Auto-enrolment (AE) was once seen as an administration task, primarily driven by the needs of payroll staff who had little interest in the quality of the pension.
However, often driven by the fact that their own money is in the scheme, decision makers are now realising that some pensions are better than others at meeting employer and/or employee needs.
Common triggers for change include:
- Poor service.
- Desire to improve payroll compatibility and data inputs requirements.
- Desire for better default fund performance and/or fund choice.
- Desire to improve employee benefits package and/or engagement.
- Changes to the employer.
- Desire to be able to evidence ‘value for money’ and/or suitability.
The current market
It is important to understand that there are two clients to consider:
The market is also projected to increase significantly as new employers must now have a scheme in place when they start trading.
In addition, the minimum contribution rate is increasing 300 per cent between April 2018 and April 2019.
Advisers do not need to become employee benefit consultants, as they already have the skills and the knowledge required.
However, advisers do need to familiarise themselves with the regulations and have sufficient knowledge to evidence that they can improve on the existing arrangement.
The current workplace pension market
Defaqto has identified over 72 workplace pension schemes, open to new business.
Collectively the market can be described as:
Regulation and consolidation
There are two types of workplace pension governance: trust and contract.
The Pensions Regulator (TPR) regulates trust schemes and the implementation of AE, while the Financial Conduct Authority (FCA) regulates contract schemes.
Although this creates a mixture of rules, in the past few years both regulators have taken steps to improve the consumer experience and outcomes:
- The FCA introduced independent governance committees (IGCs) to oversee schemes at the provider level and report on how ‘value for money’ is being achieved. However, as there is no set reporting format or stated measurable targets their impact has been minimal.
- TPR is currently overseeing the implications of a new authorisation standard. We have already seen this drive a number of providers to merge and we expect more consolidation before April 2019 when the new standards come into force.
Triennial reviews opens the door to advisers
Under current regulations, employers must undertake a review of contributions and opt-outs at least every three years.
This creates an opportunity for advisers to consider the suitability of the scheme in meeting the employers' (and employees') objectives and remove issues such as those posed by the Equality Act (see below).
Every workplace pension must have a default fund, the annual management charge of which is capped at 0.75 per cent, although many charge less.
The cap somewhat ignores the fact that employers and/or employees can be charged extra, such as for administration.
Advisers should be careful to include these extras within their assessments.
It is worth noting that Defaqto data informs us there is little correlation between charges and performance.
How advisers can help employers meet the Equality Act standards
This is probably one of the most useful opening gambits for advisers.
AE guidance provided by TPR suggests employees that meet specific definitions can be excluded from the process.
However, these exclusions potentially meet the definition of ‘indirect discrimination’ as defined by the Equality Act 2010 and therefore by following the guidance an offence may have been committed.
The Equality Act defines ‘indirect discrimination’ as when an organisation's practices, policies or procedures have the effect of disadvantaging people who share certain ‘protected characteristics’.
Examples of ‘protected characteristics’ include age, disability, sexual orientation, marital status, pregnancy/maternity, race, and religion.