Written by Jon Dean on Saturday 1 November 2014
Automatic enrolment so far has exceeded the expectations of both the Government and the Industry. With smaller businesses now joining in, cracks have started to appear with the Pensions Regulator issuing its first enforcement notices for non-compliance.
It’s not often that we hear of Government initiatives working better than planned, but in April the DWP adjusted its predictions for auto-enrolment opt-out rates, halving them to 15% based on its experience over the first eighteen months. By implication, it is now expected that by the end of staging in 2018, there will be 9 million more workers in retirement savings schemes. A number of factors threaten to spoil the celebrations, however.
The first of these is the size and nature of firms enrolling from here on in. During 2015 we will see firms staging with between 30 and 58 employees. These companies may have an HR representative but quite often their payroll will be managed by an external accountant, and they probably do not have the budget or appetite to effectively promote the benefits of their new scheme. Success of these schemes will stand or fall on whether the management adopts a paternalistic and supportive policy to encourage employees to stay in.
Then there is the much talked-about capacity crunch. According to tPR, up to the end of October, nearly 37,000 employers had processed over 19 million workers and enrolled over 4.8 million eligible jobholders who were not previously in a scheme. Put in perspective, this is only 3% of the estimated 1.2 million UK businesses (excluding sole traders who are exempt from the rules). The number of advisers offering corporate pensions advice is rising but is still below pre-RDR levels, and last year’s ban on consultancy charging for AE schemes removed the right of employers to pass advice costs onto their staff.
Master trusts and insurers have already reported fewer than expected enquiries from smaller employers or their advisers looking to set up new schemes. Could this be evidence of under-supply of advisers, or an early sign of mass non-compliance? To the end of September 2014, 177 compliance notices and 3 fixed penalties had been issued.
There is still a lot to play for in this market. With over 4 million more workers to be enrolled, providers with a simple proposition, a keen focus on low operational costs and an efficient distribution channel will be able to capitalise on this opportunity to massively increase assets under administration. Making this happen in a world charge capped at 0.75% is going to require effective automation and the leanest of operating models.