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AUTO-ENROLMENT– SEPTEMBER2013

The Specialist

BEATINGTHECAPACITY

CRUNCH

In association with

23 September 2013 TheSpecialist 3

IntroductionThe Specialist

Editor’s comment

Contents

The largest employers have comeandgone, and the resources theypiledinto their stagingpreparations yielded some impressive engagementfromemployees.

But nowauto-enrolment is approaching its crucial phase. As the larger,oftenbetter-preparedorganisationsdepart the stage, their smallercounterparts are approachingenmasse.

These employeepopulations are less attractive toproviders,whoarealsodemandingmore lead-in time than surveys suggest employers arewilling to give.

This editionof TheSpecialist takes as its central theme this so-calledcapacity crunch, andhowsmaller employers canmanage the challengesit throwsup, aswell as lessons from thosewhohavealreadyundergonetheprocess.

But before you readon, let’s consider thewider picture.The latestDepartment forWorkandPensions research considers the

ultimate impact of auto-enrolment and statepension reformon securingadequate retirement incomes.

For all the sweat and tears in government andat companies, theamount of people facing inadequatepensioner incomehasbeen reducedfrom13.2m to... 12.2m.

TheDWP is keen to stress its “cautious assumptions”, but it is hardlycompelling stuff. A case studyoffered in the researchmakes for evenmoredepressing reading.

Aworkerwith a constant incomeof £28,900, auto-enrolled at 25 andworkinguntil 68,will get a replacement ratio of 55per cent at retirement.

This is a six percentage point improvement onwhat theywouldhave gotwithout AE, but still well below their target 67 per centreplacement ratio.

I knowwhat you’re thinking:what 25-year-old thesedays is expectingto retire at 68?Oneof the solutions offeredby thegovernment is, indeed,towork longer.

But is that anoption for all types ofworkers at retirement? Thegovernment’s own figures underline thepoint thatAE is only a startingstepon thepath to fix theUK’s retirement problems.

Unless employers across theboardexceed the statutory contributions,or employees respondextraordinarily to their newpension schemewithadditional saving, thebarwill have tobe raised for somethingworthwhiletobeachieved.

[email protected]/iankmsmith

Agoodstart,butwe’renotthereyet

Chart theprogressof auto-enrolment, fromconception to fruition,with an illustrated timelinemarkingall the key events

LisaBotter looks at how the first andbiggest employers to auto-enrolfared in theearly stages

Default funds:With themajority ofmembers destined for thedefault,MaxineKelly underlines the importanceof getting it right

Escaping thecapacity crunch:GillWadsworth counts the cost ofleavingAEpreparationsuntil the lastminute

SadeLajaexamines theexperiences of theUniversity of Edinburghand the lessonsothers can learn

Mastertrusts:Pádraig Floydputs the supposedly easy governanceoptionofmastertrusts to the test

Casestudies

Analysis

04

06

08

12

10

09

Adecadeofreform

Switchingprovider:KatieMorleyweighsup thebenefits for earlystagersmoving tomore favourable arrangements18

The interviewCatherineLaffertyhears howoneSMEadviser is looking forward tomeeting the challengesofAEheadon22

The Specialist

4TheSpecialist 23 September 2013

Auto-enrolment | Timeline

TimelineAdecadeof reform

2002December

October

May

December

November

March

November

2006

2005

2009

2004 20082006

Agreenpaperestablishes thePensionsCommission, chairedby Adair Turner, toreview theUKpensions system

In itswhitepaper‘Personal accounts: anewway to save’, thegovernment explainsthe Personal AccountsDelivery Authoritywould deliver thescheme, then knownas personal accounts,for employerswithouta pension plan

The Pensions Commission publishesits second report, recommendingauto-enrolmentandamoreuniversal statepension

DWPpublishes aconsultationgivingmoredetail onemployerdutiesunder the reform

The PensionsCommissionpublishesits first report on theUK’s retirementchallenges

PensionsAct 2008 isgiven royal assentincluding auto-enrolment and PADA

Work and pensions secretaryJohnHuttonMP introduces thewhite paper, ‘Security inretirement: towards a newpensions system’. Thispresents options includingauto-enrollingpeople intopension schemeswithemployer contributions

23 September 2013TheSpecialist 5

The Specialist Timeline | Auto-enrolment

PAYE SCHEMES TO REGISTERWITH THE REGULATOR FOR AE

Jul 13

Aug13

Sep13

Oct 13

Nov13

Dec13

Jan14

Feb14

Mar14

Apr 14

May

14Jun14

Jul 14

Aug14

Sep14

Oct 14

Nov14

Dec14

Jan15

eb15

Mar15

Apr 15

January November

Spring

January

October

October

July

October

2012

2010

20102012

2013

2011

2014

2010

2017

Auto-enrolmentkicksoffwith firststaging date foremployers of 120,000ormore employees,then continuingmonthly forprogressively smallercompanies

PADAannouncesNest (NationalEmployment SavingsTrust) as thepermanent name forthe personalaccounts scheme

PADAwoundup andNestCorporationestablished

Employerswithmorethan 250 employeesare told their stagingdate is unchanged,and smalleremployers areallocated stagingdates fromApril2014onwards

Staging dateof employersthat havefewer than1,250workers

The governmentannounces stagingdates for smallbusinesseswill bepushedbeyond thenextParliament

Capacity crunch is set tohit as the number oforganisations staging peaks

TheDWP issues its ‘Makingautomatic enrolmentwork’review, including aligningearnings thresholdswithpersonal taxallowances Thegovernment is set

to reviewauto-enrolment's progressand howNest is gettingalong, five years afterthe reformbegan

The Specialist


Auto-enrolment | Case studies

BT joinswithunions towinback83%ofopt-outs – June 2013

BT has seen 83 per cent of workers who had previ-ously opted out of its DC scheme staying in, afterbeing auto-enrolled inNovember.The communications company auto-enrolled

2,300 of employees which had previously opted-outofitsStandardLife-runBTRetirementSavingschemeand only 400 have chosen to leave.BTtooka low-keyapproachtocommunicatingthe

reform and waited until a month before its stagingdate to reach out employees. This involved workingwith union representatives.“Nowthat everyone is in, ournextphase is tokeep

bombarding them with information until theythink, ‘If I actually do somethingmaybe they’ll stopnaggingme’,” said head of pensions KevinO’Boyle.

JohnLewis campaigncurtailsAEopt-outs –May 2013

The John Lewis Partnership reported an initial 5 percent opt-out rate after its staging date in February.Theretailgroup,whichalsoownsWaitrose,enrolled9,000of itsworkers into itsexisting£236.3mdefinedcontribution scheme.Dinesh Visavadia, head of pensions at the group,

said the ratehad increased to5per cent from3.2percent as “money is being deducted from [members’]paycheques” and predicted opt-out would graduallyincrease to between 10 and 15 per cent.

Minimisingopt-outsThe retail group encouraged member engagementthrough a campaign and conducted a survey ofmembers.“We needed to make sure the way of engaging

with membership was different, and to think itthroughintermsofhowitmightoperate,”Visavadiasaid. “If you engage with them in a very positiveexperience, youwill get a positive outcomeand verylow opt-out rate.”

Higher-than-expected engagement fromworkers among the UK’s biggest employershas been a running theme in PensionsWeek’s coverage of auto-enrolment.

Before the first employers were set to stage, thegovernment had predicted 30 per cent of employeeswould rejectworkplace pensions.However, as employers began enrollingworkers it

became clear employees were not opting out at thepredicted levels – reports of opt-outs as low as 3 percent took the industry by surprise.The following case studies showcase the different

approaches these employers took to educate staffandminimise opt-outs.The case studies also highlight the different

approaches taken to implementation, with somecompanies opting to enrol employees into existingschemes while others decided new funds were theway to go.InMarch, supermarket Asda reported opt-out lev-

els of 8 per centwhich “stunned” its pensions team.It was thought that workers in retail companies,

due to youngage, lowpayandvariablehours,wouldshun pensions. However, it seems the opposite wastrue. Some industry experts attributed this to itsstaff not noticing they were paying into a plan,because of theirworking situation.The key theme running through the case studies

was communication. Both Asda and John Lewisundertook sustained communication strategies toengage employees and educate them about thebenefitsofapension,whileBTtookasofterapproach.However, the true test of the reform will come

as smaller employers begin implementing it.Will employees remain as engaged as those ondisplay here?

LisaBotter isdeputyeditoratPensionsWeek

LisaBotter recounts the keyauto-enrolment case studies fromthe past fewmonths

HowtheUK’slargeemployersmanagedauto-enrolment


The Specialist Case studies | Auto-enrolment

Charitybearsbrunt ofAE contributions– September 2013

Action for Children has chosen to place a greaterburden on itself than employees when setting itsauto-enrolment contribution levels.The charity decided to flip current employer

obligations, contributing5per centwhile employeescontribute 3 per cent.“We feel that as a responsible employer it seems

fair to do that for people,” said NickWood, pensionsmanager at the scheme.Action for Children began auto-enrolment in

August,havingused the three-monthpostponementperiod. The charity’s DC plan had 1,350 memberswith assets totalling £21.5mbefore its staging date.The scheme had historically had low take-up of its

pensionofferings.Wood said a campaign involving aseries of workshops had potentially turned manyopt-outs into engagedmembers.■

AssociatedBritishFoods reports 3%AEopt-out rate –May 2013

Associated British Foods has seen a less than 3 percent opt-out rate of its 1,500 employees auto-enrolled in February. The food and retail groupdecided to use target date funds as the default formembers enrolling in the scheme.The funds, provided by AllianceBernstein, are

structured in three-year ‘vintages’ basedona saver’sretirement date. Since the funds were establishedin September, they have all outperformed theirbenchmarks, according to the company.Thegroupundertookanextensiveawarenesscam-

paign to explain the reform and the subsequentlywell-received default investment strategy.The communication strategy included focus

groups, personalised letters, video and evenanimation to explain why a suite of TDFs providedthe best default strategy for members. The pre-staging campaign resulted in 9,000 employeesjoining the scheme before the staging date.

Wehadpeoplecoming in to

manhelplinesbutwe justsent themhome.We

wereblownawaybyhowquiet itwas

Asda reports 8% auto-enrolmentopt-out rate –March 2013

Asda announced an auto-enrolment opt-out rateof 8 per cent of its eligible workforce earlier thisyear. The supermarket chain was one of the firstorganisations to auto-enrol its staff in October2012 and settled on a trust-based arrangementwith Legal & General. The scheme also madechanges to its default fund and added a salarysacrifice option.Asda carried out a full market review of all

providers but ultimately had a smaller pool tochoose from than it had hoped. “We probablyapproached around 10 providers but only hadthree to choose from,” said pensions managerSteve Jones.

MessagingCommunication was key to the success of thereform. The supermarket engaged in a sustainedway its 175,000 employees to ensure the changeswere not seen as a pay cut.It set up a strategy group to deliver its campaign

that concentrated on targeting employees twomonths before staging. While several media wereused including video, face-to-face presentationsand print, Jones said the focus was on “the clarityof message rather than clever channels”.The supermarket also set up a pension hotline

for employees in their four-week opt-out period,however only 3 per cent of employees used it.“Wehad people coming in tomanhelplines but

we just sent them home, it was unbelievablyquiet,” said Jones. “We were blown away by howquiet it was.”

The Specialist


Getting theright fitwhenchoosingadefault fund foryourworkforceWith thevastmajorityofnewlyenrolledmembersdestined for thedefault fund,making it fit their needs is of prime importance,writesMaxineKelly

Negative member reaction has as much impor-tance as the returns themselves, says Jamie Jenkins,head of workplace strategy at Standard Life, whoargues that theway towin on both points is to havea flexible and responsive strategy.“Dynamic lifestyling can achieve this level of

future-proofing by allowing the fund manager theflexibility to make changes to underlying invest-mentswithinspecifiedriskparameters,without themember having to switch funds,” he says. “That is acrucial difference to traditional lifestyling, and onethat is often overlooked in the debate.”The monitoring of the effectiveness of schemes

has caught the attention of the Office of FairTrading, which is on the cusp of completing a studylooking at howwell the pensionsmarket is workingfor consumers.One key target is governance, which it says “may

notbesufficienttoensurethatschememembersaregetting the best possible investment outcomes”.Many argue that a good base level for any

auto-enrolment scheme should be the NationalAssociationofPensionFunds’PensionQualityMark,whichsaysa schemeshouldmeetminimumcriteriaon contributions, governance and communications(see box).

Bringing themessage homeWhile employers have statutory obligations there isplenty of scope for tailored discretionary communi-cation, says Latham. “This is an area where anemployer can demonstrate the value of the benefitsthey offer their staff and get some recognition.”Aswellaspaper-basedcommunications,mostpro-

viders have also developed online portals in whichthemember can view the performance of their pot.Good communications are clear, short and

delivered inawaythatallowspeople toeasily receiveand read them, says Latham, adding: “[It] does notneedtobeoverlycomplex,butitneedssomethoughtif it is to be effective and cost-efficient.”Communication is such an important part of the

success of the default that Jenkins believes it shouldinform the design of the investment strategy itself.He says being able to select a risk profile that fits

each member, “rather than asking them to selectspecific funds which they do not understand andwhich in all likelihood they will never review orchange”, ultimately makes the overall objective ofthe pension savingmission easier to digest.

MaxineKelly isa journalistatPensionsWeek

While auto-enrolment is themechanism toget the UK’s workforce into the savingshabit, schemes’ default strategies willdetermine their retirement outcomes.

Anoverwhelmingmajorityofpeopleareexpectedto choose or fall intowhatever default arrangementtheir employer puts in place – indeed, Nest reportedin July that 99 per cent of the 300,000 individuals ithad enrolled had gone into the default.And a TowersWatson study into FTSE 100 defined

contributionschemesshowed80percentofworkersended up in the default fund.Such funds carry much of the burden of validat-

ing thewhole AE exercise. As such,many employersare rightly eager to not default themselves, andignore the opportunity to design and put in place astrategy that is right for their particularworkforce.Consultancy Towers Watson’s report published

earlier thismonth, ‘Designing andmonitoringDCdefault strategies’, says the scheme fiduciary –whether a trustee board, employer or contract pro-vider – is responsible for creating the frameworkin which the scheme’s objectives are designedand articulated.In July, the Pensions Regulator issued a guide

for employers on selecting a good-quality pensionscheme for AE, in which the overriding messagewas simplicity. “Members should be given theopportunity to understand the set-up and struc-ture of the scheme, but they should be protectedeven if they don’t make active decisions abouttheir pension savings,” it stated.The chosen pension provider should be able to

justifywhy the investmentoptions “areappropriatefor members now or in the future”, and the watch-dog advises employers to quiz providers on who’sin charge of monitoring the default, as well as theperformance of the fundmanagers.The biggest threat to real returns is inflation, so a

defaultstrategyshouldaimtobeat inflationoverthelonger term by 2-3 per cent a year to be perceived as“decent”, saysNeil Latham,principal at consultancyPunter Southall. But at the same time, the schememust avoid discouraging individuals throughvolatility and losses.“The answer is a well-diversified investment

option that takes account of changing investmentmarkets by dynamically allocating assets to differ-ent areas,” Latham says. “This is not easy and willcost more than an off-the-shelf solution, but thelonger-term returns are potentially improved andthemaximum loss can be better controlled.”

Auto-enrolment | Default funds

theNAPFPeNSioNQuAlityMArkreQuireS ScheMeS toMeet certAiN criteriA,iNcluDiNG:nA10per cent total contribution

nRobust andcontinuedgovernanceandmonitoring

n Initial, ongoingandat-retirementcommunications thatare clearandengaging“soas toenablemembersto takedecisionsabout their pensionand retirement”

23 September 2013 TheSpecialist9

Mastertrusts | Auto-enrolmentThe Specialist

What theascentofmastertrustsmeans foryourAEchallengeWith auto-enrolment putting the focus back on costs, mastertrusts have undergone aresurgence – but do they offer effective governance? Pádraig Floyd investigates

The governance model of each mastertrustdictates how it operates.There is some confusion in the marketplace, as

the perceived ‘default’ providers such asNest, NowPensions and The People’s Pension offer a singleoption, whereas some insurance companies offermany, with governance around the structure.“It’s important to understand the differences,”

says Ken Anderson, head of DC at Xafinity, “assome may offer a governed approach, whereeverything is done by the insurance company,such as admin, investment and the retirementstage.”For Anderson, not only does this limit choice,

but it falls far short of a trust-based model, withserious implications for employers to consider.After contributions, investment strategy is the

single most important factor in determiningretirement income, but some models onlyreview their investments once every three years.“I don’t think that is what trust is all about,”he adds.He also fears the current focus on costs will

drive down quality in default investments, asschemes source cheaper options. This is not onlythe regulator’s influence, either.Anderson suggests some schemes have been

ditching diversified growth strategies becausethey do not fit within the 0.75 per cent ceilingset by theNational Association of Pension Funds’Pension Quality Mark.“Diversified growth may be more expensive

but that does not mean it doesn’t offer betterquality to the member,” he says.Thoughpotentiallyanattractiverouteforschemes

to gain access to a trust-based arrangement, sizecontinues tomatter.Small schemes may find their way barred to

all but the mass-market providers – Nest, NowPensions and The People’s Pension – as this is acompetitive market and providers have learntthe lesson of stakeholder pensions and will notreadily write unprofitable business.Large pension schemes have also faced diffi-

culties as bulk transfers have been technicallychallenging, but that appears to be changingas the market matures and the traditionalproviders become more experienced at runningthese schemes.

Pádraig Floyd is a freelance journalist

Employers and providers are now expectedto focus on value for money for membersof defined contribution schemes.The Pensions Regulator has only

recently made substantial steps into this area,with the publication of its DC code.The debate on delivering better quality DC has

raised the profile of the mastertrust, which hasemerged over the past few years as a rival tocontract-based schemes.Mastertrusts are nothing new, but fell out of

favour in the past 30 years as they were seen asinflexible and in some cases expensive.The arrival of auto-enrolment changed all

that. Employers saw it as a way to deliver apensionwithmore control over investments andcommunications – at least in theory – than agroup personal pension.Claire Bell, a partner in law firm DLA Piper’s

Manchester office, says mastertrusts can beadvantageous to employers. “An employer is ableto engage with the pension arrangement andeffect change if they choose,” she says. “Employersalso benefit from economies of scale.”Using a mastertrust will avoid the trouble and

expense of running the trust arrangement,and auto-enrolment will result in fewerongoing relationships with advisers, says AshishKapur, head of institutional solutions at SEI.This increases its appeal with many more typesof scheme.“A mastertrust is like running a club,” Kapur

adds. “You can minimise the costs and have thesame kind of costs as contract-based schemes.”But Philip Goodchild, a partner at law firm

Stephenson Harwood, remains unconvinced bythese positions. “Recently, a charity client wentcontract-based because it didn’t see a significantdifference between a large contract arrangementand a large mastertrust,” he reports.This will not be isolated to the charity sector,

he says, and advises employers to look at eachoption upon its merits.However, the regulator does not necessarily

agree. It has stated its desire to see the numbersof poorly governed small schemes reduced andsees mastertrusts as a possible solution.It has also made it clear it does not believe

all mastertrusts are born equal, publishingguidance on governance during its consultationearlier this year.

thEbAlAncEofpoWErAtrust-basedschemeisonlyasgoodas itsgovernance.Thebuckstopswith thetrusteeboard,butjusthowmuchpowerdotheyhave?

Someprovidersofferwhat theycall ‘governed’ solutions–a light-touchgovernanceregimethatlooksmuch likeabundledDCplan.Someseethisascommercialopportunism,askingwhether theyoffergovernanceorarecontractsindisguise.

Therearealsoconflictsof interestingoverningyourownoperation.Toavoidsuchaconflict,providershaveappointed independenttrusteesorchairsbutsomearguethisdoesnotgofarenough.

Asacommercial relationship,providerscanfire thetrustees if inconflict.However,absolutepowerdoesnotofferabsoluteconfidenceeither, saysKenAnderson,headofDCatXafinity,but ratherregular,comprehensiveengagement isrequired.“Independence isonething,buthowactive theyare is farmoreimportant,”hesays.

The Specialist


Auto-enrolment | Case study

SadeLaja finds theexperience of EdinburghUniversity bodes well forthe wider rollout of AE

Auto-enrolment has been less painfulthan expected for the pensions team atthe University of Edinburgh.Pensions manager Ann Banks says the

institution has not had as many queriesfrom new starters or other auto-enrolees asanticipated.“The biggest area of query comes from those

who want to opt out and are disappointed whenthey hear we can’t give them an opt-out form,”she says.“But as soon as we tell them how to obtain the

form they are actually quite happy.”The university has been enrolling around 80 to

100 employees a month since going live with thereform in March.

Opt-out resultsBanks says it has been impressed with the 23 percent opt-out rate, particularly as previous figuresfor its staff schemes were between 35 and 40per cent.The majority of the recent auto-enrolment

opt-outs have been foreign nationals who holdshort-term contracts with the university – notyounger workers as Banks had expected.“They think it is not worth staying in and they

are going to go back to their home country orelsewhere in the world after this employment,”she says.Edinburgh is using Nest to enrol some workers,

whomainly comprise catering employees, cleanersand accommodation staff.It also has the Universities Superannuation

Scheme, which staff of grade 6 and above enterinto.Workers of grade 5 andbelowwerepreviouslyplaced in the employer’s £240m defined benefitStaff Benefits Scheme.

Raising awarenessThese workers now default into Nest, but the SBSis open to them if they wish to switch into itfrom the state-sponsored plan. Since going live,the university has seen some workers take upthis option and opt in to the older plan.“Auto-enrolment has helped raise awareness

and has been beneficial for those who haven’thad any pension provision,” says Banks.“They now think, ‘Oh yeah, I forgot I could join

Edinburgh:Auto-enrolmenthasraisedemployees’awareness

my pension scheme, and it is a DB scheme, so I’lljoin that’.”To gear up for the changes the university

focused closely on communications with staff.This included writing messages on employees’payslips and conducting roadshows.

Payroll problemsIt also timed its communication drive for Januaryto avoid bombarding people with informationtoo far in advance of its March staging date.But despite most of its implementation of

auto-enrolment running smoothly, it has not allbeen plain sailing.Edinburgh has experienced problems with its

payroll system, says Banks, whichwas not able tocope with the volume of those being enrolled.“Our payroll system has let us down a bit; it is

not as good as we thought it was going to be,”says Banks.

The majority of opt-outs were fromforeign nationals on short contracts

Ourpayrollsystemhaslet

usdownabit; itisnotasgoodas

wethought itwasgoingtobe

23 September 2013 PensionsWeek 11

The Specialist Case study | Auto-enrolment

“We are having to do a manual workaroundevery month, but we’re getting to grips withwhat we need to do on a monthly basis.”

Eye off the ballPayroll providers were widely criticised in therun-up to the launch of auto-enrolment lastOctober.Concernswere raised aboutwhether they could

cope with demand and deal with complicatedissues like pay reference periods.Rachel Brougham, principal at consultant

Mercer, says payroll providers were generallyquite slow with their preparations.She puts this down partly to a focus on other

regulatory requirements that were happeningaround the same time, mainly HM Revenue &Customs’ real-time information project.“I think some eyes were off the ball for auto-

enrolment, so [providers] have probably come toit a little bit late and thought, ‘Oh my goodness,how an earth can we deal with this?’.”The operational side of things has been the

most challenging for its employer clients, saysBrougham.“This has included having data in the right

place at the right time and assessing it, andgettingpeopleauto-enrolled intoapensionschemewithin the fairly tight timescale [required],”she adds.

LobbyingThere are potential challenges that could arisefor employers with more than one scheme inplace, as Edinburgh has experienced.Banks says employers should lobby payroll

providers to ensure they are ready for thisscenario.“For a payroll provider they expect one pension

scheme, and that everyone will be auto-enrolledinto that one scheme. When you start to deviatefrom that, that is where problems can arise,”she adds.It had been anticipated that larger employers

would find the reform easier to implement,

although Edinburgh’s experience demonstratesthat certain areas are likely to be tricky fororganisations of all sizes.How to assess workforces has proved quite

difficult for a number of employers so far, saysSimon Tyler, legal director at law firm PinsentMasons, who has dealt with a number of queriesfrom employers on the issue.

Queries“Assessingtheworkforcehasbeenquitecomplicatedfor a lot of employers, especially those that havegot overseas workers or complex forms of pay withdifferent allowances,” he adds.Tyler says trustees have been less affected by the

new duties because it is the employer that is “onthe hook”. But the main question from trusteeshas been whether they can continue usingschemes already in place.Overall he thinks most large employers have

been able to successfully implement auto-enrolment. But he expects small and medium-sized employers will find the process moredifficult to deal with.“The larger employers have been able to use

the services of employee benefit consultants;they have been able to afford to do that and getthe best advice possible,” he says.

Personal experienceWith thousandsof smaller employers set to launchthe reform next year, what kind of experienceshould they expect?Banks says you only really knowhow tonavigate

your way through the process once you havestarted implementing it.“We were one of the first people to go live,

apart from your big supermarket chains,”she says.“It is just through experience of the legislation

coming in and looking at your own practices thatyou are able to see how it is working and the bitsthat are not working quite so well.”

Sade Laja is a former reporter at PensionsWeek

Youonlyreallyknowhowtonavigateyourwaythroughtheprocessonceyouhavestartedimplementingit

n The institution has experienced an auto-enrolment opt-out rate of 23per cent.

n Around 5,500 employees at the university are members of the USS andmore than 2,300 are members of its Staff Benefits Scheme.

n The university has enrolled between 80 and 100 workers a month sincelaunching auto-enrolment in March.

n SBS assets are worth around £240m.

UnivErSityof EdinbUrghStAging StAtS:

The Specialist


Auto-enrolment | Capacity crunch

Escapingthecapacitycrunch

Turning up late to the party may befashionable but it could alsomeanmissingout on the champagne and having tomakedo with a warm chardonnay.

And so it is for UK businesses that fail to gettheir operation’s auto-enrolment ready wellahead of their staging dates: all the very bestproviders and advisers may be gone.TheUK’s largest employers have already passed

their auto-enrolment deadlines and the goodnews is that this has been largely successful.However, next year’s staging dates cover much

smalleremployers– startingwith350-499workersin January, ending with just 59 in November –and present the pensions industry with a hugeinflux of companies, most tackling pensions forthe first time.There have long been predictions that there

would be a capacity crunch during the laterstages of the auto-enrolment process, but onlynow is it starting to become clear how seriousthis might be.Steve Herbert, head of benefits strategy at

corporate adviser Jelf Employee Benefits, says:“The entire [pension] industry is already at fullstretch and probably has been since the start ofthis year. Whether you are looking at providers oradvisers, they are maxed out [on auto-enrolment]already.”According to the Financial Conduct Authority,

there were 21,258 qualified financial advisers inoperation in the UK at the end of July this year,yet it is estimated there are more than 30,000companies with workforces between 50 and 250individuals that will need to be auto-enrolled inthe next 18 months.By the time auto-enrolment has been

completely phased in by 2018, 1.35m employerswill have been forced to comply with thelegislation.According to research from the Personal

Finance Society, published at the end of August,nearly half (49 per cent) of firms with betweenone and 49 employees – representing more than

half amillion businesses – will seek to employ anadviser when choosing a pension.These figures demonstrate the cavernous gap

between the availability of quality advice and theanticipated spike in demand.Even where employers choose to bypass advice,

there is a strong possibility they may struggle tofind a suitable provider.The Pensions Regulator has already warned

that the industry is not yet fully prepared for theneeds of the many thousands of medium-sizedemployers with staging dates next year.“Many providers are still developing their

propositions for medium, small and microemployers and it is important that progresscontinues, especially in the run-up to quarter two2014, when we anticipate that large numbers ofmediumemployerswillneedassistance,” ithassaid.In theory, no employer should be without

a pension provider since the governmentintroducedNest, which has a statutory obligationto take on any company irrespective of size orworkforce demographic.

Theentireindustry is

alreadyat fullstretch.

Whetheryouare lookingatprovidersor

advisers, theyaremaxed

outon [auto-enrolment]

already

Despite regulatorsandadvisersall compellingsmallercompanies to takeearlyaction,manymayhaveleft it too late tobagtheindustry’sbestAEproviders,writesGillWadsworth


The Specialist Capacity crunch | Auto-enrolment

However, Nest is under no obligation to offerany of the administration, payroll or otheressential services auto-enrolment requires. Nordoes it offer bespoke schemes designed to workwith specific workforce requirements.It is also far from clear that the government-

backed scheme will be free from its own capacityconstraints as tens of thousands of schemes reachtheir staging dates next year and in 2015.So employers expecting to enjoy a genuine

choice of provider may be in for a shock unlessthey have allowed plenty of time to attract asuitor ahead of their staging date.David Hodgson, director at employee benefits

consultant RSM Tenon, says: “Providers arebeginning to take a firmer stance and demandinga six-month lead-in time.“Our experience from talking to leading

commercial providers is there will be some thatwill look at the scheme data and see what theycan do, while others simply give a flat no.”Among the providers setting criteria for

acceptance isScottishLife.Themutual lifecompanysays it is unlikely to take companies that arewithin 12 or even 18months of their staging dates,

particularly if they have done little in the way ofpreparation to complywith their statutory duties.This additional demand sits alongside the

provider’s long-held requirement that companieshavemore than five schememembers making anaverage contribution of £750 a year.Business development manager Jamie Clark

says the insurer has little choice but to set suchlimits since it has to protect both profits andreputation.“Weare lookingatemployerswhoarepreparing

early for auto-enrolment as that will be crucial tomake sure everything is compliant,” he says.“There is a risk to Scottish Life, and indeed

any provider, if something goes wrong with ascheme at set-up, causing the regulator to takeaction against them for getting it wrong. We arecautious and conservative about that.”Scottish Life is not alone in setting tough

admission criteria. Fellow providers Aegon andPrudential also prefer clients to have more thana year until their staging date before takingthem on.Even where employers have an existing scheme

with a particular provider, it does not follow

Ourkeymessages toemployersare:knowyourstagingdate,planaheadandchoosebothaschemeandsoftwareprovideratleast sixmonthsbeforethatdate

Auto-enrolment is nearly one year in and continuingat pace.

This quiet revolution has already seen 1.4mpeople saving into a workplace pension, and earlyresearch of the country’s 50 biggest employersshowed an average opt-out rate of only 9 per cent.

Rolling out change on this scale is no small task.Up to 11m people will be eligible for automaticenrolment by 2018.

Of those, six to nine million will be newly saving orsaving more in all forms of workplace pensionschemes.

We are one year into a six-year rollout and thepensions press and some commentators arereporting an imminent capacity crunch.

The increased number of workplaces due to stagein summer 2014 should not come as a surprise toanyone.

We have clearly set out timescales and peopleshould be acting now to make sure they are readyfor their staging date.

Employers and our partners in the pensionsand payroll industries have made a majorcontribution in delivering these landmark reformsalready.

We want to build on this as medium-sizedemployers prepare to automatically enrol theirstaff into a workplace pension, creating standardproducts and communications that can be usedwith little or no cost to be used as rolloutcontinues.

The Pensions Regulator is ready and is guiding

employers through the procedure so that theyunderstand what they need to do to comply withtheir new duties.

They have already written to all those who arestaging in summer 2014 and have made available aplanning tool that outlines the steps employersneed to take to meet their obligations.

We promised we would listen to those employerswho were first to automatically enrol and we willcontinue to engage having set up working groupswith intermediaries, payroll and the pensionsindustry to ensure the processes work in practice.

Earlier this year we launched a consultation basedon this feedback from industry to improve thepracticalities of implementing automatic enrolment.These proposals included the following:■ Streamlining the process for assessing who iseligible for auto-enrolment. The new regulationaims to allow employers to assess eligibility usinginformation already collected by payroll systems.■ Extending the joining window from one month tosix weeks.■ Extending contribution deadlines to all newjoiners.

I believe this reform can transform the UK into anation of savers and knowing what you can expectfrom the state will give people the impetus theyneed.

We expect to see pension saving increase byalmost £11bn a year when it is fully introduced.

The message is simple: we have a big challengeahead but one we can work together to overcome.

SteveWebbUKpensionsminister

The Specialist


Auto-enrolment | Capacity crunch

that they will automatically be able to extend thatarrangement to be AE-compliant.Clark says: “The reality is that there are parts

of an employer’s worker demographic that wewouldn’t offer terms for, so Nest might be theonly option for them.We can help set up a hybridsolution with Nest, but that takes time.”Further, employers may find their existing

providers impose significant charges forimplementing auto-enrolment software andsystems that prove prohibitively expensive.Hodgson says: “Some employers think because

they always had a pension with a particularinsurer all will be well, but then they discoverthat provider is charging £15,000 for their auto-enrolment software and it’s not economicallyfeasible.”Of course, not all providers are setting limits.

Standard Life has refused to limit customers toparticular timeframes or contributions. Insteadit is working with advisers to come up withproducts that might best service the smallerand medium-sized employers in a more mass-produced way.

Rollingoutchangeonthis

scale isnosmall task.

Upto11millionpeoplewill be

eligible forautomaticenrolment

by2018

21,258Qualified financial advisers inthe UK (as of July)

30,000+Number of companies with50-250 employees that needto be auto-enrolled

500,000+Number of companies with1-49 employees facing auto-enrolment

AE advisory statsAviva has adopted a similar stance. Both

insurers have linked up with IFA and employeebenefit consultant LEBC to provide anoff-the-shelf product that includes onlineadministration, member communications andfund management.Glynn Jones, divisional director at LEBC, says

someinsurersareconfusedaboutauto-enrolment,leading them to make “strange decisions” aboutwho they will admit and who they will refuse.Contrarily, he says Standard Life recognises

that those employers reaching their staging datesin 2014 represent the insurer’s core business andit wants to be in a position to profit both now andin the future.“The 2014 staging zone is Standard Life’s

heartland; it’s the UK blue collar/white collarmix, with a 10 per cent employee turnover.“These people paymoney into pensions anyway

and [auto-enrolment] will just increase that. IfStandardLifecangetamassivesliceofthatmarket,once people have to increase contributions [in2018] they [Standard Life] will have an inflow ofmoney forever,” Jones says.

In recent weeks, there have been a number ofreports in the pensions media of an imminentcapacity crunch.

Providers and advisers have been jostling toissue warnings that employers need to act early toget ready for auto-enrolment.

The reality is that from late spring 2014, thenumber of employers reaching their staging datesrises significantly.

This means that each month, thousands ofemployers will be automatically enrolling theirstaff, compared with several hundred employers atthe same time in 2013.

This leap in numbers should not come as asurprise to those working in the pensions andsoftware industries.

The Pensions Regulator has for some time nowbeen discussing with them how they are working tomeet this growing demand both in 2014 andbeyond.

Our key messages to employers are: know yourstaging date, plan ahead and choose both a schemeand software provider at least six months beforethat staging date. The regulator has information tohelp on our website.

The challenge is to get these messages acrossto employers, many of whom have little or noexperience of workplace pensions. Employersneed to be aware that non-compliance may comeat a cost.

The medium-sized employers staging by thesummer of 2014 will all have had a letter from us

18 months before their staging date and another 12months before.

That is not enough to guarantee they take timelyaction, and we know the clock is ticking to get thatmessage through.

We have a variety of communications aimed atgetting the ‘act now’ message out.

This includes a tool on our website that allowsemployers to develop their own timeline planner,talking to trade associations and employer bodies,hosting events for employers across the UK andproviding speakers for events organised by others.

Pension professionals have a role to play inpreparing for the busy times that lie ahead.

Now is the time to speak to your existing clientsabout what their expectations are of you. Be clearnow on what you can offer them, which productsare suitable for their workforce, the timescales andthe costs that will be involved.

My team will continue to work hard alongsidesoftware and scheme providers to avoid largenumbers of employers waiting until the last minuteto get ready.

Employers who fail to heed the advice and do notmake their pensions arrangements six months inadvance of staging, or do not discuss compatibilitywith their software provider before they go live,risk not only avoidable complications but possiblenon-compliance.

It is vital that the pensions industry continues toplay its part in helping to ensure that employersrecognise the time it will take them to get ready.

CharlesCounsellExecutive director for auto-enrolmentPensions Regulator


The Specialist Capacity crunch | Auto-enrolment

The provider has also collaborated withBarnettWaddingham, another employee benefitsconsultant, to develop additional relationshipswith the SMEmarket.In its half-year results for 2013, the company

reveals the importance of this sector to theinsurer’s future profitability.“While the broader UK pensions industry faces

potential capacity issues, the investment we havemade in our technology and processes means weareideallyplacedtomeetdemandfromemployers.We expect a total of 300 implementations thisyear and around 3,000 in 2014 as auto-enrolmentbecomes a reality for smaller employers.”The regulator is also working with providers

and advisers to ensure there are opportunitiesin the market for smaller employers that are lessdesirable to providers.“The regulator has been working with

providers to understand the issues they face andis encouraged to see anumber ofmodels designedto meet the demand in the years ahead,” says aspokesperson.Mastertrusts such as Now Pensions and The

People’s Pension offer yet more in the way ofalternatives to traditional insurers, since theseare competing with Nest and are able to take in awide variety of employers.However, there is no doubt that the capacity

crunch means employers wishing to avoid a last-minute scramble to find a provider, or wantingto cherry-pick from the best, must work to makethemselves attractive.The critical factor is time. As noted, some

insurers are already stipulating an 18-month leadtime before the staging date, and once employersunderstand the amount of work involved thesepreparation demands seem quite reasonable.“Auto-enrolment is almost removed from

pensions; it’s about business planning,” saysClark. “Can payroll cope? Will existing systemswork with the new demands? Howmuch will theadded functionality cost?“Will the employer need legal advice to oversee

changes to contracts of employment? Who isresponsible for contract and agency workers?There are huge amounts to consider.”Perhaps, then, it is unsurprising the regulator

is so preoccupied with time. It says employersmust leave at least sixmonths before their stagingdates to get themselves in order and repeatedlypoints to the importance of early preparation.“Providers may be unwilling to work with

employers who leave preparations to the lastminute,” it warns. “Employers or their advisersmay need to leave enough time to approach anumber of providers to identify those that offerthe most suitable scheme.”Data are another challenge for employers.

Jones says it takes time to clean employee recordsand ensure they work with providers’ systems.“Clients don’t necessarily understand thesecritical issues,” he says.Contributions are yet another important

element since the greater the amount paid intotheschemethemoreattractive it is to theprovider.With current mandatory contributions set

at just 1 per cent, there is little to make smallemployers with a low-paid workforce attractive toan insurer unless they are willing to go beyondthe bare minimum.RSM Tenon’s Hodgson recommends employers

pay a 2 per cent contribution, leaving employeesfree tomakeanadditional voluntarycontributionif they so wish.“Thiswillmaketheschemelookmoreattractive

[to insurers] because employers can say they aremore likely to get a higher take-up rate, whichmakes the schememore profitable for providers,”he says.While the industry and regulator are desperate

to make clear the sense of urgency, plenty ofemployers remain lackadaisical.Research from the regulator shows that as

of autumn last year, just 65 per cent of microemployerswere aware of the key tenets of pensionreform,while the Personal Finance Society surveyshows one in 16 micro firms (6 per cent) believeauto-enrolment is irrelevant to them.Keith Richards, chief executive of the PFS,

says: “The government must do as much as itcan to clarify that auto-enrolment applies to allemployers, and that they should start preparingas soon as possible. A decisive media campaign,particularly targeted at micro employers andencouraging them to seek advice if unsure,would do much to dispel any misunderstandingor confusion.”Scottish Life’s Clark shares this view, calling

for a rejuvenation of the Department for Workand Pensions’ advertising campaign. MeanwhileHerbert at Jelf says employer organisations, suchas the Federation of Small Businesses, have a roleto play “in reaching into the smaller crevices ofthe pensions market”.Just how damaging a capacity crunch may be to

thefuturesuccessofauto-enrolmentishardtogaugebut there is a fear it could derail pension reform.Were employees to perceive Nest in a negative

light since it is the catch-all default scheme, anemployer’s failure to get an alternative in placemay discourage the workforce from joining up.“We like Nest and we think it’s a good scheme,

but because it is created by government it maynot be perceived as quality by employees,” saysLEBC’s Jones. “That perception will not help.”There is a willingness from industry and

government to tackle the supply and demandproblem, but the overriding view is that formany thousands of employers the destinationwill be Nest.However, employers will still need to have

their houses in order to be admitted into thegovernment scheme and the early indicationsare that some companies simply may not beready on time.The watchdog has made clear it is willing to

bare its teeth when it comes to auto-enrolmentcompliance and it may well have to do just that,unless there is a positive shift in awareness andattitude towards this cornerstone of pensionreform.n

Gill Wadsworth is a freelance journalist

Auto-enrolmentisalmostremovedfrompensions; it’saboutbusinessplanning.Canpayrollcope?Willexistingsystemsworkwiththenewdemands?Howmuchwilltheaddedfunctionalitycost?


It’s almost a year since the government’s auto-enrolment staging programme began; manyof the larger employers will have already

staged andmanymore will be staging before theyear is ended. For most of these companies, thiswill mean extending effective workplace pen-sion schemes to a significantly larger employeepopulation, including segments of newlyenrolled, less engaged employees paying smallercontributions. These firms are only too wellaware of the costs and additional burdens auto-enrolment brings –but what if there were waysto improve pension provision while reducingthat burden, even after staging?Many employers will have

embraced auto-enrolment as anideal opportunity to review keyareasofpensionprovision, even todeliver a level of provision thatgoes beyond regulatory require-ments. However, in a bid to becompliant by the staging date,some employers may have imple-mented solutions that weremerely satisfactory rather thanoptimal, or put thoughts of non-essential service improvementson the back burner. Below we dis-cuss how employers could gainadditional cost efficienciesthrough a more flexible administrative solution.Wealsodiscuss governanceand investmentoptionsthat could reduce costs while providing improvedoversight and investment outcomes for employees.

Streamlining administrationStaged employers (or those soon to stage)will havesuccessfully reviewed and adjusted their adminis-tration process to meet the demands of auto-enrolment in the run-up to their staging date.However, the challenges of administration areongoing and evolving. Given the numerous waysan employer could delegate the function acrossinternal, payroll and pension service providerteams, it’s possible employers could achieveadditional process efficiencies to meet their spe-cific needs and situation.

There are anumberof administrative challengesemployers must continue to meet post-auto-enrolment. Maintaining ‘clean’ employee data,and addresses in particular, is essential for meet-ing regulatory demands to send notifications atappropriate times by certain deadlines. Thesenotices concern enrolment, postponement andinvitations to opt in. The issue is that payroll orpension administration systems require addressesto be in the right format, something that can behard to maintain. Employee data is usually input-ted manually by employees, while electronic pay-slips mean there’s little payroll incentive to keep

employee data clean. Employersneed a pension administrationsystem that can ensure dataexists in the right format so theycanmeet their regulatory duties.The second issue is the ongo-

ing administrative burden ofconducting employee eligibilityassessments in tandem with thepayroll cycle. Employers need toassess actual earnings in themonth, not just salary, to seewhether employees are, orbecome, eligible for auto-enrol-ment. The payroll schedule istypically a very resource-inten-sive time of the month for

employers when monthly pay is being calculatedfor the whole workforce. Yet auto-enrolmentassessments need to run concurrently with thepayroll schedule to feedback to payroll teamswhether an employee needs to make pension con-tributions andhowmuch they need to contribute.To make this process as streamlined as possible,employers need a bespoke auto-enrolment solu-tion that works as flexibly as possible with exist-ing teams and processes. The system needs to beextremely fast and if necessary, accommodatealternative approaches, such as running dualassessmentswith the incumbent payroll provider.A related issue to the one above concerns meet-

ing regulatory deadlines for sending out notifica-tions. Employers are required to send outnotifications within certain timeframes, but this

Anoptimaldefault fundhasthepower to

promotebetterdecision-makingand improve

investmentout-comes for abroadrangeofmemberdemographics

Spotlight

ContactPaul BuckseyHead of UK BusinessDevelopment, BlackRock

Telephone:+44 (0)20 7743 4680Email:[email protected]

Fine-tuningpensionprovisionafter stagingEven after staging, there areways to refine pensionprovisionthat can significantly benefit both employer and employee,says Paul Bucksey


Advertisement feature

can be challenging. For example, if an employeewants to postpone enrolment of a new joiner thatjoins immediately after the monthly payroll cut-off date, then an employer will miss the statutorymailout date for postponement notices, which isone month. This is because the new joiner willnot trigger the appropriate mail-out in the sys-tem until the following payroll/auto-enrolmentassessment. Once again, the solution to this issuerequires greater administrative flexibility, thistime to run multiple assessments per month.BlackRock’s defined contribution auto-enrol-ment solution is an entirely front-to-back solu-tion that can perform all auto-enrolment duties,including multiple assessments per month, orwork alongside other teams to share the burden.

Next generation default fundsAn optimal default fund for a particular workforcehasthepowertopromotebetterinvestmentdecision-making and improve investment outcomes for abroad range ofmember demographics with varyinginvestmentneeds.Assuchitisvitalemployerschoosea fund that’s right for theirworkforce.Mostwill be familiarwith lifestyle funds,which

aim to bring default solutions in line with mem-bers’ changing risk profiles as they approachretirement. They typically move out of equitiesinto bonds and cash in the years before retire-ment. However, recently we have seen greaterdemand for default funds that feature multi-asset strategies in the growth phase of the invest-ment glidepath. Multi-asset strategies targetequity-like returns with significantly less volatil-ity than traditional equity strategies. Thatsmoother return profile makes them well suitedto less experienced investors who are typicallyvery risk averse.Multi-asset funds are also attractive from a gov-

ernance perspective. However, they do not alwayslend themselves well to daily pricing and schemeswillneedtoensurethesefundshavetheoperationalinfrastructure tomeet regulatory requirements fordefault funds. One such fund is BlackRock’s AquilaLife Market Advantage (ALMA) fund which is aninnovativemulti-assetstrategyspecificallydesignedas an appropriate DC default fund.Many disengaged investors find the topic of

savings and investments to be daunting and, formany inexperienced investors, lifestyle fundsmaystill be too complex. They may require that mem-bers take responsibility for their own risk profileand understand reporting from investmentsacross several funds – and confusion can lead toapathy and inaction. Inmany instances, a flexible,target-date approach offering a single fund aimedat each investor’s target retirement age may wellbe easier to understand.With a target-date fund, such as BlackRock’s

LifePath fund range, all members have to do ischoose a retirement date. The fund manager canthen create an optimum investment glidepathbased on that date. Crucially, the memberremains invested in a single fund throughout.This simplified approach increases the likelihoodof member engagement, particularly when com-plemented by an easy-to-use projection tool like

BlackRock’s LifePlan, which allows members toset realistic savings targets. The approach alsomakes it very easy for the governance committeeto track performance.

Rethinking governanceBoth contract and trust-based schemes are likelyto feel the impact of auto-enrolment. Larger pop-ulations could make contract schemes becomemore costly to run, while boards of trustees mayneed to expand to provide consistent levels ofpension provision across both existing and auto-enrolled members. Employers currently runningeither type of scheme could benefit fromamastertrust arrangement.A master trust arrangement is a potentially

very cost-effective DC scheme that offers theconvenience of a contract scheme with the gov-ernance advantages of a trust-based scheme. It isa complete, full-service DC solution designed formultiple employers under a single trust arrange-ment, withmembership set up and administeredseparately for each participating client. As such,it presents a comprehensive solution for employ-ers that wish to offer their workforces a schemewith a high level of governance but are concernedabout the responsibilities it can bring. For theemployer, the master trust maintains all of theflexibility and advantages of a trust-basedscheme, but without the cost and legal responsi-bility of establishing and running their ownboard of trustees. At the same time, membersare supported by the pension and investmentoversight of professional trustees.Using a master trust arrangement does not

mean employers have to relinquish all control.The BlackRock Master Trust features a pre-selected, off-the-shelf fund range for employersthat do not wish to participate in scheme govern-ance. This range includes a preselected defaultand member-select fund options to accommo-date a broad range of member risk profiles. How-ever, for employers that wish to create acustomised solution, the BlackRock Master Trustallows for considerable governance input andinvestment flexibility.

Emerging best practiceThe challenges to meet regulatory obligationscontinue after staging, but employers can exploreoptions that can reduce the impact of auto-enrolment, create cost efficiencies and improvethe likelihood of better investment outcomes forthe workforce. In particular, employers canstreamline the administrative aspect of auto-enrolment in a way that will dovetail with theirexisting payroll and pension set-up. Theyshould also revisit their scheme default fund tomaximise understanding, engagement andultimately the investment outcome for typicallydisengaged employee cohorts. Finally, employerscan review the way their scheme is constitutedto see whether a potentially more cost-effectivegovernance structure could improve oversight ofthe scheme.PaulBucksey isheadofUKDCBusinessDevelopmentandClientRelationsatBlackRock

Amaster trustarrangement isa potentially verycost-effectiveDC schemethat offers theconvenience of acontract schemewith the govern-ance advantagesof a trust-basedscheme

The Specialist


Auto-enrolment | Secondarymarket

Asubstantial reshuffle of large companies’auto-enrolment providers is expected toshake the pensions industry within thenext 18months.

One survey has suggested a large proportion ofemployers are unhappy with the pensionarrangements they put in place last year.This is sparking anticipation of a secondary

market with employers ditching their currentproviders and jumping ship to more favourableones.Most auto-enrolment systems are working well,

but some employers are waking up to the fact thatchanging provider could be a good move for thelong term.According to research earlier this year from

employee benefits experts Benefex, almost 30 percent of organisations think they have the wrongauto-enrolment solution.But whether they will actually do anything

about it remains to be seen, as most of theswitching is predicted to begin in around ayear’s time.

Who ismost likely to switch?Experts think the largest firms with the earlieststaging dates will be the least likely to switchproviders.They chose their existing providers at the end of

a long process and thorough due diligence. Buttheir ability to do this effectively depended ontheir auto-enrolment preparedness, and somechose to adapt their current systems to meet thenew rules.In many cases they helped the providers build

their auto-enrolment systems. One such companyis home improvements retailer Kingfisher, whichnow has three pension providers and is happywith what all of them are delivering postauto-enrolment.Dermot Courtier, head of group pensions at

Kingfisher, says: “All three of our providers builttheir own systems, meaning we didn’t need tochangeproviderswhenrollingoutauto-enrolmentat Kingfisher.“SAPandPayright, aspayrollproviders, continue

to perform this function aswell as the assessmentsfor AE, while Zurich, as the defined contributionmoneypurchase schemeprovider, also ran the opt-out process.” The company has no plans to changeprovider any time soon.Then therewere caseswhere a newproviderwas

appointed. But because this tended to be the betterprepared companies,most would have had time to

TimetoswitchyourAEprovider?

change their mind before their staging date.Well before its staging date, food manufacturer

Sodexo signed up to the Nest pilot and publiclystated its intention to use the government-backedorganisation as the pension provider for its 40,000staff.But shortly after, it ditched Nest and went with

L&G’s group personal pension offering, whichwith an ultra-slimline 0.35 per cent chargeundercut Nest’s fees by 15bp – a clear motive for atransfer.More problems are anticipated in smaller

companies with more recent staging dates – andthe experts think this will be where the bulk ofsecondarymarket business will come from.Paul Macro, partner at Mercer, says there has

been a fair amount of “last-minute panicking”when dealing with these companies, as theyassumed their provider would be sufficient tomeet their auto-enrolment needs.But by the time they found out thismight not be

the case, it was too late to implement what wasneeded and change provider, so most just stuckwithwhat they alreadyhad, even if itwasnot quiteup to scratch.

What are the main reasons for switchingprovider?John Lawson, head of policy, pensions andinvestments at Aviva, says he thinks the secondarymarket will develop primarily because employerswill realise they are not complying with the lawproperly – a fallout of bad planning.He predicts the analysis systems that have been

installed will cause non-compliance if theyproduce inaccurate output, or fail to keep recordsproperly for the four to six-year periods they arerequired.Others, however, may have simply had a bad

experience with their pension provider duringstagingbecause theproviderwas only able to enrolthem using largely manual and cumbersomeprocesses.“If it then transpires that they are not compliant

with the law, this will be the final straw foremployers and they may terminate theirrelationship with that provider by moving theirscheme too,” he says.According toMacro, shoddy default funds could

also be a reason to jump ship. “[Some out there]leave a lot to be desired when compared with thebest in themarket,” he adds.And some companies are looking at their range

of funds and realising a bit more choice could

If it transpires[theirpensionprovider is]notcompliantwith

the law, thiswill be the final

strawforemployers

Employerswith enough time to change their auto-enrolment provider could take advantage of theburgeoning secondarymarket,saysKatieMorley


The Specialist Secondarymarket | Auto-enrolment

improve the quality of the scheme – anothermotivation for leaving their current provider.

Whowill be thewinners and losersof the secondarymarket?The consultants are tipping the new range ofmastertrusts on themarket to pick upmost of thebusiness, as they are already attracting attentionfor the reduction in governance time they provide.“Governance is becoming a bigger issue as

companies are realising what they must do withtheir DC scheme now that it has potentially alltheir workforce in it,” says Macro. “They also havethe added pressure of doing exactly what theregulator wants – and this is particularly an issuefor contract-based plans.”Lee Hollingworth, head of DC consulting at

Hymans Robertson, says providers with“middleware” – a type of data exchange that goesthrough payroll providers – will see the biggestpost-staging date exodus.This is because of concernsmiddlewaremay not

be fast enough at dealingwith data –meaning thedanger of payroll errors is increased and creates anextra headache.Two providers that omit middleware from their

auto-enrolment offering and could thereforebenefit from the secondary market are Legal &General,whichoriginallyused itbut recognised theproblemswith it andNest, which has never used it.And there is also a fear that if providers buckle

under the sheer weight of the auto-enrolmentschemes they are taking on, it could impact anddegrade the delivery of the service they providethe larger companies with.

If this does happen, Macro says they are likelyto look for better service elsewhere – and thiscould spell disaster for the providers’ projectedbusinesses models.

Is it really worth switching?Switching pension provider after auto-enrolmentshouldonlybea last resort,Hollingworth suggests.“To changeproviderswould be amajor upheaval

and would require a lot of extra communicationwith staff, so there’d have to be a very good reasonto warrant a switch,” he adds.But the costs involved will depend on several

factors, including:n the scale of the provider selection processrequired – for instance, whether a beauty paradeand site visits are needed;n whether existing assets are transferred to thenew provider, if the new funds are the same orsimilar, which could impact asset transition costs;n what level of communications are required toinform staff about the new scheme.It is a potentially major exercise. But relative to

the level of contributions that are going into someof these newly set up schemes, transfer costs couldbe seen as worthwhile if the employer gets bettervalue for money and, ultimately, better pensionsfor members, Macro suggests.It could also minimise future issues, such as

administration problems or bad reputation as aresult of poor investment returns, that thecompanymight have to deal with.

KatieMorley is a personal financewriter atInvestors Chronicle

Tochangeproviderswould

beamajorupheaval,

sothere’dhavetobeavery

goodreasontowarrantaswitch


A s someone who spends their life talking topeople in the pensions industry – aboutpensions – I find it affectsme inmysterious

ways. Let me share one of those.I was walking up the road the other day near

where I live. The road is primarily filled withsmall shops and businesses, providing a varietyof goods and services. Nothing unusual there.The funny bit was that instead

of walking past these familiaroutlets with indifference, orindeed perusing the goods onoffer as I ambled, instead I tooka keen interest in what type oforganisation each one was. Andmore importantly, what kind ofemployer they might be andwhat the employees who workthere are like.In fact, quite specifically, I was

considering for each business Ipassed what their positionwould be on pensions, whetherthey’d reached their ‘stagingdate’, and how their employeeswould (or did) react.As usual, my outlook on life

was tainted bymy inability to seeanything around me withoutapplying my pensions lens.But then I can justify that.This is important. It’s about

people creating a better life forthemselves when they finishworking. It’s about encouragingan environment where savingthrough work is once again asocial norm. And every one ofthese employerswill likelyneed to set upapensionscheme or convert an existing one, if not already,over the next few years.Most of the employees I see as I pass the varying

degreesofmarketingfrontagewillbeautomaticallyenrolled. Each of them will be different; each willhave a reaction that is unique; and each will havea different outcome in retirement. I hope theiroutcomes are good.

Iwonder the extent towhich these employees (orpeople, more correctly) will value their income inretirement when they have the free time awayfrom work. It’s hard to think so many years in thefuture; many of the people I pass will still be intheir twenties.I’ll come back to this particular walk, because I

do – believe it or not – have a point.The simple fact is that we’ve

decided as a nation to implementa social policy to address the gapin people’s retirement fundscaused by years of under-savingand over-spending. It’s calledautomatic enrolment and itstarted in October 2012. Thebiggest employers in the UKwentfirst and medium and smalleremployers will follow.By 2017, over amillion employ-

ers will have started automati-cally enrolling and manymillions of employees will havebeen enrolled. They won’t allstay in, but the early signs aregood; opt-outs are low. For thosewho do stay in – over time –they’ll have at least 8% of ‘bandearnings’ being saved withabout half of that coming fromtheir own wage packet.No matter what your view of

pensions, it’s difficult to think ofanothersavingsoptionthatoffersthat kind of deal.So that’s all very straightfor-

ward then.Theonly thing is, thenumberof

employerswhohave tosetupaqualifyingworkplacepension scheme next year – over the summer – isin the tens of thousands. The number of schemesneeding to be set up is equivalent to many years’worth of new pension schemes set up previously bythe industry. People refer to it as the ‘twin peaks’;two really big months where employers need tocomply. There is scope for movement on the startdate, but not bymuch.

Manyhaveunderestimatedthe amount ofwork required,particularly

aroundcommunications

to employees,sorting out dataand engaging

suppliers. Earlypreparation andengagement iskey. Anythingless than 6months is

running a riskthat it won’t bedone in time

Spotlight

Gettingaheadof thecapacitycrunchThenumber of employerswhoare due to go throughautomatic enrolmentnext year is in the tens of thousands.Howprepared arewe andwhat canwe learn from thoseemployers that have staged?

Jamie Jenkins,headofworkplacestrategyat StandardLife


Advertisement feature

One way or another, there’s a capacity crunchthat needs to be addressed.And that’s exactly what providers are doing.

We’re upscaling the technology, improvingstraight through processing, streamliningprocesses; all the things you would expect to bedone to handle a greater volume of business in ashort space of time. It’s not all there yet, but it’sgetting there.So, again, that’s all very straightforward then.Not so fast. There is work to be done by employ-

ers as well to make this happen. The obligationis with employers to choose a provider, set up ascheme or convert an existing one, communi-cate with employees, enrol their employees andthen demonstrate compliance on an ongoingbasis.That takes time; it usually involves upskilling,

guidance or advice. There are statutory time-scales for certain communications; that alsotakes time. The data required to enrol peopleinto a pension is generally more than the dataheld by an employer to pay salaries; that mayalso take time to sort out.Someone mentioned to me a phrase I’d heard

before that provides a good analogy…If we weren’t doing pensions, but instead we

were preparing Wembley for the 3pm cup final,we’d do a whole bunch of stuff to ensure thingswent smoothly. I’m not an expert, but I’d expectwe’d organise extra staff, extra signage, moresecurity, overflow parking, lane management,extra ticket stalls, more food and drink supplies,etc. You get the idea.But if on the day everyone turned up at 5 to 3,

we’d still have a real problem getting everyonein on time.So thekey issuehere is that employers recognise

when their duties fall due, what’s required andhow they plan to go about it. Advisers can help,and we anticipate many employers will seek theirservices to ensure things go smoothly.

Key lessons from those that have stagedHere are some key things we’ve learnt from thebigger employers who went first:

Lesson 1 - Preparation is keyMany have underestimated the amount of workrequired, particularly around communications toemployees, sortingoutdata andengaging suppliers.Early preparation and engagement is key. Anythingless than 6months is running a risk that it won’t bedone in time.

Lesson 2 – Engage with partnersMake sure payroll providers or outsourced HRfunctions are engaged early and able to help. Lastminute surprises or gaps in provision of datahave left some employers struggling to meet thedeadline at the 11th hour.

Lesson 3 – DatamanagementAutomatic enrolment requiresmore data on staffthan is required for payroll, in our experience, soif only the bare minimum is held then it oftenneeds to be supplemented with new data.

Lesson 4 – Default investment optionsEmployers who have engaged on this have notsought to become investment professionals – norshould they – but they have taken time to under-stand the options, and why any one should bemore suitable than another. Smaller employersshould ensure that the ‘off the shelf’ option fromtheprovider is at least future-proofed (i.e. changescan be managed by the investment managerwithout employees having to intervene, as thingschange in future). Without that, it’s very likelythe default choice will need to be frequentlyreviewed.

Lesson 5 – Communicating and engagingemployeesThose thathave left this late,or treated itasnothingmore than a process or duty, have often been sur-prised when employees have resented the message(and opted out).Those employers that have managed this well

have allowed time for messages to be digested,for employees to discuss things amongst oneanother, and to realise that – overall – pensionsare a good thing.

Before concluding, I’d like to return to the street.It’s a real street, with real businesses. I won’t

profess to know them all well, but I can makesome obsevations:n The first place I pass is a small, independentcostume jewellers. I’d hazard they have threestaff, maybe two of whom will need to be auto-enrolled. Their staging date will be a few yearsfrom now and they won’t be giving it muchthought.n The second is a small newsagent but part of amuch bigger chain. Based on having a lot ofpeople across the UK, they’ll probably alreadyhave set up the scheme and the people I see havebeen automatically enrolled. I wonder if theystayed in.n The third is a magical place; a children’s toyemporiumthat specialises inmodel trains, planesand cars. I could spend hours there – regressing– but I press on with my pensions examination. Isuspect theyhave a fewpeople andmore thanoneoutlet. They’ll probably be due to set up a schemein 2016, andhavehopefully at least registered thisin their longer-term plans.n Thefourth isarestaurant. It’sdifficult toestimatethe mix of people who work there, but I’d guessthey’ll be doing the pension thing in 2015, orthereabout. I think they’ll consider it next year.n The fifth and final place I pass is part of asmall chain of local pubs and clubs which, Ithink, probably has a hundred or so people on itspayroll. I think it might just be due to auto-enrolthem in early summer 2014. That’s not long. Ireally hope they’ve started to prepare, and don’tleave it too much later.

Jamie Jenkins is head of workplace strategy atStandard Life

For support, tools and and information on PensionReform visit www.workbenefitszone.com.

Employers thathave managedthis well haveallowed timefor messages tobe digested, foremployees todiscuss thingsamongst oneanother, and torealise that –overall –pensions are agood thing

The Specialist


Auto-enrolment | Interview

‘We’reurging ourexistingclients tograsp thenettle’

With staging dates for smaller companiesgetting closer by the day, the pace of auto-enrolment is ramping up.As operations manager of PK Group,

Bernard Rust advises individuals and businesseson pensions. At the coalface of smaller businesses’work to meet their AE obligations, he feels farfrom daunted by the task ahead.

“There’s no challenge around auto-enrolmentfor me,” the Yorkshireman tells me brightly,pausing briefly to recount his substantial indus-try experience: he’s been in the business for 25years and spent 15 of those advising on companypensions for the likes of insurance companies,banks and IFAs.

It has given him a varied depth of understandingof what corporate clients want, he says.

That is not to say auto-enrolment will not beaccompanied by hurdles and challenges, but itis rather at the employer end where it may posedifficulties, Rust feels.

“The biggest challenge is employers and busi-nesses accepting they have to do something andthat they’re going to have to pay for any advice,”he explains.

Whereas some people might find the topic ofretirement planning dull, Rust clearly derivessatisfaction from it. He explains that it is thelogical side of pensions he finds intellectuallyinteresting.

“The increasing urgency you feel every daywhen you wake up that you have to save for yourfuture; I like that kind of shortfall analysis,” hesays, and by way of illustration poses a rhetori-cal question in return: “If someone were offeringyou £10,000 a year would you take it or ignore it?That’s what the taxman is doing with pensions:there’s up to £10,000 a year potentially availableto you.”

When described with such easy clarity,pension saving doesn’t seem boring, so muchas almost exciting. Rust has the ability to makepensions and tax relief appeal to the part ofus that loves nothing more than getting agood deal.

“I suppose people would describe me as a pensionsgeek,” he concurs. “I’ve been called a pensions guru,but I just know a lot about pensions.”

On the back burnerInertia is what may lead to employers havingdifficulties with auto-enrolment in the nearfuture.

Some businesses are putting off dealing with stag-ing dates, Rust observes, whereas auto-enrolmentshould be tackled as soon as possible to ensure theproject is delivered on time.

“The staging date is the deadline,” he insists.“They have to be ready for then and there arecommunications requirements ahead of thatdate.”

Industry figures have warned that the peak ofauto-enrolment may be accompanied by a capacitycrunch, with providers struggling to deliver theirproducts to employers that have responded tooslowly to staging dates.

Already one provider, Scottish Life, has confirmed

The surge of smallemployers approaching their stagingdates does not scare Bernard Rust,who is looking forward tomeetingthe advisory challenge head on,hearsCatherineLafferty

INTERVIEW

The Specialist

23 September 2013 TheSpecialist23

Interview | Auto-enrolment

Theprovidersweusewill become

selectiveandwewill reach

saturationpointat somestage

If someonewereoffering you£10,000 a year,would you takeit or ignore it?

it will be rejecting auto-enrolment business fromcompanies less than six months away from stagingon the grounds that it will not be able to handle theadministrative workload, and there are fears otherproviders may follow suit.

“We know the capacity crunch is coming;we’re encouraging our existing clients to graspthe nettle, but it’s difficult to encourage adultsto do things they don’t want to do,” Rust admits.He has heard figures being cited of up to 12,000employees a month from next April needing toauto-enrol.

“Some clients are leaving it too late,” he agrees.Rust is in no doubt PK Group will be affected bythe capacity snap in some way.

“The providers we use will become selectiveand we will reach saturation point at some stage,”he forecasts, adding, “We are considering how toaddress these issues, perhaps with an increase inour own staff levels.”

The journey to reformThe consultant has followed the auto-enrol-ment story “with interest” ever since it wasfirst mooted in the 2005 green paper (see time-line on pp4-5) and he has also been involvedin providing group seminars on the topic toemployers.

“My initial thoughts were that it would radicalisehow we advised clients, but also that there wouldbe other important changes, the major one beingthe retail distribution review,” he says, adding:“I welcome both; anything that increases the take-up of employees providing for their futures is agood thing.”

The challenge for PK Group has been design-ing a proposition alongside its standard way ofdealing with clients in a transparent way, withinRDR principles, Rust says, noting some employ-ers have shown resistance to paying for auto-enrolment advice.

At the moment, PK Group has around 12employers staging within the next six months,projects that are in the analysis and design stage.It is also engaging with established providers,new players such as Nest and other ancillaryservice providers.

It has found that skills have to be built up inits team around new software and “middleware”providers, and it is launching an educationprogramme for internal staff as well as currentand future corporate clients.

Perhaps it is the scale of the task that hasŸoverawed some employers, something Rustfinds understandable.

“It’s easy for me as it is just another layer ofcomplexity to existing regulations,” he replies,in answer to why some people are finding thesubject sufficiently difficult that they are avoid-ing tackling it head on. “But for employers andemployees it can be daunting, so I have to makethings as simple as possible.”

How do pensions gurus like to spend theirrelaxation time, I ask in parting. It turns outthey like guitar music.

Particular favourites for Rust include Eagles,Beatles and heavy rock: “I like anything with atune to it, which I can sing along to,” Rust says.

Catherine Lafferty is a freelance journalist

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