What advisers need to know about switching AE providers

According to Glynn Jones, divisional director of group savings and investments at national corporate advisory group LEBC, the first thing to consider might be whether it is worth it.

He comments: "The market for switching is limited. There will be some larger employers switching providers, perhaps for improved terms or better functionality, including auto-enrolment, but generally there is little appetite to switch provider after the employer has gone through the pain of auto-enrolment in the first place."

Look beneath

According to Chris Daems, director of Cervello Financial Planning, there can sometimes be little to differentiate one scheme from another - at least on the surface.

There are a number of factors where switching might be worth considering.Chris Daems

He comments: "All auto-enrolment compliant providers tend to meet a number of minimum standards relating to charges and the default funds that are available to employees.

"This means that switching pensions should be considered carefully, as there can be less which differentiates your typical workforce pension scheme than there are differentiators for individual and personal pensions.

"That said, there are a number of factors where switching might be worth considering", he added, urging advisers to look deeper.

He comments: "These factors include the financial strength of the provider, service levels, fund choice and compatibility with the payroll software an employer uses."

Fund choice

For some employers/employees, they might consider switching because the underlying investment funds are not diverse enough, or not suitable enough.

Natanje Holt, retirement expert for Bravura Solutions, says: "Advisers need to know how the provider is approaching the default funds to ensure good consumer outcomes."

According to Mark Fawcett, chief investment officer for NEST, getting the investment strategy right first time means many people will not need to consider switching simply because their investment funds are not diverse enough.

He explains: "Most auto-enrolled pension savers stay in the fund they are first put in. We do not think that needs to be a bad thing. 

"It is because we knew most of our members would stay in the default fund that we have designed it so carefully to meet their needs.

"We began from the starting point that we wanted a default fund which even the savviest member who has the appropriate investment expertise would make as their conscious choice."

Service

Ms Holt adds it is critical to get the service levels right first time, otherwise advisers may advocate switching to a provider with a better track record of service.

She explains: "Advisers need to be able to gauge the level of customer service provided, along with ongoing costs, and ascertain whether the provider is able to scale, and whether the provider will even be there in the long-term."

The Pensions Regulator has issued a series of guides that will help advisers, employers and pension professionals with all aspects of choosing, setting up and enrolling workers into auto-enrolment pension schemes.

One key thing to note is to make sure service levels and processes at the new provider are absolutely spot-on to cope with the changes to contribution levels, and that employers are set up to communicate effectively to staff not just the details of the new provider, but also the details of rising contributions.

Figure 1 shows the rise in contribution levels (Source: Nest).

Jason Green, head of workplace research for F&TRC, says: "Advisers must fully understand why they are switching and identify the benefits.

"These should be benefits to the members as achieving good member outcomes should be at the core of all decisions that are made."

Compliance and tax

Another thing advisers should consider if they do believe switching will be in the scheme member's best interests is to ensure the new provider has the best functionality and continuity of compliance.

Mr Jones explains: "If switches are to proceed, it will be best to let the future provider ensure continuity of auto-enrolment compliance."

It is also worth checking what sort of minimum and maximum contribution levels a scheme is set up to do if advisers are to advocate switching between schemes.

For example, in April, NEST's maximum contribution cap will be lifted allowing members to contribute the full annual allowance of £40,000 a year.

In addition, NEST will open its doors for the first time to transfers in with a 0.3 per cent annual charge.

Do not underestimate how massive a task it is to do wholesale data transfer when migrating a scheme. Andy Agathangelou

This will give greater flexibility and help for people who are intending to save as much as possible for their retirement.

While many schemes do allow members to invest the full allowance, advisers will have to make sure employers and employees are not exposing some larger pension pots to any inheritance tax (IHT) liability.

Graham Peacock, managing director of Salvus Master Trust, comments: "It is important advisers make the best recommendations for their clients by being aware of discrepancies between schemes that may mean members become liable to IHT, for example."

However, with the current contribution rates for auto-enrolment (2 per cent on a band of earnings) IHT is unlikely to be a consideration for most workers on average earnings unless they have significant previous pension savings they would want to transfer.  

Data systems

The need for ensuring data is fully protected and up to date is also something that advisers and trustees should consider, according to Claire Montgomery, senior business analyst for Trafalgar House.

It is up to trustees and their advisers to make sure the scheme into which they are considering switching has complete, thorough and up-to-date data processes.

Andy Agathangelou, founding chairman of the Transparency Taskforce, lists technology as a key criterion when it comes to switching or staying.

He says: "There is no room for complacency. New technology is coming to the market all the time, so do not allow your clients to become out of date with what is available.

"That said, do not underestimate how massive a task it is to do wholesale data transfer when migrating a scheme."

Moreover, Ms Montgomery says schemes should beware of the data risks being left uncovered by only focusing on traditional conditional data testing, because other, more significant data issues might be sitting below the surface which simply would not be picked up through a basic conditional data analysis. 

She explains: "Common and conditional reporting goes some way to identifying missing data, but just focusing on this assessment can mean several more complex associated problems are missed as a result of historical administration processes."

She highlights some of these issues:

• Administrators have created non-standard data fields which cause items to be held in abstract fields.
• Dependent records are sometimes not linked to the original deceased members.
• Valuable data and benefit information is not clear, but stored in notes fields.

She states: "We regularly encounter these bigger problems with data as part of our scheme transition projects, and they come as a surprise to many trustees as they were given a clean bill of health from a conditional data analysis.

"Since it is now more widely recognised that good quality data is key in improving service to members, the time is right to take data quality interrogation to the next level."

Mr Green offers another practical comment: "It is crucial to understand who owns the existing scheme and client data. 

"If you are switching to a different pension provider, you must ascertain how easy it is to get access to the data which you have accumulated over the past three or so years, as this will be needed to meet regulatory duties.

"This would be particularly relevant when understanding which employees have chosen to opt out."

Mr Daems adds: "While middleware played a significant role in the early days of auto-enrolment, we have seen payroll software providers and bureaus improve their propositions.

"This is why we are seeing fewer employers switching pension scheme during this re-enrolment period, but many are looking at their systems, processes and software to see if they can manage auto-enrolment more effectively."

simoney.kyriakou@ft.com