The sins of the past

Government spending

Over the past four weeks we have talked with some of the senior people at the insurers and mastertrusts who will be providing workplace pensions to the 1.2m employers staging auto-enrolment over the next five years.

IWe’ve asked what they think are the main threats to a success for the Government’s program of auto-enrolment. Here in rough “order of worry” is what we’ve got back.

  1. insufficient capacity to recommend on the employer decision
  2. over-complex rules surrounding the administration of auto-enrolment
  3. financial strain on the provider of “having to take part”
  4. lack of interest among employers in “good” especially “good contributions”
  5. impact on legacy book of pensions.

As described in my blog “stick or twist” , the market has divided between those whose primary aim is to protect the existing estate (stick) and that part keen to get a market share from the disturbance (twist).

Both strategies have sense; large providers who have established good schemes with employers like BT, The Royal Mail and Centrica (to name three at random), are now reaping the benefit of their committment to the market in the past ten years. Auto-enrolment may dilute the profit margins on these schemes, but the new flows from those not opting out will more than compensate and it looks like you can “stick and win”.

Similarly, those providers with a small legacy like the mastertrusts can be nimble and take on larger rivals because they have neither the overheads nor the conflicts accumulated in the past,

The bind comes when your legacy book looks vulnerable , either from the introduction of minimum standards from above, or from commercial assault from below. Many life companies are acutely aware that many of the plans that have been sold over the past five years could easily be replaced by aggressive rivals paying no commissions and offering funds at prices existing providers cannot match,

We have already seen a withdrawal of some household names such as the Prudential, Royal and Sun Alliance and the Prudential from offering new workplace pensions. Tomorrow, the emphasis may be more “protect what we have” than “sell and replace” for the weaker providers.

Establishing new schemes is disruptive for employers and employees alike. Better by far that an upgrade is available than a replacement scheme.

I am not a natural fan of the EU Solvency II requirements, but if they focus the minds of those stablished  workplace pension providers on improving sustained value for their existing customers, and not targeting “new business”, both their and their customers interests will be best served.

There is no public service obligation on providers to compete for unprofitable business (other than for NEST). It is up to each provider to work out what works for them and what doesn’t.

The Government is likely to introduce minimum standards in the next few weeks which will ensure that legacy schemes, if they are to qualify as auto-enrolment workplace pensions, need to be reviewed and in some cases improved.

We have concentrated  our thinking  on how the financial services industry will cope with the new business strain of auto-enrolment. For many providers the bigger issue will be the impact on its existing business.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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