Written by Adam Jones, Guest Blogger on Monday 15 April 2013
While I generally try and avoid any kind of psychic visions about what might happen in the financial services industry, largely due to the unpredictability factor, I have been speaking to a lot of people recently about what happens from 2014 onwards. April 2014 marks the point at which ‘smaller’ (i.e. sub 250 staff) companies begin staging for auto-enrolment and the date poses some very interesting challenges for employers, advisers and pension providers. At this point in the auto-enrolment project the volume of distinct employers staging ramps up (over one million need to be covered between January 2014 and the end of 2018) while the number of employees per company decreases rapidly.
There has been a huge focus in the life and pensions industry around capturing the early stagers as they are seen to represent the high value opportunity. Product providers generally view the onboarding of these employers as a way of increasing revenue and will often bend over backwards to win the business. One thing that is becoming increasingly apparent based on articles in the press and conversations with businesses is that few providers have a solid plan for companies of 250 employees or less. From speaking to people working in the industry, there seems to be a general perception that the business offered by these employers is more costly to operate and not worth their while. As such, there is an expectation that NEST and the other super-trusts in the market place will pick it up, almost without challenge.
As time goes on, and the staging employers get smaller, this viewpoint will become more prominent and reminds me of something which has weighed upon the industry for quite some time; a lack of real industrialisation. Product providers are often concerned that they can’t turn a profit operating smaller schemes due to the set up effort and ongoing administration overheads to the extent that some firms are even contemplating excluding that business altogether. But does it really have to be that way?
The utilities industry generally serves well for a cross sector comparison and in this matter it is particularly useful. Energy suppliers epitomise how economies of scale can be leveraged to create a profit. The actual amount of money made per client is very small (although it may not feel like it when your bill lands on the doormat at the end of the month) but the sheer number of clients on the books means providers can build a substantial profit margin by reducing the cost to serve and trimming operational overheads. Auto-enrolment offers a comparable example in financial services and it could be that a large number of low value individuals can provide a substantial profit for a business if it is operated efficiently.
The key point here is cost to serve. Without decreasing this, additional business from smaller firms would be more of a hindrance than a help to a product provider. There are two key factors which can be leveraged to great effect; automation and standardisation. The lack of automation in the industry is something that never ceases to amaze me. With the advances in technology over the past decade, there is little reason that most operational processing cannot be completely automated. ViaNova market practice for funds trading and the Transfers market practice for automated transfers, both using the ISO 20022 standard messaging, are solid examples of progress being made in this space but for auto-enrolment to be viable for larger firms, we need similar practices in place for the entire auto-enrolment process, including the other looming time bomb, “pot follows member” transfers. While some proprietary formats are emerging none have yet received substantial provider backing. A set of open interoperable standards would go a long way to providing compatibility and standardisation between solutions and hence reducing overheads for providers.
Standardisation doesn’t stop at file or messaging formats however. The historic focus of most product providers on high net worth individuals has lead to operational processes being broken left right and centre in an attempt to serve the whims of an often demanding client base. This approach needs to be challenged as a result of AE and the change in market demographic it brings. For providers to operate economically viable corporate schemes for smaller employers, the operational process must be automated and standardised. Without wishing to state the obvious, a solid self service web offering for members and employers to interact with is essential to this approach and should be viewed as the principle client contact method, doing away with the cumbersome paper driven approach usually adopted to demonstrate added value. In reality, corporate pension schemes have very low levels of client interaction compared to high net worth individuals so appropriate processes and industrialisation should allow the product provider to turn a profit, while also providing a greater level of choice for staging employers and their staff.
There is another side to this issue of course, and that is how these same employers will be treated in the advisory space, especially with the restrictions which have been put in place as part of the RDR. While the larger firms staging this year have pockets deep enough to pay for bespoke advice on how best to handle their auto-enrolment responsibilities, many smaller firms will not be able/willing to spend thousands on the process. What is needed, and what we are beginning to see emerge from some corners, is industrialisation of the advisory process. Specifically group advice or collective certification processes.Without this, and with a potential lack of interest from product providers, many employers may end up using NEST by default as a tick in the box for regulatory compliance which could be contrary to their employee’s best interests.
Ultimately, employers of all shapes and sizes will go through auto-enrolment. This means that there will be a huge amount of money heading towards pension pots and careful planning and industrialisation from product providers and those in the advisory space could result in healthy returns and employees gaining access to the best pension for them. That’s wins all round from what I can see.