The changing shape of the UK pensions industry is being driven in part by proposed major government reforms, the likely impact of which are only now beginning to be appreciated.

Some industry experts believe the changes will provide opportunities for those pension providers who come up with new ideas and products. Others are less optimistic, warning that the changing pensions landscape may result in the loss of many traditional providers.

The reforms, which will start coming into effect in 2012, will mean employers in the UK having to automatically enrol their workers in a company pension scheme. Employers will be able to use an existing scheme or set up a new one with a pension provider or independent trustee.

In a recent government report looking at industry reaction to the forthcoming changes, pension providers and intermediaries both agreed the reforms were being introduced into a market that had changed significantly in recent years.

The market had evolved from one that was very profitable, with high and complex charging structures, to one with lower margins, greater competition, and increased pressure for each provider and intermediary to occupy a profitable space.

The report, “Likely industry responses to the workplace pension reforms: Qualitative research with pension providers and intermediaries”, was commissioned by the Department for Work and Pensions.

In the report, the pension providers and intermediaries said it was impossible to isolate the industry’s responses to the reforms without also taking into account factors such as the competitive environment, the recession and the Retail Distribution Review. While acknowledging the pension reforms would entail significant changes to their industry, they believed these other factors would be just as important, or even more so.

The majority of providers agreed automatic enrolment would lead to increased membership

within existing pension schemes, the report continued. But many of the newly-enrolled savers would be the lowest paid on average, and so might be unprofitable. Increased administration and communication costs relating to the reforms and automatic enrolment were expected to exacerbate this.

“Providers agreed that the organisations that are successful after the implementation of the reforms would, therefore, be those that can secure a business stream that is profitable. As a result, providers suggested that they would firstly assess the potential profitability of any employer, before making a decision as to whether to take on that new business. This evaluation would include consideration of a number of factors such as contribution levels, staff turnover, number of scheme members, and the cost of administering these members.

“Many providers also felt that their profitability would partly depend on whether they could automate much of the administration surrounding increased membership”, the report added.

The Retail Distribution Review was launched by the Financial Services Authority in 2006 with the purpose of changing the way investment products are to be sold in the UK. The changes, which are set to come into effect in 2012, aim to improve the clarity with which products and services are described to consumers, and reduce distortion in the market caused by advisers only recommending products for which they receive a commission.