Auto-enrolment is a huge change in the pensions world as the UK moves away from government-run pensions (such as graduated pensions, state earnings-related pension and state second pension) to privately run schemes for which the employer takes responsibility for overseeing administration and making payments.
The onus is on employers to choose and set up pension schemes, and oversee their compliance with the raft of new regulation brought about with the move to auto-enrolment. Large employers may have the relevant experience and knowledge in-house, but smaller employers will not, and therefore will have to outsource.
However, with an ever-shrinking adviser base as a result of the retail distribution review (RDR), the banks and building societies running away from providing pensions advice, and hundreds of thousands of employers seeking advice, the supply-and-demand equation is clearly not going to add up.
In the pre-RDR days, group pensions could provide rich pickings for advisers as the pension companies offered attractive commission rates and employers did not have to pay fees directly to advisers. This has all changed.
To make matters worse, new schemes and new entrants are likely to be on far lower average premiums and in most cases without attractive transfer values, so the providers are shying away from these schemes rather than fighting to take them on. With a likely ban on consultancy charging from auto-enrolment schemes, the traditional earning avenues for pension advisers seem pretty much closed.
While many traditional pension advisers may turn their backs on the huge number of employers seeking help and advice for new schemes, we see the potential for earning from the demand resulting from auto-enrolment. We know the earnings will be far lower on average per scheme, and technology will have to play a big part in making sure it is cost-effective for employers and profitable for advisers.
The National Employment Savings Trust (Nest) will be the chosen provider for many, mainly smaller employers. This is mainly because other providers will not want to take on the schemes due to low contribution rates, lack of transfer values and low numbers of employees, rather than because Nest is particularly attractive. The traditional providers will probably cherry pick the schemes they take on, selecting those with higher than average premiums and transfer values.
We see great potential in providing both advice (to the employer and employees) on a fee basis and assistance to employers in implementing the systems-based solutions to compliance, communication and payments.
Employers with existing schemes will look to use the systems of their current providers, although there is no guarantee all providers will offer a sufficient level of support in this area. For employers that are bringing in new schemes and for those whose providers do not provide sufficiently comprehensive systems, a systems-based solution is the only answer.
Perhaps the highest profile system is that provided by Steve Bee of Jargon Free Pensions. This system provides a comprehensive solution that is easy for the employer to use (with the assistance of a pensions adviser) and enables the adviser (and if required, the accountant) to earn on a monthly basis. This can be used with an initial fee for set-up, and a monthly fee charged per employee per month.
We plan to use this solution. It is practical and cost effective for employers and, if used properly, can be potentially profitable for pensions advisers over the longer term.
The pensions landscape has changed dramatically. If advisers wish to play in this arena, they will have to implement dramatic changes to how they operate and charge for what is potentially a massive source of pensions business.
Richard Skerritt is managing director of Skerritts Chartered Financial Planners