I think I really started something with my ‘tsunami’ talk on auto-enrolment at the New Model Adviser® conference in January this year. I suppose I meant to; but it’s amazing how that story has grown.
As far as the tsunami goes, nothing’s happened yet. We’ve seen the big swirls as the biggest employers in the land have taken auto-enrolment on the chin, but that was never going to have anything other than a positive outcome. A disturbance far out at sea, if you will.
No, the wave starts to build from now on. All through 2014 and well into 2015, we will see ever-smaller firms hitting their staging dates. It is now that the volume of firms doing that will present itself as the single biggest issue. It’s not that small and medium-sized enterprises (SMEs) can’t cope with auto-enrolment, it’s just that they all have to cope with it within a very short timescale.
Firmly in IFA territory
The firms staging from January 2014 onwards are smack in the middle of what I’d call ‘IFA territory’. That’s why I’ve always said that IFAs are crucial to the success of these important reforms.
There was never any real doubt that the largest employers in the land would be able to take auto-enrolment in their stride. By and large they already ran pension schemes and had the in-house skills to cope. They also had access to intelligent middleware systems to communicate with their employees and ensure compliance with the onerous duties laid on them as employers.
Those duties, though, are no different for smaller employers.
A recent report by the Centre for Economic Business Research (CEBR) highlights the fact that SMEs will have to complete 33 administrative tasks in the run-up to their staging dates, and estimates such preparatory work could take each business up to 103 days.
Not only that, but SMEs will have to be prepared to establish administrative systems and processes that the CEBR estimates could take more than three man-days each month to run on an ongoing basis.
If anything, having had the experience of building so many auto-enrolment schemes this year, I think those numbers could be a little on the low side. There is no doubt that these reforms are all about processes and compliance and that choosing the pension scheme is only a tiny part of what employers need to worry about; probably less than 1% of the problem.
Perfectly placed to help
IFAs these days are well aware of all this. Reading through the New Model Adviser® magazine and website confirms that. They have seen this coming and have already built their propositions to help employers cope with their new duties on their staging dates and beyond. Many have also taken the step of acquiring professional qualifications, such as the one provided by the Pensions Management Institute. The IFA community is ready for the tsunami, I’d say; what it needs, though, are the tools to do the job.
Tools for the job
My view all along has been that the commoditisation of the sort of middleware that large firms use to manage auto-enrolment processes (as well as pension schemes and a whole host of other workplace benefits) has to be the way forward. That depends on the price being right and the middleware being built quickly and efficiently.
What I mean by that is SME firms should be able to put in place affordable, intelligent middleware systems to which their employees would have online access – a bit like the way online banking works. The online access by employees is key to minimising the burden of work on the employer before the staging date, on the staging date and at every payroll run after the staging date on an ongoing basis.
Intelligent middleware can run the whole process of auto-enrolment from end to end, coping with record-keeping, postponement and self-certification, and even allowing employees to opt in or out using a secure online portal. Such a system takes less than an hour a month to maintain and needs only the scheduled uploading of payroll files by the employer’s administrator; a process that is much like, say, uploading a photo to Facebook.
The price is not right
Made that simple, the administration process doesn’t seem as daunting. But the price has to be right or middleware will be nothing more than a pipe-dream for smaller employers.
There are now plenty of middleware systems available for IFAs to choose from to help their larger employer clients with auto-enrolment. Many pension providers have their own in-house middleware and the largest payroll providers have developed middleware systems too.
But the middleware systems all seem to be sticking to the old model and are built in the same way as they would be for very big firms. The costs of putting that kind of middleware in place are somewhere between £10,000 and £20,000. They have ongoing running costs too, as you’d expect, and they also take a long time to build on a bespoke basis.
Costs and timeframes like that were fine for the small number of the very largest employers, but I doubt many SMEs will want to pay so much upfront. In any case, there simply won’t be the time to custom-build systems in the old way for so many SMEs staging in such a short period of time.
Slow progress on middleware
I have been waiting to see how the large pension and payroll providers would change their middleware offerings to make them accessible to ever-smaller employers as the staging dates roll out next year. But the pension providers’ systems seem to be stuck in the mud and are only now being made available to larger firms or those where the pension scheme provides high average levels of contribution.
The long-awaited response to auto-enrolment by the big payroll providers is finally becoming clear now they have come out from the other side of the introduction of real-time information (RTI) requirements. That response appears not to be the commoditisation of their middleware systems, however, but rather the introduction of self-service, do-it-yourself (DIY) processes that will provide employers with all the templates they need, but will leave them to build and run the processes themselves. Some pension providers have also taken this route.
The success of that sort of approach rests on every employer in the land having someone on their payroll who has a good working knowledge of auto-enrolment. That seems an unlikely outcome to me.
A gap in the market
For this market to be efficient, it requires a core group of professional firms to be able to build middleware solutions quickly and cheaply, and for those systems to be able to be run on an ongoing basis by someone who does not need to understand the pension legislation.
Once IFA firms have built a few such middleware schemes, they will become very effective at doing so; much more effective than each employer getting their heads around building and maintaining the one set of processes just once.
Until now I had thought, as the tsunami builds, the SME wave would be over by the early summer of 2015 (when the micro-firms and the real tsunami starts to hit). But my view on that has changed.
One of the big problems IFAs report from their dealings with employers is that many of them still do not understand the enormity of what is facing them with auto-enrolment. That is a natural reaction and many will simply be waiting for their payroll providers to sort things out for them. It is likely that what is involved will only dawn on many SME employers once they have had the experience of running a DIY, template-based system for a while.
Second wave opportunity
That leads me now to believe there will be a strong second SME auto-enrolment market opportunity for IFAs throughout 2015, 2016 and probably 2017 and beyond as firms look to switch from DIY approaches to middleware systems that can take the problem away. By then they will understand exactly what the problem is and will appreciate the value of working with professional intermediaries who can provide intelligent middleware systems at an affordable price.
Complex and confusing as it seems from the inside, this is just a market like any other and is subject to the same market forces of price and distribution. There’s nothing special about it, just because it’s about pensions and compliance. The obvious long-term outcome has to be that efficient and commoditised products will become the norm.
Steve Bee is chief executive of Jargonfree Benefits.