They think they will be able to sort this in a few weeks – they are very much mistaken.”
Top priorities for employers selecting schemes are the level of charges, the quality of default investment funds, the standard of communications offered by providers and the very real logistical challenge of getting payroll data into the format that pension providers want it in.
Rip-off pension charges have been a constant theme in the media for years now, and the government is putting pressure on providers and employers to make sure the schemes they enrol their staff into are good value.
Mr Small says: “The single most important issue when selecting a scheme is charges, although it is not the only issue. The good news is that there are lots of schemes around now that offer pretty good value for money. Nest, Legal & General, NOW: Pensions and The People’s Pension all offer good-value pensions with high standards of governance.”
Employers wanting to find out just how much different charging structures will impact their employees’ pots can obtain projections through a pension-charges calculator available on the Pensions Advisory Service website.
Even though auto-enrolment has been under way for a year now, the Department for Work & Pensions (DWP) has just launched a consultation on whether schemes’ charges should be capped, possibly at an annual management charge (AMC) of between 0.75 and 1 per cent.
To make matters even more complicated, the DWP consultation is also questioning whether schemes already in place, which pay commission to financial advisers or those which increase charges when individuals cease working for an employer, should be permitted as qualifying pension schemes for auto-enrolment purposes.
No employer should assume the task is an easy one and anyone with less than six months until their staging date should already have an implementation programme under way
While it is unclear whether a ban on schemes set up through commission will be implemented any time soon, pensions minister Steve Webb has repeatedly stressed that he expects the practice of having higher charges for former employees than existing employees, a structure known as an active member discount (AMD) to be outlawed sooner rather than later.
These schemes, many of which have been set up in the last 12 months, will probably be stopped by April 2014 for employers reaching their staging date from then onwards, with other schemes potentially required to come in line by April 2015.
David Robbins, senior consultant at Towers Watson, says: “The assumption is that from April 2014 onwards, schemes with commission and particularly AMDs in them won’t be allowed, although the situation is not completely clear yet. So if you are an employer with one of these schemes today, you have got to start from the assumption that it is not OK to use it for your auto-enrolment scheme if your staging date takes place after April 2014.”
Michelle Cracknell, chief executive of the Pensions Advisory Service, the government-sponsored information service, adds: “It would be foolhardy to put in place a scheme with an AMC of more than 0.5 per cent. The state-backed National Employment Savings Trust (Nest) has an AMC of roughly 0.5 per cent, so unless you can demonstrate you are genuinely getting something beyond what that offers, you shouldn’t go for something that charges more.”
This is not to say that the absolute cheapest is always best, says Andy Cheseldine, partner at pension consultant LCP.
“Most of the low-cost auto-enrolment providers’ defaults are passively managed diversified growth funds. That is fine, but just because they come in at 0.5 per cent or less doesn’t mean the margin they make on them isn’t higher than on more expensive funds which can potentially deliver better returns,” says Mr Cheseldine.
“You do need to consider the investment option on the default fund, but this can be difficult because most of them are newly created for auto-enrolment, so they have got no track record.”
Nest has a public-service obligation to take any customer who wants to use it. Other pension providers, including your existing one if you already have a scheme for part or all of your staff, may not be so accommodating.
For example, where a hotel chain offers a group personal pension to its headquarters staff and senior managers, the life insurer that provides it will almost certainly refuse to extend access to it to all the lower-paid workers who may only stay at the organisation for a few months.
Big master trust providers, such as Nest, Legal & General, NOW: Pensions and The People’s Pension, all have a one-price-fits-all charging structure and will usually take all-comers, but some will add an administration charge for setting up the scheme, and all will require the employer’s payroll data to be supplied to them in their specified format.
Jonathan Dowden, product manager at payroll software house Sage, says: “Not every payroll system will dovetail with every pension provider’s system. There are about ten fields of information a pension provider might ask for that some employers may not already have.
Some pension providers are offering free middleware that will link these systems together, while others are not.”
That leaves employers faced with paying an adviser, provider or payroll supplier for some form of service that will assess their workforce, maintain compliant records of employees’ eligibility for auto-enrolment and contributions, and pass data to the pension provider’s system.
“You may get the pension provider to do the assessment of workforce eligibility or you may get your payroll provider to. If the latter, you may need to put in place a new payroll system to get there. Some pension providers will charge you for implementing auto-enrolment, particularly if it involves lots of extra work for them, while others will not,” says Mr Cheseldine.
Sourcing this capability will not be straightforward and, with a massive wave of small and medium-sized businesses required to comply with their auto-enrolment duties by mid-2014, experts are predicting a rush for resources from scheme providers, advisers and payroll service providers.
Providers and advisory firms are working to create web-based systems with telephone support that will help employers to do as much of the work in implementing auto-enrolment themselves. But no employer should assume the task is an easy one and anyone with less than six months until their staging date should already have an implementation programme under way.
