That “it’s all about payroll stupid!” has become one of the axioms of auto-enrolment strategy. It’s a truism you hear mouthed by people who sell pensions but I’ve not hear many in payroll return the compliment!
“It’s all about pensions” is a phrase I cannot remember hearing once in the past twelve months and I’ve been in a lot of rooms with a lot of people who do payroll.
What I do hear from payroll is “It’s all about time“. Time is a commodity in short supply among payroll operatives , it is valued in financial terms ; each job is apportioned time and the effectiveness of a business process is measure by the its cost divided by the time to deliver (Aka Time Cost).
For payroll, the business of establishing and managing auto-enrolment succeeds of fails on time-cost delivery. Ultimately this is what is meant by the capacity crunch.
The most recent work by Systemsync suggests that the processing of a payroll file to make a compliant auto-enrolment contribution takes 32 minutes. The spot survey may not be statistically valid but it certainly rings true, if that number does not decrease sharply , a payroll bureau processing 300 employer contributions is a month, will be faced with another 160 hours of processing time a week. That’s another four to five people’s time simply to manage the pension work.
Systemsync’s research suggests that this additional time has not been properly costed and that the cost of auto-enrolment processing is currently being absorbed by payroll out of payroll’s margin. In a thin- margin business, either payroll will go bust, put up its prices or find a quicker way of doing things.
How have the big pension players reacted?
It’s a good,bad and ugly story! The new master trusts, NEST, NOW and People’s pensions (plus the odd enlightened upstart – like Smart) have reached out to payroll. Primum inter Pares is NEST which has created a set of web-based tools which dramatically cuts the processing time to set up a pension, the payroll interface and to manage the day to day processes of opt-out. NOW and Peoples are hard at NEST’s heels and smaller players such as Smart pensions are hunting with the pack. Perhaps because they approached auto-enrolment without the baggage of “an established distribution strategy”, these pensions are offering a massive advantage to payroll, they are easy to use and cheap to run.
The bad news for payroll is that the insurers have not followed at the same pace. Rather than invest in interfaces that worked for payroll, most of the insurance companies invested in middleware that replicated the payroll process outside of payroll. While this worked for very large employers when payroll wasn’t ready, it doesn’t work for small employers now that payroll bureaux know what they are doing.
The large insurers are belatedly recognising that auto-enrolment is all about payroll, or at least the second half will be. Yesterday I wrote about the cost to the employer of using Standard Life’s Good to Go product. That afternoon, Professional Pensions ran a story claiming that Standard Life is “in talks with payroll to beef up its AE proposition“.
The article suggests that Standard Life may, as Legal & General have already done, contract with systemsync to access smaller payroll software systems.
The harsh reality is however that 2 out of every 3 small business running payroll today is using either Sage, Iris or Moneysoft software. Unless systemsync can broker deals with these three, they will only offer access to the remainder of the market.
The biggest challenge for the large insurers is to build direct interfaces, as the mastertrust have done, to the biggest payroll software companies.
If they cannot do this in a timely and cost-efficient way, they will either have to broker deals using systemsync or accept that they cannot compete. It is all about payroll.
The ugly in this context are the host of providers who have neither the vision, the interest or the money to work with payroll in a cost efficient way. There are a large number of insurers and established master trusts which simply don’t get the new market dynamics and what it takes to make a success of it now that the logistics have changed.
There simply is no time and no money in payroll to meet the demands of providers who cannot adapt to the new times and rely on bulk processing that involves IFAs and ineffective middleware. Those established providers who cannot move with the times will put at risk not just their new business targets but their existing business, already threatened by the sunset clause on commission.
The burning need for Real Time Information
Five years ago, before payroll and HMRC started exchanging real time information using real time technology, the idea that pensions and payroll systems could interact without the need for manual processing was a pipe dream.
Everything changed when RTI was implemented and implemented (pace Kate Upcraft) successfully. There is now an expectation within payroll that data can be transferred and received to and from HMRC at the press of a button. Straight Through Processing is here.
But RTI worked on a common data standard, there is only one interface between HMRC and the various payroll systems. The Pension industry failed to agree a common interface between the various providers and this has led to the messy outcomes where we have good, bad and ugly competing in a crowded market.
Pension RTI is available through systemsync (and AE exchange), it is available through NEST connect and through the chasing pack of master trusts, but coverage is patchy.
We are now in a headlong dash towards pension/payroll integration and the next few months are going to be tough times not just for the big beast payroll providers but the big beast payroll providers too.
If we cannot get integration into the market, then payroll costs will have to rise, or payroll will go bust. Payroll is too important to go bust. There is a cost to payroll’s time that can only be met from greater efficiency. Time cost will – in a free market – prevail.