In September we sent out 80,000 e-mails to companies in the UK with between 5 and 100 staff, the sort of companies that will be obliged to auto-enrol their staff between 2014 and 2015 and are today obliged to offer their staff a stakeholder pension or a reasonably funded alternative.
We have got back 21 responses and I’ve been responsible for dealing with the questions that have come our way. There is one question that every company asks “how much will it cost?”. Not as simple as it sounds.
How much does it cost to provide our staff with a reasonable level of pension? – define reasonable
How much will it cost us to comply with the stakeholder regulations today (now 10 years old) and auto-enrolment tomorrow?
How much will it cost us to talk to First Actuarial?
The need for certainty on costs easily outweighs those things which pension boffins discuss in ivory towers.
No questions on investment or administration or governance or contribution structures. Simply a wish for transparency so that the business owners can do their business planning.
Once we’ve established what costs what, the next question is why this should cost companies anything at all. There seems to be some credence in the idea of free advice. Whether that is because company owners have cottoned on to the concept of commissions derived from member’s funds or because they hang on to a vague notion that financial advice is a charitable activity, I do not know.
Well I do know – though there are companies we are speaking to who really do not understand commission and need to have it explained, there is another type of corporate buyer who, when presented with the opportunity to buy directly from the supplier – does so – who can blame them?
It is a sad and despicable defence of one’s profession that the most succesful argument you can give to be paid is that pensions are now so complicated you can no longer buy directly with any certainty. Nevertheless this is true.
The long-stop providers – NEST, NOW, Pensions Trust and the plethora of other multi-employer mastertrusts compete against each other. The insurers compete against each other and advisers compete with each other to present the choices in an intelligible manner.
The business of setting up a pension for owners and their staff is difficult requiring a detailed understanding of people, tax, operations and the complex interactions between them. In all probability , most companies would be best off taking advice from a solid transparent adviser like First Actuarial.
Speaking with these business owners, I feel a deep distrust of me and my profession. What is encouraging is that the more open I am about our fees and the opportunities paying fees offers me to advise them on products such as NEST, the less distrustful prospective customers become.
It is as if the solution to the problems of engaging small businesses with pensions is as simple as telling them it as it is.
The cost of a pension is the amount needed to buy the pension plus the fees to be paid to those who advise and manage the pension. The cost can be reduced by pre-funding over the working life of the employee and fees can be kept down by joining collective arrangements and not working on an “every man for himself” basis. There are further ways of reducing costs but they involve taking risks – working out which of those risks is acceptable and which aren’t is what a pension manager does. You chose the manager based on your trust in their capacity but the less you trust the more you need to pay.
There are certainties. Without a pension most people will struggle to retire. With a small pension, most people might as well not bother as they will, as likely as not simply save to replace what the state would give them for nothing. To get a reasonable pension, most people will need to save a reasonable proportion of their total pay over their lifetimes and do so with an efficient pension manager who takes the right kind of risks.
We can be pretty certain that whatever is touted as the right solution in 2011 will have been superseded by 2021 and that will have been superseded by 2031. Some kind of ongoing management of the pension scheme is needed.
Whether firms like mine will be around to provide that management depends on whether we can regain the trust of firms like the ones I’m talking with now and in the weeks to come. If we can find a way to win their trust and deliver proper advice at a reasonable cost then I sense there is a groundswell of support for workplace pensions among the people who matter most – the business owners who have to deliver them.
Mrs Higham’s letter (henrytapper.com)
- Axa asks staff to give up index link pensions (telegraph.co.uk)
- Pension provision ‘damaging business insurance holders’ competitiveness’ (premierlinedirect.co.uk)
- Top tips on saving for a pension (moneyexpert.com)
- When we make company pensions compulsory.. (henrytapper.com)
- New national pension scheme gets the go-ahead (confused.com)
- It’s the legacy, stupid! (henrytapper.com)
- The workplace pension changes that affect you (confused.com)
- Pension choices for smaller companies (henrytapper.com)
- Bankrupt companies must fill pension gaps before paying other debts, Court of Appeal rules (telegraph.co.uk)
- Pension concerns? The Cash Clinic is here to help (blogs.confused.com)
- NEST LIVE “Their hands in our pockets” (henrytapper.com)
- Yeovil has the best pension plan in the country (henrytapper.com)
- Nest is coming: Get ready now (bbc.co.uk)
- Employers forced to cut pay rises to pay for pension plans (telegraph.co.uk)
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Hi Henry, great idea as the more I look at automatic enrolment the more I wonder how any business can possibly do what it needs to do without taking advice. The principle of automatic enrolment is simple but the reality is just so complicated.
The alternative to advice is an all singing all dancing software system which does it all for them. The optimist in me says someone will come up with a software package which deals with automatic enrolment simply and efficiently. The realist in me says there will be some significant teething problems and a price tag which means small businesses will not be able to afford it!
Good luck with this and I would be interested in seeing your report.
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