How can you “rate” auto enrolment pensions?

This is proving a real challenge for some of the more traditional industry product research and ratings companies such as Defaqto, Capita/Synaptics etc.

They have all had a go, but to my mind they aren’t really hitting the mark. They are not addressing many of the relevant issues that apply to auto enrolment as faced by SMEs and micro employers – or their advisers.

The research companies seem to assume that the products deemed the “best” for the existing group pensions market are going to be the best (with a few added things thrown in) for auto enrolment. The more features and benefits you throw into an auto enrolment pension the better, apparently. What do lots of features and benefits make? Well, prizes of course! Lots of 5 star or gold star ratings.

What lots of features and benefits do NOT make are realistic pension products which 95% of the SMEs and micro employers want or can afford. Even more bizarrely, most of the top rated pensions aren’t even available to 95% of the SME and micro employer market.

Fortunately there are a few research companies that are addressing the current, relevant factors. Henry Tapper’s Pension PlayPen is not focusing on pension product features, but whether the whole auto enrolment user experience works. By using xyz pension provider is the employer likely to experience a quick, easy and efficient set up with its payroll partners? Once set up, does everything work smoothly each pay period?

I was talking with the Finance and Technology Research Company (F&TRC) recently and it is evident that they are keen to explore how pension providers are making it easier for advisers and payroll professionals to help smaller employers set up their auto enrolment schemes. Good, practical, real factors that will ensure small employers can choose well – not least because advisers and payroll professionals can afford to reach out to more of them.

What should be rated?

OK, I know it’s easy to criticise. So what else do I suggest?

Well, it is worth remembering that auto enrolment is an initiative attempting to get the majority of workers back into workplace pension schemes in the numbers that existed when far more employers ran defined benefit schemes. Those schemes were run by trustees that took on full governance responsibility for the scheme and, crucially, investment of the scheme funds. Employees and employers did not have to worry about making poor investment decisions.

In my experience that is what is important to the vast majority of SMEs. In fact it is also what most larger employers that had not provided workplace pensions before being forced into it by auto enrolment wanted. Employees are confused by investment choice; when they make decisions they are poor ones; when they don’t make decisions they leave themselves in inappropriate funds. Employers just want a simple, low cost solution which does as much of the work for them as possible. They don’t want to spend time or money on anything which isn’t core to their business production.

So, research companies should be making much more of an effort to assess auto enrolment pensions for strength of governance and simple, relevant investment solutions. At low cost. Other important factors are:

  • Is the pension provider going to accept all or most schemes?
  • Will the terms be consistent and predictable?
  • Can the pension provider work with all payroll software and payroll bureaux?

Why are they so concerned about the number of funds; free switches; links to unit trusts; access to DFM? Why are they rating pension provider drawdown and annuity products within auto enrolment surveys? I agree they should check there are no withdrawal penalties and that there are plenty of pointers to independent financial advice for those retiring or transferring – supporting the promotion of open market investigation by members.

So where should advisers look for relevant “ratings” and research?

Well, it is undoubtedly going to be the master trusts that will be providing nearly all the auto enrolment solutions to employers from now onwards. So, if you accept most of my arguments above then the most important “rating” is probably accreditation under the master trust assurance framework – AAF 02/07. This was introduced in 2014 by The Pensions Regulator  (TPR) and the Institute of Chartered Accountants in England and Wales as a stringent benchmark to allow master trusts to demonstrate high levels of governance and administration. Only three master trusts have managed to achieve this accreditation to date:

  • NOW: Pensions
  • SEI Master Trust
  • The People’s Pension

TPR is now actively promoting the importance of AAF 02/07 on its website. The updated pages can be viewed here.

The NOW: Pensions Trust solution is in many ways replicating good aspects of good DB schemes – very strong independent governance combined with one investment solution designed to meet the requirements of the mass employer/employee market, with the trustees taking full responsibility for its suitability.

Conclusion

Most research companies were created to research retail financial products and give reward for multiple features and benefits. Really useful tools for financial advisers within complex financial planning scenarios.

Other than notable exceptions such as Pension PlayPen and F&TRC, research companies, as yet, are not using criteria or tools which arrive at the right suitable products for the mass auto enrolment market. They need to step up to the mark and rethink what they are “rating” if advisers are to find them of value and benefit within the world of auto enrolment in 2015 and beyond.

Martin Olive

Strategic Partnership Manager, NOW: Pensions

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