Auto-Enrolment conundrums

By the end of this year, the ten largest UK employers will have been operating under the new auto-enrolment pension rules for roughly one business quarter.

However, even by then, it is quite possible that the public and even politicians will take some time to appreciate the full implications. The staging by employer size and gradual rolling up of contribution levels means this is a revolution in slow motion.

Even if AE fails in its aims the impact will be substantial, because a failure would put compulsory pension saving for employees firmly back on the political agenda.

But either compulsion or a successful reform that sees many more people opting into pensions will have huge implications for company staff costs and personal budgets.

It will divert cash – a three per cent of salary minimum from employers and four per cent of salary minimum from employees – from elsewhere.

That could prove to be very significant for financial firms because other discretionary spending on financial services could be cut to make up for it. Almost all firms need to consider their strategies for convincing people not to cut back.

At Space 01, we’ve been mulling how the challenge varies for different types of firms.

A big ‘waterfront’ financial services firm such as a bank assurer with many distribution channels may have all the bases covered. What it might lose out from personal pension, bond or Isa investment, it may get back through the corporate pensions channel. It could even help cement the relationship with scheme members and allow cross selling. Eventually that could be an opportunity, though it wouldn’t be wise to take anything for granted given the state of the economy.

EBCs and IFAs which do corporate pension business have an opportunity to offer existing and new clients compliance services to make sure they meet government requirements. The introduction of consultancy charges complicates matters quite significantly when it comes to discussing the bill.

It may be a while before many employers that haven’t offered pensions to the majority of their staff realise that paying someone to help them comply is money well spent. Firms may also want to think about how they can convince employers to maintain an on-going relationship with them.

Advisory firms offering effective communications programmes can help employers derive as much value and employee good will as possible from something they have to do and have to pay for. But we suspect that is an easier concept to get across to employers which already offer a substantial benefits programme.

However the extra costs of compliance will surely see some finance directors putting pressure on the overall benefits spend. It may not just be generous pension schemes that could be scaled back, but perhaps group protection as well. Employers may be seeking cheaper options or decide to offer benefits where they offer access but don’t pay for them or certainly not in full.

Advisers may want to think about how they can measure and demonstrate a return on investment for their corporate clients. Employers may also need reminding about how group protection can be integrated with absence management and better pensions with retirement management. With retirement management, some employers may not appreciate the full implications of the removal of the default retirement age and what happens if employees in their 60s cannot afford to retire even though their employer wants them to.

Protection insurers need to consider the pressure on budgets for both group and individual policies. How much do they want to help their intermediary partners marshal their arguments and can communications and technology help?

There is another thorny issue. Will many of the AE target group be better advised to insure their income or their health, rather than investing for a pension? Outside of bespoke advice, there may not be an easy answer to getting that message out there. It is certainly an interesting sales and compliance challenge for insurers.

Fund managers will also want to make the case for specialist investment management above and beyond that available in the sort of auto-enrolled default fund offered by Nest. It is true that there is a big group of established Isa investors, who have substantial pensions and Isa pots already and whose behaviour may not change significantly. But there is certainly no harm in restating why utilising all your tax wrappers can make sense. Fund managers are already facing pressure on charges from politicians and national newspaper money sections. The focus is on the cost of auto-enrolment default funds but active fund managers, in particular, may want to give some thought to demonstrating why value for money is better than as cheap as possible before they suffer any more collateral damage.

Finally we come to individual IFAs. Advisers may want to think long and hard about whether they wish to refer their valuable entrepreneur/director clients elsewhere for auto-enrolment advice or to establish that capability and offer that service themselves. For individual clients, they may also wish to consider how to put any AE arrangement into the context of general financial planning. It may not be a huge adjustment, because all advisers are already taking account of company pensions at the moment.

It will become more significant especially as auto-enrolled DC pots build up and have to be taken into account as part of clients’ overall portfolio and retirement strategy. It could even have a bearing on an advisers’ execution-only offerings. Dare we ask should advisers even be offering something higher up the risk scale for people invested in a low risk Nest strategy?

There are a host of questions surrounding auto-enrolment that we’ve been debating at the Space 01 offices in the last few weeks. We certainly don’t have answers to all of them.

But we think that everyone in financial services, whether specialists or not need to give the matter some thought and how that might fit into their marketing and communications.

But we would also love to hear your views. Please email Marilyn.cole@space01.co.uk

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