L&G changes its AE distribution strategy

Legal and General have consistently been an iconoclastic force in auto-enrolment; I would argue a “Force for Good”, not afraid to stick their necks out and take risk where others have waivered.

Within the past few days they have made a bold move which marks a tipping point in their delicate balancing act between maintaining competitive and managing new business at a profit.

L&G now require any employer or intermediary to deliver new business to them using their AE expand service. This service is currently only available through two organisations “pensionsync” and EASE.

Regular readers of my blog will be familiar with both. Pensionsync allows employers to run payroll as usual but allows data to transfer to workplace pension providers as if it were RTI (real time information).

EASE works differently, effectively doing the AE function for payroll as conventional middleware.

Both EASE and pensionsync interact with L&G to populate L&G’s member database at scheme set up and update the data each pay period to ensure employers stay compliant and members get the right money invested in the right place at the right time. Technically this is known as data integration.

L&G is free to use but pensionsync and EASE aren’t, L&G are profit sharing their value chain and challenging the market to collaborate. It’s tough love.

A big bet!

This is a big bet from L&G. It risks alienating that part of the market that isn’t using middleware (which runs the risk of duplicating a pre-paid payroll service) and of alienating the part of the payroll market that doesn’t want to partner with pensionsync.

That at present is most of the market. The question is whether Legal & General are taking one step backward to take two forward of (as some will suppose) that L&G are tactfully withdrawing from the mass market.

A missed opportunity?

Much as I admire L&G, I think they have missed a trick. Though they have a fairly clunky pension database that doesn’t “take kindly to strangers”, L&G have been reluctant to open their doors to payroll wishing to contract with them directly. While it may be costly to build the “portal” that allows ingress and egress to the marble halls of L&G’s pension system, it’s hard to see the big payroll players at the bottom end of the payroll market (Sage, then IRIS then Moneysoft) taking a haircut by working with pensionsync or Ease.

Frankly, L&G should have direct relationships with at least one of the big three to have a mass market offering going forward and it will be interesting to see whether these payrolls can be bothered to press L&G for just that, or whether they forge alliances with L&G’s chosen partners, or whether they simply ignore L&G claiming they are effectively “out of the market”.

“Never too late if Faustus will repent”

In Marlow’s Dr Faustus, the eponymous hero contemplates his inevitable descent to hell and speaks with an interceding angel, who utters these words.

I feel like an interceding angel!

It’s very important for auto-enrolment, for choice and for the 5m employees still to enrol that L&G maintain a direct presence in the market. This can and I hope will happen because L&G’s partners have the capacity to grow into AE II. Those payrolls that have integrated with pensionsync QTAC, Bond and Xero so far, several more in the pipeline, have the capacity to grow organically and may find their relationship with pensionsync adds fertiliser.

Accountants and other bodies that use EASE can manage auto-enrolment with payrolls that are difficult or where the complexity of the employer’s circumstances requires the expertise of EASE’s parent -ITM – a specialist pension data management company.

Let’s hope that those large payrolls, Sage, Iris , Moneysoft and a number of further payrolls, can either adapt and adopt or find a way over time to talk directly to L&G.

A learning point

Some of the lessons of the PAPDIS project have been learned, specifically the need for collaboration between payroll and provider. The major AE providers other than L&G are all busy building direct to the large payrolls using the new API technology that rids us of the accursed CSV file.

But we are not getting a common data standard and L&G, Aviva, NEST , and Peoples and NOW have different ways they want to talk. There is no Esperanto, only a number of ways of saying the same thing which are sounding more alike (but are still in different languages).

The lesson learned is that a common data standard should have been established when AE was first mooted back in 2005, it should work like RTI so that there is a lingua franca for data integration. But – like the tower of Babel which mythically created the diversity of world languages we have today, the years following saw every AE provider speak in its own tongue.

We are seeing the price of this today in the difficult gestation of L&G’s new approach. Whether they get to the other side depends on the success of their partners, the capacity of L&G work directly with the bigger players and the capacity of the market to embrace choice.

Choice matters

Workplace pensions need competition. If the insurers are driven out of the market by their inability to get on with payroll, then we will be left with limited choice. I fear this will lead to lazy master trusts who coast along without innovation, lazy purchasing from employers who say (as we say of politicians), they’re all the same and lazy regulation , (anything for an easy life).

I will continue to champion choice and http://www.pensionplaypen.com will continue to promote L&G as part of the choices employers have. The choice of using L&G has just got a lot more difficult as it will only be available “in selected stores”.

But to have quality pension providers in the market (and L&G is quality), we need quality purchasing too. Intermediaries – IFAs, accountants and payroll – take note!