Fiona Murphy discusses the massive opportunities advisers have encountered in the first year of auto-enrolment
Auto-enrolment has just reached its first birthday, and like all newborns has had a fair amount of teething troubles to overcome. What a year it has been, with more than 1.6 million people now auto-enrolled.
The opportunity for advisers is huge. As the next few cohorts of companies reach their staging date over the coming few years, we will see many smaller employers in need of advice and support.
A recent report from the Personal Finance Society and the Chartered Institute of Insurance (CII) Are we in yet? found advisers are the preferred choice for choosing a pension for firms.
Nearly half of respondents said they would use an adviser, which represents more than half a million businesses. One-third of small employers (about 60,000 businesses) would turn to a financial adviser for setting up and running a pension. However, about one-third of micro firms want to self-advise.
Headway into SME market
Scottish Widows head of business development corporate pensions Lynn Graves says many advisers are still at the stage where they are thinking about the opportunity.
She says: “We’re seeing evidence of advisers where they’re identifying if there’s a mid-market there where they haven’t historically had adviser relationships. A number of clients wouldn’t be able to pay for the full auto-enrolment proposition, but they would like some help through the auto-enrolment journey, with advisers who are starting to scale down for that more lighter touch, SME market. Many are making some headway.”
Positive signs indeed, but what about those advisers who have yet to dip their toes into the market?
Scottish Life business development manager Jamie Clark says: “I think the issue is adviser firms need to be set up to deal with corporate clients. Some of them won’t be, and some of them will be in the process of doing that. It could be a complete change from what they were used to doing before.
"Before, an IFA might have sold a pension scheme to the employer and set it up, while auto-enrolment requires a lot of understanding and knowledge of the rules.”
Graves explains: “It’s probably quite a strange place in the cycle that there are some large adviser firms that have done a few staging dates and have that knowledge and experience. But there’s probably a lot that are just going through it the first time with their larger clients in the corporate mid market. Until they’ve been through that, they’re not really going to turn their business to the SMEs.”
Up to speed with technology
Clark says the real challenge for advisers is keeping up to speed with everything that needs to be done.
Meanwhile, Graves says auto-enrolment advice is right for some advisers and not for others. She says: “The ones we’re seeing start to get engaged in this market are looking at technology solutions. I think that will be the direction of travel and I would encourage advisers to explore this to see what support providers would give in that space.
“Some of the discussions we’ve been having with advisers is around the fact that they have a robust auto-enrolment proposition for their clients. But they can’t necessarily provide that for the SME market in a cost effective manner, so they’ve been looking to see what they can put online. Some advisers may develop tools or content for employers using an online portal. In terms of efficiencies, schemes will also have data integration with the provider as well so the process can be seamless.”
Rowanmoor Pensions has both a consultancy arm and a non-advised administration service for pension schemes. A lot of its business is introduced through IFAs and it has seen an increase in enquiries and requests over the past year.
Rowanmoor Pensions consultancy administration manager Janet Bower says: “I think there’s a huge opportunity for IFAs to hold their clients’ hands. There’s an awful lot of work to be done. It’s confusing for someone who has never dealt with a pension scheme, and they need help to make the correct choices.
“The non-advised service means we do a job to help the employer meet their duties, but we’re not giving advice. The employer will need advice on whether they need postponement, whether they phase, whether they put in bigger contributions at the beginning, what basis they make their contributions upon. One of the biggest things is IFAs need to make an employer understand this takes time and planning. If they don’t plan it, they will end up in a mess.”
However, there are a number of pitfalls that advisers must consider when entering this market. One such example would be industry murmurings that providers will cherry-pick firms to pick up more profitable business.
Adviser network Tenet recently warned about the problem of getting auto-enrolment terms as providers do not perceive the business as profitable from the SME sector.
Tenet’s group brands director Mike O’Brien explains: “A lot of companies are starting at the one per cent employer, one per cent employee contribution level, and many providers do not have the appetite to issue terms on these contracts. With about 38,000 medium-sized employers due to be staged for auto-enrolment next year, this issue will only become more acute and is another reason to not leave it too late to engage with auto-enrolment.”
Another much debated question has been, is there a potential for a capacity crunch? Industry commentators have warned that we have a scenario of too few advisers to meet the entire scale of auto-enrolment demands. The Are we in yet? report also said that demand for advice will grow significantly as the bulk of small firms reach their staging date, straining supply. Graves says advisers will increasingly turn to technology to streamline their proposition.
Clark adds: “I don’t think there’s any doubt about there being a capacity crunch. There’s a few statistics. One is 1.4 million employers and all of them will need help with auto-enrolment. SMEs are more likely to go to financial advisers than anyone else. However, there’s only about 21,000 financial advisers in the country. The figures do not stack up, and not all of those 21,000 advisers will be getting involved in AE. You could probably reduce that to about half who want to get involved in advice. I think there’s a massive advice gap.
“The advice gap doesn’t show any signs of being addressed. There are providers coming out with direct to market solutions for example, but in my opinion, I think the government needs to do more to try and address that massive gap.”
However, Graves is positive: “The only way we can free up sufficient capacity would be more advisers using an online model.”
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