Grasping the nettle

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The number of employers undergoing auto-enrolment will rise significantly in the coming months, and, according to figures from Nest, 98 per cent of employers aware of the reforms have sought advice.

To discuss these issues, Financial Adviser teamed up with Nest to launch Nest Live Spring 2013, a seminar attended by those interested in auto-enrolment.

Speaking at the seminar, Tim Jones, chief executive of Nest, said: “There are 6000 employers starting auto-enrolment in April 2014, 12,000 in May, a gap then 12,000 in July. Just breathe in those numbers. Just think about the capacity of the industry and how it is going to respond to those numbers. It is going to be difficult. The pensions industry has never brought in that volume of employers over that compressed timetable.”

Employers face significant challenges, and, according to Nest, have a high expectation of support from their advisers. Figures from Nest show 94 per cent of employers are expecting support on understanding the legalities. When it comes to the auto-enrolment process, Mr Jones said employers’ chief concerns include: workforce assessment every pay period to identify who is eligible for auto-enrolment; managing payroll processes; communicating the changes; coping with a high-turnover workforce; and dealing with low-paid workers, who could easily flit between either side of the qualification criteria.

Mr Jones said: “This challenge is not about choosing the pension scheme – yes that’s important, but the issue here is that auto-enrolment duties require workforce assessment every pay period – that’s a non-trivial activity.”

Are advisers equipped to deal with the scope of this challenge and fully reap the rewards? This was central to the debate between industry experts at the seminar chaired by Financial Adviser editor Hal Austin.

Roy Porter, assistant director of distribution for Nest, certainly thinks rewards may come, but only if advisers “grasp the nettle” and ensure their business model is fit for purpose.

He said: “I personally think that demand will outstrip supply and when we get to early next year there will be a huge pull on advisers’ time. It is whether or not you have the capability, the business model, and the inclination to engage with employers. I definitely see it as a huge opportunity for advisers.”

However, some employers who are already struggling to manage the cost burden of auto-enrolment will be reluctant to stump up the cash required for the advice they need. This could be even more of an issue if the government decides to abolish consultancy charging on auto-enrolment schemes, which allows the cost of advice to be spread between the employer and employee.

Challenges

Speaking at a panel discussion, Martin Freeman, director of JLT Benefit Solutions, said: “Some of the challenges we have had while all those opportunities have also been there have been about the different skillsets needed, the different forms of remuneration and charges, and the willingness of employers to pay for some of this stuff and understand quite what a big a problem they have got.”

Roger Sanders, managing director of Lighthouse Group, said: “At what point do we point employers in the right direction and say, ‘Go and do it yourself’? Or do we have a fee model that allows us to charge for doing everything for them? It may be that offering a solution other than Nest might be appropriate.”

Meanwhile, Mr Porter said that adviser charges may have to be amended for smaller employers. “There will be a lot of employers out there who won’t be able to pay for advice”, he said.

The general consensus among advisers is that it is fundamentally important to get employers to understand the role of Nest – which can be used not only as a stand-alone option, but also alongside existing schemes.

Some employers will use Nest for those who have to be auto-enrolled as they have not voluntarily joined the current scheme. Others will use it just to auto-enrol new joiners, some of whom may have a waiting period before they are entitled to the organisation’s established pension scheme.

Nest is working with a number of private pension providers, including Prudential, Scottish Life and Standard Life, to offer employers this kind of hybrid provision.

It has also unveiled a new website designed to support employers and advisers through the auto-enrolment process. The website, which is now live, includes information on employer duties; guidance on the preparation and online set-up of Nest; and information on key areas: assessment, enrolment, contributions and opt-outs.

Mr Freeman said: “Nest is clearly playing a massive role in the auto-enrolment landscape – there are lots of employers that have used Nest as part of their duties, and essentially it is not possible to advise a client without considering Nest and understanding it.”

Nest now boasts over 100,000 scheme members and is working with 300 large employers. It announced a further 26 new employers during the seminar. These include Greene King, The Random House Group and Timpson.

But many believe that the restrictions on Nest are damaging its appeal among

employers wanting to cater to higher earners.

Early during the Nest Live Spring 2013 seminar, Mr Jones admitted that the £4400 contribution cap was problematic, and acknowledged that, as it stands, Nest will allow employees to meet their required duties, but may not allow them to do what they want for their workers. He said: “Customer practice is that employers pay their higher-paid staff a percentage of total income often on basic pay, and often an even higher percentage so that the package gets richer as the employee gets nearer the top of the organisation. At a certain point the contribution cap on Nest does get in the way.”

Mr Jones reiterated that Nest is calling for the government to lift the restrictions, including the contribution cap and the ban on transfers in and out of the scheme. The work and pensions committee has also called for the restrictions to be lifted ahead of the 2017 review. This comes at a time when concerns have been raised that lifting restrictions, which form part of the conditions approved by the EU for the state aid of Nest, will give it an unfair advantage over providers that have not benefited from public funding.

Difficulties will also arise if advisers do not take the necessary precautions to ensure that high net-worth individuals are not enrolled. This is because high earners may have fixed or enhanced protection to protect accumulated pension rights from tax. They will lose this protection if they gain additional pension entitlement.

Clients

Mr Sanders said: “If you are an IFA that hasn’t traditionally worked in the corporate space you really need to get your head around what auto-enrolment is because clients who suddenly find themselves auto-enrolled will be coming to you and saying, ‘What the heck has happened?’”

The full impact of auto-enrolment and the pension reforms will become clear in the coming months. Advisers have to act now to turn it into an opportunity, otherwise it will completely overwhelm them.

Nicola Sullivan is a freelance journalist

Key points

- Nest has unveiled a new website designed to support advisers through the auto-enrolment process.

- The contribution cap on Nest poses challenges for higher earners.

- Advisers are urged to ensure their business models can cope with the flood of new business coming into the market.

Panel

Roger Sanders is managing director of Lighthouse Group. Mr Sanders has over 40 years’ experience in insurance. Prior to joining the Lighthouse Group, Mr Sanders was at Helm Godfrey Partners, where he had been deputy chairman and head of employee benefits, after merging his own IFA practice with the firm in 2005. Between 2000 and 2003, Sanders was the UK director of Islamic firms iHilal Financial Services and Rasmala Investments, developing Shariah-compliant products and advisory services, and served on the Bank of England’s working party on Islamic finance.

Martin Freeman is a director for JLT Benefit Solutions and helps organisations understand the practical implications of auto-enrolment on their businesses and to develop effective approaches to it. He has a background in both pensions consulting and software development and has a particular interest in using technology to deliver better outcomes for members. He joined JLT Benefit Solutions in 2004 following the acquisition of Profund Solutions, and previously worked at Claybrook Computing and actuary firm Bacon & Woodrow.

Roy Porter is assistant director of distribution for Nest. He has more than 30 years’ experience in the financial services industry, and has worked as a specialist in the retirement planning sector for most of that time. He is also a member of the Personal Finance Society and the Pensions Management Institute. Mr Porter and his team are primarily responsible for raising awareness of Nest and communicating the benefits of the scheme with employers and their professional intermediaries.