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Beware the coming auto enrolment tsunami

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31st Jul 2013
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The auto enrolment ‘tsunami’ is about to hit IFA beach and unfortunately many advisers still think it’s an opportunity to sell lots of pensions to people, according to Steve Brice, business development manager at Lansdown Place.

The auto enrolment solutions expert told AccountingWEB that out of the 1.3 million businesses which have staging dates they can’t change, around 750,000 have no current pension provision, but will need to have one in place soon. In terms of number of employees, out of the 23 million workers in the private sector 10 million have nothing whatsoever.

He illustrated the size of the gap by picking one of the big pension providers, such as Aviva, which currently has around 10,000 schemes and intends to double that amount by the end of the four-year auto enrolment period.

“But even if you combine all the big pension providers, they are not going to cover the new market.” Brice said. “So where are the rest going to go? They’re not all going to be able to go over to NEST, so there is nowhere to go.”

He used the recent Specsavers/Aviva case as an example of where Aviva decided against offering the remaining Specsavers workforce a scheme. To retain Specsavers’ business Aviva initially offered to lower its charges, but in February this year the insurer made a U-turn, saying it would only honour the reduced charges for head office staff and not offer a qualifying scheme for its 18,000 store staff.

Tom McPhail, head of pensions research at Hargreaves Lansdown, told Pensions Week that the Specsavers’ scenario was not an isolated one.

“For some pension providers there are issues regarding the dilution of their profit profile. We are aware that in some cases this has prompted them to seek to close their schemes to certain categories of employees or to renegotiate the terms of their scheme,” he said.

Examples like this add tremendous pressure on NEST, the National Employment Savings Trust, to pick up the slack.

Brice said NEST will be there as it has a public service obligation, but warned “the tsunami is coming over the hill”.

Brice is not alone in his view that NEST’s ability to cope with high volumes of new customers was questionable.

Just last week NOW Pensions chief executive Morten Nilsson queried the long-term health of NEST after figures revealed its government loan has increased by £68m to £239m over the course of a year.

“NEST’s operating costs reinforce the fact that it isn’t run as a commercial business on commercial terms. Over the long-term, these escalating costs will impact both on taxpayers and members as it will take NEST longer to repay its loan,” Nilsson told Payroll World.

In terms of the raw stats on auto-enrolment, the staging graphs reveal just how big the auto enrolment issue could turn out to be.

In one month alone, for example May 2014, 12,000 businesses will need to stage and open schemes; this ramps up to 60,000 per month during parts of 2016; and up to 135,000 businesses in June 2018.

In addition to the sharp staging spikes over the coming years, Brice also pointed out that a lot of IFAs still think auto enrolment is all about pensions: “Auto enrolment is actually all about data handling, how you manipulate the data, clean it, transfer it and get it back.

"Oh, and by the way, you get put in a pension scheme at the end of it,” he added.

Replies (7)

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By AnnaKournikovasKnickers
01st Aug 2013 07:13

Oh, and by the way, you get put in a pension scheme at the end o

Oh! And whatever minimal pension you get after all this boondoggle, will me means tested away at the end.

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By Mallock
01st Aug 2013 15:59

Ludicrous

I could never understand why the Government wanted all employers to start a scheme. I have clients who have been told by insurers that they won't open a new scheme so they will be forced down the NEST route, if it can cope.

Would it not have been simpler to say that everyone must have a personal pension and that employers are required to make a contribution to it.

The regulations and fines for failing to operate the auto enrolment schemes are draconian and a very large number of small employers will never be able to comply. NEST will be unable to cope and the large insurers will cherry pick the employers who will make them the most profit.

Another disaster designed by those who don't have to be part of it! 

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By Kaylee100
02nd Aug 2013 12:27

When I invested into a pension scheme, my advisor took about two hours completing paperwork and then however long in his office afterwards, before producing a long document giving me advice on where to put my money. It took so long because he was bound by the FSA rules to ensure he had all the right information before he sold me a pension. Now, it seems, vulnerable, lower paid employees are going to be investing into schemes without such care being afforded to them by the Government. Some may even naively think (due to lack of financial savvy and lack of Government ensuring they get proper advice before buying)  they have a proper pension scheme, like nurses and doctors get. So much for mis-selling - our Government ought to ensure proper procedures are in place to protect vulnerable lower paid employees, so they understand and make the right decision on whether to choose to invest or not.

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By mstrutt
02nd Aug 2013 13:09

NEST investment funds

Quote from one of the NEST fund fact sheets:

"During our research, younger savers told us that they would react very negatively to falls in the value of their savings. For this reason, members who join in their 20s will typically spend up to five years in the Foundation phase. In this phase we concentrate on steadily growing the balance rather than exposing our members to substantial investment risk. This lower volatility approach still aims to at least match inflation after taking charges into account."

So for the first 5 years they'll be lucky if their fund keeps pace with inflation, then their carefully accumulated money will be fully invested (and subject to greater risk).

No one knows when good and bad investment years (or decades) will happen, but Sod's Law says that many investors will sit on the sidelines during a rising market only to be thrown in just before a crash.

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By chatman
02nd Aug 2013 15:23

National Insurance

The government could do this instead of the private sector, without all this hassle. They could call it National Insurance.

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By [email protected]
05th Aug 2013 15:22

Moaning aside...

We may not like it or agree with it, but the "Tsunami" (which expresses the situation well) is coming.  Has anyone any constructive feedback or prepared to share what they are doing with their clients so far?

With our clients, we are finding a large amount of complacency so far, although a few are now getting on with things and even putting schemes in place early.  I think the figures for what this is going to cost are going to be pretty shocking for those larger employers with no existing scheme in place for the vast majority of the workforce.

I'd be interested in any examples of real-life reaction you've had from clients.

 

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By SteveB@LPAES
20th Aug 2013 14:06

Tsunami solutions...........

In my view there will only every be a technology driven solution to the vast numbers of employers who will need to comply with this legislation. Comments above recognise that face to face advice is just not practical. We have developed a web based solution which is low cost and easy to use that allows employers to download an initial assessment report based on their own company data (£250 plus VAT) which could be your own "starter for ten" on how you get this whole thing lined up, which if you can't can be followed by a monthly fee "based on the number of employees you have) which can be as ow as £50 pm to deal with the returns for your each pay reference period.

There is no magic pill that makes all of this go away but maybe there is an easier way to swallow it? There are a number of providers including LP Auto Enrolment Solutions out there who are developing such solutions so lets hope that by 2015 and 2016 there are many more!

 

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