WHITE PAPER

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THE FUTURE OF PROVIDING AN AUTO ENROLMENT SERVICECHRIS DAEMS

Chris Daems is a director of financial planning practice Principal Financial Solutions Ltd and a director of the

Auto Enrolment Advisory Group Ltd.

He’s an experienced financial planner with over 15 years’ experience in helping clients achieve their financial goals.

Chris specialises in working in

conjunction with professionals including

accountants and solicitors to help their

clients with both their business and

individual financial goals.

The majority of his clients are directors

of owner managed businesses and Chris

considers this to be his particular area

of expertise.

More recently Chris has specialised in

helping firms of all sizes (ranging from

an employer with a workforce of 1500

all the way through to a small business

with 30 employees) with the challenges

they face whilst meeting the employer

duties relating to automatic enrolment

regulation.

In 2014 Chris won “Bluebook Newcomer” and “Pensions Adviser of the year” awards at the Unbiased

adviser awards 2014 as well as being

commended in the 2014 FT Adviser Life and Pension Awards.

Chris also won ‘Group Pension Adviser of the year’ at the 2014 FT Adviser Life

and Pension Awards and is regularly

featured in the press.

ABOUT THE AUTHOR

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THE FUTURE OF PROVIDING AN AUTO ENROLMENT SERVICE

The new employer duties (which include automatic enrolment) are one of the most far reaching pieces of workplace pension legislation in the last century. It impacts all employees, regardless of whether their job is within the micro sector, SME market or they are employed within a larger business.

It impacts all employers ranging from those with a workforce of millions, all the way to the smallest firms (companies which employ 2 people) – and It impacts the professionals who work with these firms.

Successful automatic enrolment work is about more than pension implementation. It includes elements of project management, input from key stakeholders and work to ensure employment contracts are fit for purpose.

Therefore companies usually need input from their payroll providers, their accountants, their financial planners, their lawyers and their HR professionals.

However the impact of Automatic Enrolment on the market is broadening and the pace of change is quickening.

There is one reason alone for the pace and scale of this change and this is best explained using a concept originally from Chinese Philosophy.

A concept used to describe balance, opposing forces and natural opposites (think of hot & cold, fire & water or light & dark).

A concept most of us know as Yin & Yang.

Although I’m not a Chinese philosophy expert, a believer in Taoism, or a follower of the school of naturalists (the school of thought Yin and Yang is originally from) the concept of Yin and Yang can also be used to explain a number of elements of the automatic enrolment market.

Firstly it explains the duality in the market in terms of scope and scale.

• Large and medium sized firms with an HR team, a payroll team, a Financial Director and usually a Managing Director.

• Firms who employ thousands (and sometimes millions) of people but relatively speaking a small number of firms

• Smaller companies with one person who is responsible for payroll, HR, running the office and usually loads of other responsibilities besides.

Firms where, regardless of their relatively small size, have the same responsibilities and obligations as the larger firms in the land. Up to this point (June 2014) Automatic Enrolment has been a success.

The pension’s regulators “Automatic Enrolment Registration Report” (from July 2012 - April 2014) reveal an encouraging picture:-

Employers who have confirmed to the regulator they have met their duties by registering during this period . . . . . . . . . 11,834

Total works of registered employees . . . . . . . . . . . 15,641,000

Consisting ofEligible Jobholders. . . . . . . 3,328,000

Workers who were already part of a qualifying scheme . . . . . . . . . . . . . . . 7,937,000

Eligible jobholders who have a defined benefit or hybrid scheme transitional arrangements applied to them. . . . . . . . . . 416,000

Workers who do not fall into any of the above categories . . . . . . . . . . . . . 3,960,000

The Auto Enrolment Yin/Yang

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While these numbers are massively encouraging (especially as the 3 millionth eligible jobholder was employed by my football team West Ham United) the greater challenge we face in this market is yet to come.

Consider the following:

Estimation of total UK Employees1 . . . . . . . . . . . 24,300,000

Total number of registered employees2 . . . . . . . . . . . 15,641,000

Estimated UK Employees yet to register . . . . . . . . . . 8,659,000

Estimation of total UK Employers1 . . . . . . . . . . . . 1,210,195

Total number of registered employers2 . . . . . . . . . . . . . . 11,834

Estimated UK employers yet to register . . . . . . . . . . . . . 1,198,361

1 Figures from the following report from Department of Business Innovation and Skills - https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/254552/13-92-business-population-estimates-2013-stats-release-4.pdf

2 Figures from the following report from The Pensions Regulator - These figures are May 2014’s Automatic Enrolment registration report - http://www.thepensionsregulator.gov.uk/docs/automatic enrolment monthly-registration-report.pdf

It’s easy to see both the success so far but also the fact that the lions share of employers still need to comply with the new regulation.

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The recent pension regulator statistics tell us that Auto Enrolment has been a relative success with larger and medium sized employers. However the statistics reveal some of the challenges we face over the next few years:

* While, based on recent estimations, just over 6 in 10 employees have gone through the automatic enrolment process less than 1 in 100 employers have complied.

* This is not immediately surprising, but highlights as there are over a million firms yet to comply, the real challenge for most employers and the professionals who work with them have yet to begin.

There are also two additional questions which need answering as we approach the time when small and micro firms need to comply:

1) Do smaller firms need or want help with automatic enrolment?

2) What level of service can they afford (or are prepared to pay for)?

We know through the experience we’ve had with larger employers that they appreciate the approach we’ve taken. Namely a face to face consultancy based solution.

However, as we move into a market where the requirement is to help firms with smaller workforces (and budgets), we wanted to understand whether a consultative face to face approach was sustainable or if we had to shift our thought process on how we helped smaller firms (less than 50 employees) to solve their automatic enrolment issues.

To better understand the changing market we asked 50 of our accountancy connections (ranging from top 100 firms all the way to small family practices) the following question…

“By percentage, and given the choice, how many of your clients who are yet to comply would choose the following solutions (if provided through you) to help them comply with automatic enrolment?”

The aggregate results were as follows:-

Employers who would be happy to pay a higher price for a consultancy based solution . . . . 28%

Employers who would opt for a lower cost “In a Box” style solution designed to help an employer comply but with simple step by step guidance. . . . . . . . . . . . . . . . . . 64%

Employers who felt confident fully understanding and meeting their obligations without any external help. . . . . . . . . . . . . 8%

The survey revealed some interesting findings, according to their accountants:

• Less than one in ten employers (who still need to comply) feel they don’t need any form of support in order to comply with auto enrolment regulation.

• Less than three in ten employers (who still need to comply) felt that they would look to comply using a consultancy based solution.

• Most employers (just over three fifths) will be looking for a low cost and low touch solution in order to comply with the upcoming regulation.

From those survey results, these findings tell an interesting story.

It tells us for the majority of Small and Micro employers looking for help, a key factor is cost. Smaller employers are happy to pay a reduced cost and take on more responsibility. However they still need significant help and support. The consultancy route is cost prohibitive for these employers, and not felt needed by the majority of them (64%).

The challenge of “Auto Enrolment Yang”

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So what’s the solution?

This shows a fundamental change in the Automatic Enrolment market...

...from Consultancy Yin to Commodity Yang.

The Yin / Yang analogy could also be used to explain the way that professionals need to view the automatic enrolment market as the smaller firms enter the marketplace for solutions designed to ensure they comply with automatic enrolment regulation.

When we started working actively with large and medium sized clients in the auto enrolment space we found that many of the skills and knowledge we required stretched way beyond the remit of pensions.

We were managing projects, ensuring the puzzle of auto enrolment worked for large corporate employers and charging for our time and expertise accordingly.

Of employees have been auto enrolled

Of employers have complied with automatic enrolment

Consultancy Yin or commodity Yang?

Due to the nature of auto enrolment project management work (high touch, personal and complex) we found corporate companies were, on the whole, comfortable working with us on a consultancy basis.

Of course for larger companies buying in a consultancy solution it is both affordable, and on many occasions due to the more complex nature of this type of business, necessary’.

Recently speaking at an Event about the changing nature of the automatic enrolment market, one of the issues which came up in both the questions and some of the presentations (including mine) was cost of support.

The survey tells us those running smaller firms with less complex auto enrolment issues are best served by the SaaS model. Software as a Service - a product based, technology based commoditised solution. Not the consultancy road larger employers took.

Smaller firms, are effectively looking for something they can buy ‘in a box” to help them solve their AE puzzle.

This means the professionals who look after businesses in the automatic enrolment space need to take a different approach. Which raises an additional question:

How do professionals who want to work in the automatic enrolment market do so profitably?

The answer to this question, I believe, lies in the gap.

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06 64%1%

The automatic enrolment market is an interesting one.

You’ve got the pension providers.

You’ve got the software designed to automate many of the processes (usually called middleware)

…and then you’ve got “The Gap”.

For professionals to effectively service the smaller end of the SME and micro market I believe they need to take the following 4 steps:

1. Identify “the gap” (what’s delivered by professionals in the consultancy model) and automate these tasks as much as possible.

2. Simplify the consultancy process

3. Reduce the costs accordingly to accommodate a larger scale but which enables employers to comply easily.

4. Make complying with automatic enrolment as easy as possible for the SME/Micro market.

Like many things in life the answer might be clear but the solution isn’t always as easy to develop.

We spent some time looking at this issue in depth and realised we needed to take a number of steps ourselves.

The first step was working out what exactly was “The Gap”?

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07 The Gap

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08 The lion’s share of what Automatic Enrolment specialists deliver can be systemised and automated to make it far easier (and cheaper) for some of the smaller (and on most occasions less complicated) firms to comply.

After analysis of our consultancy work in this market I believe “the gap” contains the following:-

Project ManagementAuto enrolment requires planning. Putting a plan in place needs the knowledge, expertise and resources which comes from understanding what needs to be done in a bunch of different scenarios with different companies.

Employer supportEmployers are actively seeking support to help them comply with automatic enrolment. The larger firms can provide consultancy solutions however the smaller firms will still need a degree of support in order to comply.

Support to SME and micro businesses can be delivered, however the support (and due to its low cost nature) needs to be ‘low touch’ and systemised if it’s going to be delivered appropriately.

Employee support and communicationsThe issue that most employers we speak to, large and small, are keen to avoid is, being caught up in providing advice to their employees for fear of advising (or miss-advising) them or being accused of trying to persuade their employees to opt out.

We found through our work with larger companies, one of the greatest areas of need is not the needs of the employer, but of the employee.

While larger firms can potentially afford to support their employees by arranging face to face seminars, helplines and other forms of support, smaller firms are looking for more direct routes to support their workforce.

Updates due to changes in legislationNormally we provide our consultancy clients with a promise.

As long as they remain clients of ours we will ensure they are made aware of any changes and what they need to do to ensure they continue to comply.

Most of the regulatory bodies involved in the automatic enrolment aren’t currently

prepared to commit to the fact that future changes will occur in this field,

However if we look at the size of the ‘retirement gap’ together with the experience of other countries who have adopted nudge tactics, it’s pretty clear that change will occur once automatic enrolment has bedded in.

The danger with smaller firms, especially the ones which assume once all provisions are in place it will be “job done”, is the regulatory changes will potentially pass them by.

This leaves small firms open to the risk of being compliant one day, and into the realms of non-compliance the next, unless they have a support system in place.

The system needs to provide regular, pertinent updates together with a clear plan on what needs to be done in order to comply once more.

…and quite a bit more

There’s a bunch of other gaps:

• Support on the employers ‘software of choice’.

• The ability to contact professionals and ask questions.

• Relevant resources designed to support employers and professionals with software, regulator expectations, and more.

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09 Delivering consultancy solutions to commoditised main market.The key to delivering these services to Smaller SME and micro employers, we believe, is systemising every part of the process and delivering an IT based platform to meet their needs at a cost they can afford.

In our business, and when we looked at the approaching commoditised market we had three clear choices:

1) Ignore the commoditised SME and Micro market by just continuing to focus on our Medium sized and larger SME employers.

2) Plug into a system which provided and automated the services in ‘the gap’

3) Build our own platform which provided and automated the services in ‘the gap’

We saw the opportunity (and the danger) in the micro and small SME end of the market.

The opportunity came in the millions of firms who still needed to comply.

The danger came in providing support to those employers in an efficient method.

Our preference would have been to take option 2) Plug into a system which provided and automated the services in “The Gap”.

It would have been a cheaper, more efficient route to take as well as giving us a quicker route to market for the smaller businesses.

However we discovered an issue.

There was plenty of software out there delivering “middleware” functionality (including, but not exclusively Jargon Free Benefits, and some of the main payroll providers) there was no solution which delivered “The Gap” in an automated systemised way.

We had no option then but to plump for choice no 3) Build our own platform which provided and automated the services in ‘The Gap’. Leaving the AE market is not an option for us.

Professionals in the Auto Enrolment market might feel the consultancy route

is the only profitable one for them. Although there is a clear shift in the market, 28% in our survey remain happy to pay extra for this type of solution.

This relates to 330,000 employers still prepared to pay for a consultancy based solution.

Of course, the danger in the smaller SME and micro market is whether these firms who want a consultancy solution are prepared to pay for it once they realise the true cost of this approach.

Only time will tell.

Professionals also need to be careful to manage expectations and costs in this respect.

We have found this management to be fundamental in the medium sized market and will be increasingly important when starting to work with small and micro firms.

This does leave scope for professionals in this market to continue to provide a face to face consultancy based solution.

However it does mean that over 760,000 employers who need a more automated solution won’t be serviced by the professionals who take the ‘consultancy only’ approach.

This provides professionals who are prepared to systemise and engage with the Micro and Small SME businesses that are looking for ‘commodity’ based solutions massive opportunities both in new relationships and income streams.

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10 ConclusionIt’s clear from the accountants and employers we speak to that the market is changing. For automatic enrolment to continue to be successful in the realm of the small employer there needs to be commoditised tools designed to help these employers comply.

There is clearly not the appetite, or the capacity in the advisory or accountancy community to provide a consultancy solution to every single Small SME and Micro business.

The reality is that most small SME and Micro business do not need a “full fat” consultancy solution but many can be satisfied with a commoditised system based solution to meet a number of the consultancy services provided in a commoditised “in a box” solution.

In an open market the choice of how employers and the professionals who work with them is, of course, theirs.

What we are seeing is a significant increase in demand, both from fellow professionals and the employers they

represent, for a low cost low touch option designed to meet their needs.

Auto enrolment is a fast developing market where the commercial opportunities are vast if administered correctly.

There is also a risk if time, effort and energy of the professionals who work in this sector are misplaced.

Therefore what we believe is required is a system designed to empower employers to support their compliance, leaving the professional to focus on their areas of both interest and expertise in the future.

Good luck with your own personal automatic enrolment challenge, the battle of the “Yang market” and the challenge of profitably and effectively filling “The Gap.”

If you’re interested in knowing more about the system we’re building to fill “The Gap’ – get in touch.

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You can contact the author of this White Paper and find out more in the following ways

Email: Chris@Principalifas.co.uk

Twitter: @Chrisdaems

Website (Principal): www.principalifas.co.uk

Website (AEAG):www.aeadvice.co.uk

Contact Details