Size does matter when it comes to businesses taking care of pensions, reports Anthony Harrington.
The government's attempt to turn us into a nation that saves for its future by enlisting the power of inertia is gathering momentum. Auto enrolment has already scooped up all the huge companies and moved on down the size scale to the point where firms with 50 employees are now "staging" (the term that signifies that employers at a particular size category now have to include all qualifying employees in an approved pension scheme).
Auto enrolment, of course, simply means that you are in the scheme, assuming you fit the criteria of a qualifying employee, until and unless you make a deliberate choice to opt out of the scheme. The problem for the pensions and advisory industries is that when you rank businesses by employee numbers, you create a pyramid with an enormous base.
So as the auto enrolment staging dates move down to firms with smaller and smaller numbers of employees, the number of companies caught by the legislation goes up massively, which creates a mountain of work for scheme providers. Justin Corliss, an employee benefits consultant at wealth managers AGL Corporate Services, reckons that his firm sees three distinct categories of employer.
The first comprises those who have missed their staging dates and are now experiencing varying degrees of panic as they realise that non-compliance could carry some steep financial penalties. "We are not seeing many who have missed their staging dates yet, but we expect this number to increase in the months ahead.
"For these customers we'd be talking to the regulator for them and helping to put a plan in place that would get them up to speed," he says. There are two major drawbacks to missing a staging date, quite apart from the fact that it is mandatory by law. First, the employer will have to make up the missing contributions and will generally not be able to make this employees bear part of this burden. This means that the employer will have to pay both the employer and the employee's contribution for the missing months between when they undertake remedial action and when they should have staged. So at this stage they will be contributing two per cent of salary, not one per cent.
Second, they will miss a lot of the good options that are available to those that stage in time, such as being able to find a good plan provider and suitable middleware software to handle all the compliance reporting. "There will only be a few scheme providers that are prepared to help if you have missed your staging date. When we act for a client in this position we'd have to find a provider rapidly from a very limited set, so the options and the fees would probably not be as good," he comments. "Even now the Regulator is starting to move away from a relaxed, lenient approach to one where fines are imposed. From what we have seen going forward I would not expect the Regulator to be a soft touch when it comes to dealing with those who are well past their staging date."
The second category of client is those with six months or less to their staging date, with the third category being those whose staging date is more than six months away. The whole staging process comes to an end of March 2018.
"Where clients have six months or under to their staging date, we will do a free initial consultation. We generally use our own Master trust as the way forward and we would need a very good reason to look for a provider beyond our Master Trust option.
"We have an independent administrator, in Staff Care, and the investment solutions inside our Master Trust, which has its own board of trustees, including a range of discretionary fund managers who are appointed on performance and can be changed if they are not performing as expected," he explains.
Corliss points out that AGL Corporate Services will also provide the 'middleware' which enables employers to scan their payroll and employee systems to identify all those employees caught by the auto enrolment requirements.
"The middleware system does all the record keeping and the automated communication with the employees," he comments.
"The point is, when the Regulator calls in three to five years and says: 'Show me the records proving that you have been compliant all this time!', the system has the complete compliance record and can demonstrate you have fulfilled all your obligations, both in terms of registering all valid employees and deducting and paying over the appropriate contributions," Corliss comments.
Kris Nocker, the UK business development manager of TAM Asset Management points out that TAM specialises in providing pension services to even the smallest employers.
"We run systems that can easily provide services for two billion members, so there is no capacity constraint with our systems," he notes.
"The TAM service enables clients to go online and look at the funds that their scheme is investing in and view their performance. The real advantage of our system, apart from its scalability, is employees paying in very small sums a month still get to have the services of a range of discretionary fund managers. Normally, to access a discretionary fund manager you would need to be running a pension pot of half a million or more. Now for, say £20 a month, you are getting the same skill sets and the same level of updating.
"That is a powerful story for employers with modest numbers of employees,” he comments.
The difference between TAM's services and the service an employee gets from the government's default provider, NEST, is that with NEST employees choose their own funds and the vast majority will lack the experience to do so wisely.
With TAM the employee has discretionary find managers working for him or her, picking the best performance funds.
"If a particular fund is stagnating because it is in the wrong country or the wrong sector our discretionary managers will sell that find and move into a better performing fund. Your money is being actively managed until retirement. That is a powerful selling point for us," he comments.
David Philpott, the founder and managing director of Staffplan, founded his company a year ago after a very unsatisfactory meeting with a major scheme
"They said they would only deal with companies with more than five employees, paying in an average of £62 a month, which would mean the employees would need on an average to be on a salary of £40,000 or so.
"Plus they would only deal with employers who were at least six months from their staging date – a deadline the provider has now pushed up to year.
"I said they would be excluding more than 90 per cent of the market with those criteria, and they said they knew that, but those were their rules," he remembers.
Philpott wanted to be able to sit in front of any employer and be confident he had a scheme to recommend for them regardless of the details about their employee case (how many, contribution levels and so on). “We found a provider in TAM Asset Management, that fulfilled that criteria and that could provide discretionary fund management services at any level of employee numbers and contribution levels.
"We also found an excellent administration services provider in Corplan, which means that unlike the big providers, who are cherry picking clients, we can provide a solution to all employers," he comments.
Philpott points out that Staffplan has now progressed to the point where it is a scheme provider in its own right, instead of being an advisor to employers on auto enrolment. He expects demand to ramp up sharply in this months ahead.
"Historically, before auto enrolment, the industry coped with meeting demand for around 1000 new pension schemes a quarter. When we hit the peak the industry will be having to deal with demand for some 200,000 schemes a quarter. We are dealing with this by issuing our Reserve Account, which enables employers to set up well in advance of their staging date, without actually paying any contributions over until the start date.
"This enables them to avoid having to struggle when thousands of employers are all trying to initiate auto enrolment schemes simultaneously," he comments.
19 April 2015, Anthony Harrington