Tackling auto-enrolment's SME challenge as capacity shrinks

During 2013, we found that putting the principles into practice was complex, with data issues posing real challenges and payroll providers diverted with delivering real-time information as an HM Revenue & Customs imperative.

Fortunately, larger employers had the internal resources – in terms of people and budgets – to make auto-enrolment happen, access to professional expertise from their consultants, as well as the motivation to spare the CEO any public embarrassment.

Presenting each employer with a tailored solution is ideal, but is prohibitively costly to a smaller company

Providers were also keen to secure larger clients and offered implementation teams to work on these projects. However, for 2014 and beyond we enter a very different market.

The mainstream providers are now at capacity and very selective about new business. It is expensive to set up a new pension scheme and the contribution cash flows may be low until phasing is completed. 

There is a significant risk that employers expect their existing provider to handle auto-enrolment, but will be disappointed when they contact them and are refused qualifying workplace pension scheme status.

The next cohort of employers is made up of much smaller companies with very limited internal resources and key people often performing several different roles. 

No one has the time or expertise to review more than 300 pages of guidance from the Pensions Regulator.

Small employers also lack direct experience with the regulator and do not view it in the same light as HMRC. It appears that many are not taking engaging with auto-enrolment seriously – and this may continue unless the watchdog takes enforcement action that makes it real.

Perhaps companies think they will never be questioned about their pension arrangement, so can afford to get it roughly right.

Nest has expressed concern that many employers have gone awol, which is echoed by several leading providers. This suggests that employers believe they can postpone staging for three months and sort out auto-enrolment in a few weeks, which is misguided.

When surveyed, some employers believe their payroll provider will sort out auto-enrolment as part of a business-as-usual process. In practice, many payroll companies are not engaged with pensions.

They can deduct the contributions and may offer a middleware solution, but will not advise on pensions. Even where middleware is available it can require an upgrade to the latest version of the payroll software.

We expect smaller employers to turn to their accountant or independent financial adviser for advice. However, many smaller advisers have not helped larger employers stage and will have their own auto-enrolment learning curve to work through, assuming that they are willing to offer specialist pension advice and the regulatory reassurance it involves. 

Many small employers will use Nest, but will have to self-serve and risk repeating the mistakes that larger employers and their advisers have addressed. 

They may also experience the capacity issues Nest will inevitably face, and the lack of branding and flexibility will not suit all companies. Some may want more corporate ownership of their pension offer. 

Presenting each employer with a tailored solution is ideal but is prohibitively costly to a smaller company that is used to pension advice funded by commission.

Off-the-shelf solutions are coming to market as consultants and providers package their AE expertise into light-touch, lower-cost services aimed at small employers. 

These simplify the technical issues: picking a provider and a default fund, or assessing and communicating to workers, which are more difficult for small companies.

From 2015 and beyond we enter the world of microemployers, charge caps and fees, which present a minefield for employers and their advisers to negotiate.

Neil Latham is a principal in the defined contribution consulting team at Punter Southall