Auto-enrolment will create thousands of new pension savers, and advisers will have an opportunity to set up pension schemes for employers to help them meet their statutory duties. No doubt there is money to be made from auto-enrolment but will it come from advising scheme members or from the fee paid by the employer?
Putting a group personal pension (GPP) or the National Employment Savings Trust (Nest) scheme in place for an employer will be the easy part of the task. The real job will be in steering employers through the maze of regulation and helping them cope with the day-to-day task of carrying out new duties required of them as a result of the legislation.
The employers need the advice
With 1.3 million employers needing to implement pension schemes and between eight and 10 million employees being swept into them, I doubt anyone will think it is remotely possible to advise each member of every scheme. Auto-enrolment is about advising employers, not employees.
Employees will have almost no choice other than to join such schemes and employers are required to use auto-enrolment to ensure all eligible employees are signed up. Being in a pension scheme will be the default position but employees will retain the right to opt out should they wish to. Where employees do choose to opt out, employers are required to re-enrol them after a while.
Finding a management system
As well as providing a suitable pension scheme that passes muster with the new rules, an employer must devise a system to ensure their eligible employees are auto-enrolled on time and in the correct fashion.
They must first establish which employees are eligible, which have the right to become voluntarily eligible and sift out those who are ineligible. This latter group is referred to in the legislation as being ‘entitled’, which no doubt will cause some confusion.
Unless employers regularly have plenty of time on their hands, it will probably pay to use a system that helps them manage the various aspects of auto-enrolment on an ongoing basis. There are various standalone middleware systems that can handle the intricacies of auto-enrolment, and some pension product providers now bundle such systems in with their pension schemes.
Who pays for the system?
The question of how such systems are paid for and who should pay that cost needs careful consideration. I believe the systems employers use to manage the ongoing processes related to auto-enrolment should be paid for by employers, in the same way they would expect to shoulder the costs for payroll or HR systems used in the general running of their business.
Consider a hypothetical case of an employer with 300 employees. One hundred of them are members of a GPP, 100 become members of Nest and the remaining 100 are either ineligible or opt out. This will not be such an unlikely scenario as the auto-enrolment staging dates will hit small to medium-sized firms over the coming year.
If the employer pays for the compliance system to manage its auto-enrolment duties by charging the 100 employees in the GPP, it could be seen as unfair that employees in Nest, where no charges can be made, and those who opt out or who are ‘entitled’, but still incur costs on the employer as they are essentially users of the compliance system, do not pay for the service.
The way to make money from a GPP is not by devising a charge that can be applied to each member and multiplying it, but by charging a fee for a service to the employer.
Where advisers come in
Financial advisers ought to be able to help employers through this kind of problem by using software solutions to manage auto-enrolment without needing to worry about how many pension schemes an employer has or what product providers supply the schemes.
The fee for the advice and assistance provided by the adviser to the employer should clearly be paid by the employer, even if the system used comes as part and parcel of one of the pension schemes.
Steve Bee is chief executive of Jargonfree Benefits