As auto-enrolment finally moves into view, it has turned into the financial services equivalent of the Daily Mail ontological oncological approach – it causes cancer! No, it cures cancer! It all depends what day of the week it is.
I'm struck by the optimism of providers, busy building auto-enrolment solutions to help employers navigate the challenges of their new responsibilities. And, of course to deliver lots of new bodies and assets into their group pension propositions.
I'm struck too by the see-no-evil, hear-no-evil optimism about the impact of NEST and the new breed of low-cost pension providers on the mid-market. NEST has had a bad few months, with some founder schemes opting out (pun intended) and signing up with insurers. Given that NEST's controversial 1.8% contribution charge (and other restrictions including transfers in) were put in place to protect insurers, the good people at NEST could be forgiven for feeling a little chagrined.
So far it seems likely that large employers, advised by large consultancies, will steer well clear of NEST – (as Henry Tapper of First Actuarial recently pointed out in his blog) none of the Big 5 schemes with over 120,000 staff each have plumped for NEST, favouring instead a ragbag of cash balance, DC, GPP and mastertrust. Others may choose to have it as part of the mix, but so far the news isn't good.
Further down the market, staging doesn't happen for another 12-18 months, and it's all to play for. It's this SME market, possibly extending to the callused feet of the FTSE All-Share gentlemen's club, that is, I suspect, the key battleground for the insurers and for many corporate IFAs.
In this market, auto-enrolment is still tomorrow's problem, and while anecdotal evidence suggests there is some sign of engagement, these employers are currently thanking their lucky stars it isn't them yet. But 92% of employers are reported as being concerned by AE, even if it's just a little niggle, so the message is getting out. I listened to a distinguished actuarial consultant speak at a conference recently; his experience was that within 10 minutes of starting to discuss auto-enrolment, CEOs and FDs switched off and were generally of the mind that we should just have compulsion as what we do have is just too complex.
That complexity is the backbone of the auto-enrolment systems offered by providers and software suppliers. The functionality fairies have been out again, sprinkling their pixie dust. Now everyone has to have an AE system; employers or advisers looking for something to help administration of AE along the way already have a dizzying choice.
The choices broadly split into two – tied cottages offered by insurers, which no doubt do the job but only 'talk' to their own products. Marketing and sales teams being what they are, we can look forward to a mine's-bigger-than-yours fight on that front which will probably not move us very much further forward. However, they will be free, which is something.
More persuasive, I suspect, will be the paid-for models being built by software providers like Staffcare and Xafinity and consultants like Thomsons Online Benefits and Lorica. These will be provider-agnostic so able to help companies with multiple payrolls and multiple schemes. An honourable mention here goes to Aviva, whose AME system will, when launched, work happily with other providers' pensions. I don't know if other insurers are doing that, but they should. Staffcare research published recently suggested that 70% of advisers favour a third party solution, presumably one that featured the word 'Staffcare' prominently on it, but still.
While all this is going on, various providers are putting large amounts of money into corporate platforms, which fulfill a number of strategic functions. They offer great investment flexibility (even if it's never used), corporate ISAs (even if they're never used) and the ability to record holistic information on individuals' financial affairs (even if it's never used). More importantly, they replace creaking systems which struggle to offer the flexibility required by consultants and IFAs trying to design new benefit structures to stave off the threat of NEST. But given that at least some of the new platforms don't yet offer consultancy charging as a feature, this section of the market has a way to go yet.
Where does it all shake out to for advisers? I think everyone involved in advising corporates could take a lesson from the largest EBCs for once – think carefully about pension structures and be ready to advise on bundled DC business, mastertrust, cash balance and contract-based business. These structures will filter down the market and smart providers will find ways of making them accessible. Diversify income streams where possible – I'm sceptical about consultancy charging as a mechanism and certainly as an engine for adviser profitability – and look at services you can fee for. Employers who won't pay their way may avail themselves of the new breed of direct propositions and NEST.
And most of all, don't expect auto-enrolment to deliver massive business benefit. With opt-out rates predicted recently to hit 40%, it is very, very far from being a cure for cancer.