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How thinking small can help you crack auto-enrolment advice

Anthony Carty of Clifton Wealth believes that small firms face the biggest challenges in meeting auto-enrolment rules, but also present the best opportunity for IFAs looking to break into workplace advice.

Preparation is key

Most business owners are unprepared for auto-enrolment, with no idea of the costs involved, and almost half do not understand what it is. Despite the government’s and the Pension Regulator’s best publicity efforts, it seems auto-enrolment remains a mystery to many small business owners.

Given the nature of enquiries we received, we decided to carry out a survey of small to medium-sized enterprise (SME) owners. The results were shocking.

Around half of the business owners who responded did not understand what auto-enrolment is and, equally seriously, 82% did not know the ball-park cost of auto-enrolment for their companies.

It also appears business owners are leaving their preparations for auto-enrolment too late, with 90% of those with a staging date within the next 12 months saying they have not started planning. This is a significant issue for companies and their advisers, particularly in light of the possibility that many pension providers will not accept auto-enrolment business from new or existing customers unless they can deliver a certain level of business and give a minimum of six months’ notice.

There is a widening chasm between what business owners believe is needed to meet auto-enrolment regulations and the reality of what is required.

Preparation is key

Most business owners are unprepared for auto-enrolment, with no idea of the costs involved, and almost half do not understand what it is. Despite the government’s and the Pension Regulator’s best publicity efforts, it seems auto-enrolment remains a mystery to many small business owners.

Given the nature of enquiries we received, we decided to carry out a survey of small to medium-sized enterprise (SME) owners. The results were shocking.

Around half of the business owners who responded did not understand what auto-enrolment is and, equally seriously, 82% did not know the ball-park cost of auto-enrolment for their companies.

It also appears business owners are leaving their preparations for auto-enrolment too late, with 90% of those with a staging date within the next 12 months saying they have not started planning. This is a significant issue for companies and their advisers, particularly in light of the possibility that many pension providers will not accept auto-enrolment business from new or existing customers unless they can deliver a certain level of business and give a minimum of six months’ notice.

There is a widening chasm between what business owners believe is needed to meet auto-enrolment regulations and the reality of what is required.

Implementation planning

For the past 28 years our core client base has been business owners from the SME sector. Recognising that auto-enrolment is as much about compliance as it is about pension schemes, we have identified several key factors that will play a part in successful implementation.

Most business owners want to comply with the regulations at the lowest possible cost, with the minimum impact on their core business, and mitigate the regulatory and reputational risk of getting it wrong. While we are happy to oblige with support that will achieve the legislative minimum, we believe there is more to it.

Compliance alone may not enthuse employees. However, auto-enrolment presents a genuine opportunity for employers to show support for their employees and help them achieve a more comfortable retirement. We encourage them to develop a fuller employee benefit proposition that complements the basic solution.

Capacity crunch ahead

It does not take a qualified accountant to do the maths and discover that a capacity crunch is on its way.

Take Aegon, for example, one of the world’s largest life insurance and pensions firms. It supports roughly 27,000 workplace schemes in the UK. In the months between now and April 2017, there may be more than 100,000 employers staging at any one time. In one month alone, auto-enrolment could be asking the market to accommodate four times Aegon’s current book.

Now let us assume there are around 20,000 advisers in the UK to handle the 1.2 million companies that are going to stage. That is an average of 60 companies per adviser. However, recent conversations with peers and competitors indicate that little more than 30% (6,600) of those advisers are actively offering an auto-enrolment proposition, which equates to 180 companies per IFA active in this marketplace. Which all adds up to a serious capacity crunch.

An effective solution

As our primary focus has always been supporting SMEs, taking on auto-enrolment was a natural progression. The challenge was how to develop a proposition that worked effectively for clients. The solution is a three-part structure:

Design Building a solution that is fit for purpose to meet business objectives and regulatory requirements.

Implementation Making auto-enrolment a reality for that business via a detailed project plan covering the key milestones and stakeholders.

Run Providing an employer with an end-to-end, compliant solution that will typically use middleware.

Early in the development of this solution we realised the traditional employee benefits model was not appropriate for auto-enrolment because it is too labour intensive. Generally, benefit schemes are employee-focused, while auto-enrolment is chiefly about employer duties. For example, why spend time talking with an employee about joining a scheme when they will be enrolled automatically?

After a great deal of due diligence, it became clear that an agnostic, fully independent piece of middleware was required to sit at the heart of our solution when working with SMEs. It needed to involve a minimum change to employers’ payroll systems but to accommodate any pension solution at the end.

We also decided that any solution should allow competent administrators in a SME, regardless of experience, to make their business compliant by following no more than a five or six-step workflow.

The only company that could provide that solution cost effectively was JargonFree. White-labelled as Clifton Assist, it was launched in October.

Help to wake up the laggards

There has been plenty of debate about proposed caps on pension scheme charges and banning commission on group personal pension schemes. At face value, low charges have obvious appeal, but they can also produce adverse consequences for pension scheme members, such as poorer quality of services, less choice and loss of investment in innovation and development.

As smaller employers start implementing in 2014, they will not benefit from the same economies of scale as the largest employers that have already gone through the process. To protect existing customers, private pension providers cannot take on new schemes at a loss. Therefore, introducing too low a cap will mean many small employers will only have the National Employment Savings Trust (Nest) available to them.

When it comes to a ban on commission, whatever anyone’s views, the reality is that it is a thing of the past. So it is better to look forward and, as responsible advisers, do our level best to ensure the SME community wakes up to the responsibilities of auto-enrolment. Detailed discussion of employee advice and engagement is a moot point if, in the first instance, the employer does not fully commit to the auto-enrolment process.

Clifton Wealth’s auto-enrolment proposition

What are your charges?

Recommendations: £250 to £1,000

Implementation: £1,000 to £5,000

Ongoing: £2.50 to £3.00 per employee per month.

Do your charges increaser nearer the staging date?

No, however, we are looking to work with employers at least four months (ideally six months) before they stage; closer than that and the business and reputational risk becomes too high.

Do you charge for services such as employee seminars or one-to-one advice?

We have an employee benefits package that employers can use to complement our auto-enrolment service if they wish go beyond just compliance.

Do you offer any non-pension products as part of an employee benefits package?

JargonFree Benefits provides a flexible benefit package if required. We also have an in-house specialist who can arrange specific group life, private health and private medical insurance cover and other packages.

Do you offer advice to individual employees in any way?

No, however, we can refer employees to our specialist wealth management team.

How many auto-enrolment clients do you have?

Some 1,350 auto-enrolment clients of which: 1,250 are existing corporate clients; 50 are existing employee benefit clients; and 50 are auto-enrolment only clients (which have staged or will be staging within the next six months).

What is the averge memebership of the schemes you advise on?

Around 20,000 employees. Of these, some businesses have in excess of 1,500 employees and others as low as three. With our core market in the SME community, the typical number is between 50 and 300.

Anthony Carty is group financial planning director of pension specialists Clifton Wealth

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