Paul Budgen says many of the smaller providers with less resource and funding will not make it through the costly and time-consuming months ahead
Every market, after a period of rapid growth, arrives at a moment when it is forced to look at itself in the mirror and ask whether it can still deliver value to its customers. For auto-enrolment (AE) workplace pension providers, that time has come.
Five years ago, when AE was introduced, there was an explosion of new schemes in the pensions market, each one eager to benefit from a wave of new savers. Since then, a whopping 10 million savers have flooded the scene and the best thing about it is that the majority of these people are saving for the first time ever.
The industry has grown from a handful of master trusts to 81 at the last count, with about 25 of these focusing exclusively on AE. There are lots of little pots across lots of little schemes and I'd estimate that these smaller trusts have no more than £100m in assets under management between them.
But come October, when we'll all have to meet The Pension Regulator's (TPR) new authorisation criteria and hand over a £41,000 cheque for the privilege, the AE landscape will look very different. The harsh reality is that many of the smaller players with less resource and funding will not make it through the costly and time-consuming months of planning to the authorisation process. As a result, they will have some tough strategic decisions to make in the coming weeks - either they merge with established providers to reach the scale needed for this next stage, or they shut up shop.
At Smart Pension, we're gearing up for the deadline and our in-house team is tackling the submission daily. It's fair to say the cost of this piece of work will amount to much more than the £41,000 we have to physically hand over; the time spent by management on the project over the next few months could result in an expense that is four times that number.
I believe any small provider without scale, e.g. a minimum of 75,000 active members, is really going to struggle. They'll need the financial resources, a continuity strategy and be able to demonstrate their trustees are good and proper. The regulator has stated that schemes will also have to supply a "sustainable breakeven" point in their submissions.
Having spoken with many of these younger AE schemes, I'm not sure any of them imagined they would need to put this much effort and cash into authorisation with TPR when they started up a few years ago. This was not a contingency within their business plans. Now they're having difficult conversations with themselves and their backers about what to do next.
TPR has already cut master trusts some slack by lowering the registration fee for authorisation from £67,000 to £41,000 for existing providers and from £24,000 to £23,000 for new schemes. This is as far as they'll go to ease the pain for the younger firms. The lesson, which will be tough to accept, is that pensions are, and always will be, about scale.
The silver lining for these smaller schemes is that many will have good homes to go to if they decide that merging with larger players is the best way forward for them. We are in live talks with a number of master trusts already, with impressive data standards and a mature approach to business and project management. For this reason, it wouldn't be too complex to bring them on board and transition their employers and members onto our platform. But perhaps what is most impressive about them is that crucially, they realise they must put the members at the heart of their decisions.
They know it's time to grow or retreat. But others need to come to the same realisation soon - or they just won't make it.
Paul Budgen is head of business development at Smart Pension
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