Are you ready for the auto-enrolment
avalanche?
How advisers can ensure they
select the right scheme for
their corporate clients
Introduction
Automatic enrolment is reaching a critical turning point.
While nearly 5.4 million people have been enrolled, 97 per cent of all UK employers are yet to reach their staging date so the biggest challenge is yet to come.
A total of 1.8 million smaller employers are required to stage their schemes by 2018.
Small and micro employers face very different challenges to the larger employers that have already enrolled.
This supplement features information on governance of automatic enrolment schemes, discusses default strategies in light of pension freedoms and business opportunities for advisers.
Answers to questions you asked our panel of three pensions experts during FTAdviser On Air are also featured.
Hopefully this supplement will provide lots of food for thought on how to support smaller employers with their obligations and assist you in anticipating potential challenges for these employers.
You can also earn CPD by answering questions on the content of this supplement.
Just click on the CPD link at the end of the supplement.
Your AE questions answered
Live from the studio
EAH - Emma Ann Hughes, editor of FTAdviser.com
PB - Paul Budgen, head of business development at NEST
AB - Adrian Boulding, policy strategy director of Tisa
TS Tim Sargisson, chief executive of Sandringham
EAH: What can advisers do to make sure the default reflects what their members actually want?
PB: This is an area where, I think, advisers can really add value to this whole process and to their employer clients.
If we throw ourselves forward in the next five, 10, 15 years what is going to make a huge difference to savers is the performance of their investment funds.
When you think, on average, 90 per cent of those scheme members of a qualifying workplace scheme are in the default fund, the performance of that default fund is absolutely key.
When you think, on average, 90 per cent of those scheme members of a qualifying workplace scheme are in the default fund, the performance of that default fund is absolutely key.
At NEST when we were putting together our default fund strategy, we did an enormous amount of research with our membership and consumer groups and getting feedback and understanding on what was important to them.
The key message that came out was risk. How do we manage risk for them? How do we structure a fund that does that? Diversification is key.
This is the kind of skills and knowledge that I think means advisers are really well placed to help both their employers and their workers.
EAH: What are the key differences between contract and trust governance? How does this impact on the schemes and members?
AB: There are lots of differences. The trust is governed under the TPR rules and the contract is governed under the FCA rules.
The first difference you will see is the TPR rules are much more relaxed in terms of the communications that the scheme can issue. A number of employers have gone down the trust route really for that reason.
You get much more freedom about how you communicate and much less volume of communication.
Against that, trust is quite strong as you have to put your trustees in place, do the governance and we have the new TPR code of governance. This isn’t an easy option.
The easier option is probably contract governance where the employer sets up a scheme in conjunction with an insurance company as a GPP (group personal pension) or a stakeholder.
You don’t need to have any member governance involved in that but I would strongly urge them all to do so.
Having a degree of feedback from the membership, back into the scheme, is so important to make sure that scheme is delivering in the members’ interests.
The voluntary arrangement, which the good contract schemes have is an employer-based management committee, where you get volunteers from the workforce to come in, sit as a committee and monitor what the scheme is doing.
They are quite like trustees, but their difference is they don’t make decisions they advise.
They would reflect back the views of the membership back to the employer and the adviser.
EAH: What is a reasonable fee for someone to charge to implement automatic enrolment in their business? Should a fee be paid on an ongoing basis given that providers/software will handle much of the administration?
TS: Nearly three years on from the Retail Distribution Review, most advisers in this country should now understand their cost base in running an advice business.
Any fee they look to charge has got to reflect the costs involved. Critically, you have got to start with that and then build out.
There is no point going in with some ad-hoc fee for a service you are going to provide without actually understanding what it is going to cost you.
You have got to break it down. How you are going to target the automatic enrolment market. Is it going to be through professional connections such as accountants? I see this as a very fertile ground for advisers over the next few years.
You have got to break it down into component parts.
There will be the initial work involved in actually doing the research, engaging with the employer and explaining to them what it is going to cost.
There will be the need to review and keep reviewing on an ongoing basis in exactly the same way as any group pension arrangement means you need to liaise with the employer and to some extent the employees, who perhaps should want to look beyond the default fund options and looking at what their options are going to be when they come to take the money.
EAH: Do you feel auto-enrolment providers are doing enough to combat against pension fraudsters?
AB: You have to continually work harder and stay one step ahead of the fraudsters in this game.
We have done a lot of work as an industry in stopping people transferring from a good scheme into a fraudulent scheme.
We need to do more at the point of retirement, where people are looking to exercise their freedom and choice and move money out of a good pension scheme into an unregulated investment. They may well lose a lot that way.
We need to do more within the master trust industry as well in terms of saying which of the 80 master trusts out there are good ones and which of them are being run on bad principles with hidden charges, almost venturing on fraud.
When you (advisers) are choosing a master trust look very, very carefully at the master trust you are choosing. There are good ones and not good ones out there.
EAH: What simplifications should the Department for Work & Pensions consider making to help micro businesses with automatic enrolment compliance?
TS: Absolutely no changes should be made. We need consistency.
We have already seen in the recent Autumn Statement a change with regards to contribution rates.
Advisers have certainly struggled with the monumental changes we have seen in recent years in trying to factor in all those changes to the advice process. It is very, very challenging. Leave well alone.
EAH: There are no legal requirement to offer a Sharia fund, but what are the implications for an adviser who recommends a scheme without one, regarding discrimination in the workplace and encouraging opt-outs under automatic enrolment legislation?
PB: Without jumping to solution mode, we have got to try and understand what the real question is.
A Sharia-compliant pension scheme is very different from having a Sharia fund you make available to workers.
Like all these things you need to go back to the employer and really understand what it is they are telling you, understand the implications for them and then look at the choice in the market.
Are you looking for something that is Sharia-compliant everything from start to finish or would it be sufficient to just have a type of Sharia fund within the suite of funds that you are offering?
Don’t confuse the two. You really need to get underneath that question.
AB: One Sharia fund is not enough. It is too easy for us to sit here and say that is for Muslims.
If you drill down into the Muslim faith there are several different branches of the Muslim faith and you may need to have a number of Sharia funds signed off by different Muslim clerics.
We are not finding this is fed back by employers. We are not seeing it in opt-out statistics. At the moment I would say this is not an issue.
EAH: Will NEST be introducing a similar style of additional charge to their contract since all the current pension providers who offer auto-enrolment schemes will have an employer fee of some sort from January 2016?
PB: The easy answer is no. There are no plans to introduce an employer fee.
To understand that we need to put this into context – the automatic enrolment programme is a key part of the UK reform agenda. It is about getting millions of people saving into pension schemes – some for the first time ever.
There is a well defined and articulated failure in the market in terms of pension scheme provision. That is why NEST was created and part of that was to have our public service obligation.
We accept any UK employer that wants to use us. They can have a scheme with NEST.
An employer fee would be completely contrary to satisfying that public service obligation.
EAH: Do you expect small and medium-sized firms to struggle with automatic enrolment?
TS: They will struggle without professional advice. The first people they will turn to are their accountants, largely because their accountants are probably doing their payroll or indeed it might be the only professional connection they have got.
They will struggle without professional advice. The first people they will turn to are their accountants, largely because their accountants are probably doing their payroll or indeed it might be the only professional connection they have got.
It is very important that the adviser community liaises with the accountants and makes them aware that the adviser community is out there to help and support accountants and micro employers.
Accountants 30 years ago were very much at the forefront of financial planning but regulation means most of them have pulled back from doing that now so they do need a qualified adviser who is happy to work in the auto-enrolment space and charge fees for doing that.
AB: Small employers need help both at the outset and on an ongoing basis.
You have new staff joining the firm, pay rises and some people coming forward saying ‘Can I pay more money into the scheme?’
That could be delivered by the provider, it could be delivered by the adviser, it could be delivered by the payroll bureau. They will look to different places for it but what is needed is ongoing month on month support.
EAH: Was the government right to delay the increase to contribution rates?
AB: I think they hit the wrong target with that and I have been into HM Treasury and told them that.
I think it was done to save the chancellor a little bit of money but the real need was to smooth out the increases.
We have a 13-month window, which has now been shifted back six months, but it is still a 13-month window in which employees will go from paying 1 per cent of their pay to paying 5 per cent of their pay.
We have a 13-month window, which has now been shifted back six months, but it is still a 13-month window in which employees will go from paying 1 per cent of their pay to paying 5 per cent of their pay.
That is a huge leap. People will really feel that in the take home, which could spur a number of opt-outs that we don’t want.
What the chancellor should have done, and maybe he still can do this later, is to seize the opportunity and say it is not about putting it back it is about spreading it out.
We need those contributions to increase in baby steps not 4 per cent jumps.
EAH: Are advisers using automatic enrolment to engage with employees as well as employers?
TS: Our experience is not at the moment. The auto-enrolment service we offer is very much aimed at professionals and their clients. Ultimately it may trickle down to employees, especially when they have got specific issues regarding their pension scheme membership and then we hope some of the more low cost ways of servicing those clients will be available.
You hear about robo-advice a lot at the moment. We expect there to be a lot of initiatives in that (robo-advice) space to support those relatively small pots and ultimately a few relatively small pots across a range of providers.
PB: I was at an event recently where we were looking at how many payroll professionals will be needed to help with doing the work of assessments and doing the uploads and things like that.
I think there is a real challenge. As far as NEST is concerned, we are a self-service master trust so we introduced a functionality called NEST Connect, which enables IFAs, accountants and payroll professionals to set up and run an employer account through NEST.
So far, we have seen 4,500 organisations sign up for that and 9,000 employers are working through that. We see that as being an integral part of how an intermediary can add value to their employer clients.
How do you know when you’ve recommended a good DC default?
This is a critical question for advisers helping businesses with auto enrolment.
The default fund is where NEST has found as many as 99 percent of the workforce will stay.
It is the fund that is under the most scrutiny when companies first choose their scheme.
And it follows that it is also the default fund that is under the microscope at regular reviews with clients for years to come.
Whether you’re a trustee, employer or adviser, the regulatory guidance is clear that getting a good quality scheme for auto-enrolment is not just about good administration.
The regulations have a lot to say on things like suitability of the default fund, choice and also value for money. These are all factorsthat play out over the long term.
We’re going to look at these topics and suggest some related questions advisers might use to interrogate what schemes are offering so they can be confident about the schemes they recommend. Finding a suitable, value for money investment approach is essential - recommending something that doesn't meet savers' needs could mean questions in the future from both employers and their workers.
Ensuring the default strategy provided is suitable for the needs of the membership starts with having a comprehensive understanding of your clients’ workers.
Ensuring the default strategy provided is suitable for the needs of the membership starts with having a comprehensive understanding of your clients’ workers.
You’ll probably need to know:
What sort of savings experience do most of them have? If they’re typical auto-enrolment savers, then it’s probably not much. This means default funds that looked right for pre auto-enrolment pension savers might not be suitable.
What’s the age and spread of the workforce? Does the investment strategy for the default fund recognise that risk needs to be managed differently over time? If so, what’s the delivery mechanism and governance around, for example, de-risking members’ pots as they approach retirement?
What are these workers’ attitudes to investment risk? Are they highly sophisticated risk maximisers, or are they worried about volatility and the potential for loss?
NEST research, for example, tells us that most new DC savers want good growth but there’s a strong desire to keep their money safe too. NEST research also shows that many are unaware their pensions savings are exposed to any kind of investment risk.
This relates to what the workforce is expecting and what the consequences will be if these expectations are not met.
Finally, will the name of the default fund, or the manner in which its operation is communicated serve to confuse and prompt worries and questions or can it be easily understood by the majority of members?
What about beyond the default (and the guidance here is clear that members’ should not be locked in)?
The Pensions Regulator says that quality schemes should also ensure that the number and risk profile of investment options offered reflects the needs of the membership.
Let’s start with the number - what level of choice is too little? Are you confident that members’ needs can be broadly served by just a couple of other choices?
Alternatively, long lists of options can look impressive to the employer, but become less attractive if they lead to questions from workers overwhelmed by choice. Is that a risk that needs to be considered?
What’s real choice anyway? Does the scheme offer dozens of funds that actually cluster around the same risk profile? What about peoples’faith and beliefs? Are they reflected too? Are the fund options available actually the legacy from existing schemes or have they been tailor-made for auto-enrolment savers?
So you’ve found something that ticks all the boxes when it comes to suitability and choice. What about the charges and costs?
Most advisers will agree with our position that low charges do not necessarily mean good value. Equally, good performance alone may not give a scheme license to go to the top of the charge cap.
Low charges do not necessarily mean good value
The regulator accepts that there’s no single definition of value for money, but has set out a model process for trustees of schemes to assess to what extent their scheme offers value for money.
These findings are brought together in ‘value for money statements’.
NEST publishes ours on our website and these statements could be a helpful tool for advisers to consider when assessing schemes.
So, the regulator divides costs and charges into two categories.
When it comes to member-borne costs and charges, what do they cover?
Are legal and custodian charges included?
Does anyone – worker or employer - pay more or less for the same offer?
And does performance stack up against the scheme’s objectives and the relevant benchmarks?
It is also important to understand whether the investment strategy is likely to lead to high portfolio turnover.
Is the asset allocation tending towards the more tactical and short-term, which could increase the number of transactions, or focused on strategic, long-term positions?
Are switches between assets mechanistic and could incur additional costs to members compared with, for example, a target date fund structure?
Is any extra transactional drag on pots justified?
Is any extra transactional drag on pots justified?
How might the investment governance work for or against members’ pots being eroded by transaction costs? How and who green lights investment decisions?
Caring about good governance
It should go without saying that all schemes should be designed and run in their members’ best interests.
It is vital that advisers assess the governance of the pension they recommend so they can be confident the schemes are capable of delivering a good outcome.
So, what does good governance look like?
Back in 2011 The Pensions Regulator identified six principles for good design and governance of workplace defined contribution (DC) pension provision.
The six principles span the lifecycle of a DC scheme from the design and set-up phases through to the ongoing management - including monitoring of scheme governance, accountability, scheme administration, and communications with members.
Principle 1 is schemes should be designed to be durable, fair and deliver good outcomes for members.
This principle covers the features necessary in a scheme to deliver good outcomes for members, including the provision of a suitable default fund, transparent costs and charges, protected assets and sufficient protection for members against loss of their savings.
Principle 2 is a comprehensive scheme governance framework should be established at set-up, with clear account abilities and responsibilities agreed and made transparent.
This includes identifying key activities which need to be carried out, and ensuring each of the activities has an ‘owner’ who has the necessary resources to carry out the activity.
Principle 3 is that those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.
The principle covers definitions of fitness and propriety for accountable parties and also conflicts of interest that may arise.
Principle 4 is that schemes benefit from effective governance and monitoring through their full life cycle.
This principle looks at the ongoing governance and running of the scheme, including the internal controls and monitoring needed to ensure that the scheme continues to meet its objectives, and continues to be run with the best interests of its membership in mind.
Principle 5 is that schemes are well-administered with timely, accurate and comprehensive processes and records.
This principle is informed by The Pensions Regulator’s previous work on record keeping, looking specifically at the administration processes required in a DC scheme.
The final principle, principle 6 is communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings.
This includes all communications to members during their time with the scheme – from joining through to making decisions about converting their pension pot into a retirement income, including promotion of the open market option.
Principles 1 to 3 are all relevant at scheme set up and therefore are most relevant to product and service providers and those advising employers on scheme selection.
Principles 4 to 6 cover those activities which are likely to remain relevant through the life of a scheme and therefore could involve all parties included in scheme provision, including providers, administrators, trustees, employers and even members.
But why is good governance essential?
What happens if advisers fail to pick a scheme with good governance?
While the principles above are a good guide what advisers need to be looking for is a pension that allows your corporate client’s staff to go to sleep at night not worrying about whether they will have to face a choice between heating and eating in old age.
What advisers need to be looking for is a pension that allows your corporate client’s staff to go to sleep at night not worrying about whether they will have to face a choice between heating and eating in old age.
Good governance should ensure savers are engaged and informed.
Pension schemes should collate data to assist an adviser or employer with monitoring those who opted out allowing them to regularly revisit these individuals to check if they are now able to start to save.
The scheme should make clear whether the amount being put in today will deliver what is required in retirement.
It is vital the point of making more than just minimal contributions to their pension pot is put across.
Post pension freedoms, good governance should also assist with making sure your corporate client’s staff are not duped by con artists.
Post pension freedoms, good governance should also assist with making sure your corporate client’s staff are not duped by con artists.
Two years ago, Aviva’s head of policy John Lawson cautioned that pension liberation was at least a £600m problem.
Back in May 2014 the Pensions Regulator’s governance survey highlighted the fact pension liberation fraud was a growing issue.
It is interesting to note large schemes were found to be more likely to be aware of pension liberation fraud (99 per cent) than small schemes (88 per cent).
Among the schemes aware of pension liberation fraud, eight out of 10 schemes have processes in place to combat pension liberation fraud, with one in seven having suspected such activity in transfer requests.
So in summary, auto-enrolment has changed the dynamics of membership in a pension scheme.
Auto-enrolment has changed the dynamics of membership in a pension scheme.
This new breed of opted in members will presume having a pension “must be the right thing to do” as it was enforced and endorsed by both the government and their employer.
Given this new set of dynamics, a stronger governance framework focussing on member education, support and outcomes will be required to prevent members from becoming disillusioned and presenting additional risks further down the line when they realise just what a pension plan they didn’t engage with will deliver or when pension fraudsters come calling.
Enhancing relationships
Different employers will want help with different aspects of automatic enrolment.
There are a lot of different levels of service you can offer your clients.
Let’s start by looking at what the basic requirements are for your corporate clients.
The Pensions Act 2008 introduced new rules for workplace pensions in the UK. These changes affect every workplace and make sure that every worker will have a chance to save for their retirement.
These changes affect every workplace and make sure that every worker will have a chance to save for their retirement.
Under the new rules, every employer will have to give their workers the opportunity to join a workplace pension scheme that meets certain standards.
Workers earning over a certain amount will also be entitled to a minimum contribution into their retirement pot. The new employer duties are being introduced gradually.
They’ve already begun to apply to the largest UK employers and over the next few years they’ll apply to most other organisations.
Currently staging are employers with 30 to 49 members of staff. From the start of next year employers with less than 30members of staff are staging.
The minimum contribution has been introduced at 2 per cent of a worker's pay. This will increase gradually to 8 per cent.
So, what should you be looking at when it comes to making sure corporate clients are meeting these requirements?
Just because you have arranged a pension scheme for a corporate client in the past does not mean it is fit for purpose today.
Advisers will also need to reassess any arrangements that are currently in place to make sure they meet the auto-enrolment requirements.
According to NEST, many existing corporate clients will have a scheme in place that they can’t use for auto-enrolment.
Many existing corporate clients will have a scheme in place that they can’t use for auto-enrolment.
Options that need to be considered include finding a new scheme that is simple and flexible enough to work alongside what they already have, or looking to replace it with a scheme that meets the regulatory requirements.
Another type of corporate client being created by the auto-enrolment rules are those who have no previous experience of pensions.
For some corporate clients auto-enrolment is not simply about pensions. The real issue is payroll processes, and advisers are coming under increasing pressure from clients for guidance and support.
Some clients have shift or time sheet-based staff whose earnings vary month to month, employees doing unforeseen overtime to meet a surge in demand, younger workers crossing the minimum age threshold, new joiners, etc.
These employers may require far greater hand holding than an adviser is used to –with these individuals the first step maybe to see if they employ anyone classed as a ‘worker’.
For advisers who want to build an on-going relationship with a corporate client the opportunities created by auto-enrolment are far greater than just selecting a scheme.
For advisers who want to build an ongoing relationship with a corporate client the opportunities created by auto-enrolment are far greater than just selecting a scheme.
Selecting what the default solution or service will be, investigating the pros and cons of "bolt-ons" to existing payroll software packages, versus specifically designed online auto-enrolment solutions, developing a marketing strategy to ensure employee engagement and support through education and training are all extra tools an adviser can add to their kit.
It is also likely that clients you’re advising on pension matters may be willing to explore other new duties.
Advisers can push beyond pensions and tackle the way healthcare benefits or business protection could boost business and the happiness of the workforce.
What is clear is auto-enrolment gives you the opportunity to offer far more than just financial advice to corporate clients and their employees. Thousands of employers who’ve never sought professional support will be looking for help with auto-enrolment.
While some employers may just want to comply with the pension regulations and find the simplest way to fulfill their new duties others could become engaged with the value of offering greater benefits to their workforce.
Finding quality default funds for your clients
