As the government nudges millions of Britons into master trust pension schemes, trustees are taking on an unprecedented level of responsibilty. For Andy Cheseld- ine, now a professional trustee at Capital Cranfield, the task of challenging providers is as relevant in his role of trusteeship as it has been in his career in consultancy, which included stints at LCP, Hewitt and Watson Wyatt. His portfolio of roles includes chair of trustees at Autoenrolment.co.uk (Smart Pension), the fast-growing master trust, as well as roles at Lewis Master Trust, Mizuho Intl Retirement Benefit Scheme and the BOC Retirement Savings Plan. He also sits on the PLSA’s DC Council, the DC Asset Security Working Group and PASA’s DC Governance Working Group.
How independent are trustees?
With the FCA majoring on conflicts of interest, the inevitable question for any trustee of a master trust with asset manager owners or part-owners – Smart is roughly 20 per cent owned by L&G – would they ever sack the manager.
“There is no reason why we wouldn’t sack any manager. But whether you were in L&G, Vanguard or State Street, the cost of moving is very high. L&G are efficient with passive funds, so the reason to move is not evident,” says Cheseldine.
With the master trust sector predicted to contract significantly over the next 12 months, trustees will face complex deci- sions. Some schemes have already met with headwinds in the field of administra- tion and investment and it has not been clear that members have been kept fully up to date, raising questions as to the way those schemes’ trustees have dealt with their responsibilities. Ethical questions abound – such as, whether trustees with deferred scheme members in schemes that charge a fixed monthly fee that will eradicate all or most of their fund should tell them to switch to another provider.
“If a member is 25 and monthly charges will erode the pot significantly before they can access it, as a trustee you would have to say you would be better off elsewhere. You should not be thinking about keeping assets. That said, it is possible that you might think that things will change,” says Cheseldine.
Future cuts in charges?
“For any master trust, contributions are going to go through the roof over the next three years. If in March of this year you are receiving £1 million a month, by April next year you will be receiving closer to £7 million per month. Breakeven for a lot of master trusts is not that far away. So we could see charges coming down on master trusts within five years. I have had that conversation with Smart. I will not be pushing it for the next 2 to 3 years while we get towards breakeven, although we might start providing extra services in the years before considering whether to bring charges down. In the longer run there will be maybe five or 10 master trusts and no one will want to be defending really high profits being made out of a semi- compulsory plan.”
So does he think trustees of those master trusts that have faced big admin and investment return problems – which have not been publicised by those trustees – have fulfilled their duties properly?
“The conflict for them might have been that if we make things public right now, members may opt out, which will be bad for them. But if people were worried that they would not get paid the fee for being a trustee, that would clearly not be good,” he says.
Master trust market consolidation
Smart is one of several providers that is positioning itself as a home to schemes exiting the market as new regulations take effect. So will the consolidation process be messy?
“The initial impact assessment from the Department for Work and Pensions (DWP) expected the number of master trusts to go from 83 down to 57. My understanding is that the Pensions Regulator (TPR) expects it to be closer to 30. With the discussions I have had with DWP and TPR, I do not think that is a hard target. But if we end up that there are still more than 50, it may be that the government thinks about new measures,” he says.
“That level of consolidation implies significant movement of assets, but not necessarily a significant amount of cost. Because when teams are wound up there will be plenty of opportunities for re- registration of assets and in specie transfers. “The bigger risk is on records. If records are really inadequate you would expect an employer to be able to go and find a new scheme for new contributions.”
Growth in ESG
Cheseldine sees change ahead for the default fund he oversees at Smart. “Currently it is a combination of L&G funds. It is not enormously exciting, but I would say that pensions are not meant to be exciting. It will become more diverse going forward. We are looking at how an ESG approach can be brought in – we have external people coming in to talk about how to implement that,” he says.
He also argues the new auto-enrolment providers are in a position to access a wider range of asset classes than they are currently doing. “Defined benefit pensions are already at a threshold where outflows are bigger than inflows. That is not the case for DC pensions and will not be for some time – they will be cash flow positive for 20 or 30 years. So why not take advantage of liquidity premia. So we will be looking at property, infrastructure and emerging markets. With emerging markets you get a currency play. Most experts would predict that emerging markets will grow faster over the next 20 to 30 years,” says Cheseldine. “There is no legal reason for daily pricing in master trusts. Just because you have got daily pricing does not mean that you need to have a daily trading. If you look at our competitors, such as Nest, it is investing in a wide range of markets.”
Talk of a switch to ESG comes at a time when focus on this approach is increasing across the board. “We do see ESG as being a key area going forward. In time we are more likely to move out of UK passes into ESG passives,” he says.
So is ESG an investment strategy whose time has come, or is it a case of it being flavour of the month and everybody adopting it as a ‘me too’ strategy?
“It’s a bit of both. It is self-fulfilling, because if more money starts following ESG assets, they will become more expensive. At a fundamental level, why should we invest in ESG? Not, not because it makes us good people. We think there are a whole reason a whole range of reasons why investments that take an ESG approach will do better. There is some evidence of this in relation to climate change and governance. For example – if you were to invest in financial services companies, would it not make sense to invest in those companies that were not likely to get fined?” he says. “We are looking at a passive screening approach for Smart. But there are so many different types of ESG approach, which means it is complex to decide which ones to offer. And if you offer too many, there is a cost to that and it ends up being subsidised by other members in the defaults, which is not fair on them. However I take a different approach to Sheriah funds because for Muslims it is potentially a case of being invested or not invested at all. But for a self-select alternative to the default we would probably go for something fairly generic, possibly a dark green and a light green option,” he says.
Fallout from the Asset Management Market Study
On the likely fallout from the FCA’s asset management market study, now referred to the Competition and Markets Authority (CMA), Cheseldine predicts the authorities will ultimately settle for a pragmatic approach with improved signposting. “Most of the consultants would accept that they need to be careful how they sell fiduciary services where they are both salesman and provider. If I had to guess, I think the FCA will allow them to adopt both business plans and will say that sales teams cannot recommend their own services without putting in place clear information about the alternatives that exist. The idea that trustees have the wool pulled over their eyes is becoming increasingly outdated. In time, when the number of schemes reduces, buyers will be more savvy, so the risk will be lower,” he says.
And what does he make of the charge from the CMA that investment consultants’ recommendations have not been adding value?
“I thought the CMA analysis was as good as we have seen. The key point is that the ball is now in the consultants’ court. If they think they can evidence that they can add value, now is the time to show it. But I would add that the Asset Management Market Study makes life harder for new consultants to enter the market because of the onerous nature of its disclosure and transparency measures.
The same applies to Mifid 2 disclosure, he says: “Part of the problem is these new costs are very difficult to disclose. If you are taking lots of new contributions and so you are buying shares, you have big costs at the beginning, such as stamp duty of 50bps, and other withholding taxes. How should you disclose that?”
Threats to asset managers
For Cheseldine it’s not just the master trust sector that is going to contract – so too is the life office provider sector, and potentially the fund manager space. “When I look back – we had Phoenix Assurance, Pearl, Scottish Amicable, NPI, National Mutual. Now we have BlackRock going to Aegon, Zurich going to Widows, Standard Life to Phoenix. It would be foolish and complacent for any trustee or employer to presume that a provider is going to be around in five years’ time. But this is equally true of fund managers. We are going to go down to 30 master trusts, reduce the number of DB schemes from 6,000 to 3,000, and local government schemes down to 10 pools. DB schemes are moving towards wind-up. Then there is Mifid 2, Solvency 2, Brexit. Will these schemes want the same number of fund managers? I expect some fund managers are going to disappear,” he says.
Hot air on net pay?
Cheseldine’s stance on the thorny issue of net pay issue and its impact on lower earners is that it’s been blown out of proportion, and that the Government should get its own house in order on tax relief for low earners before the industry is attacked on this issue. “If you go for relief at source, you have to make sure that higher rate taxpayers reclaim their tax – there are issues both ways around. But if the Government was truly concerned about this issue they would look they would be looking at the 1 million members of public sector schemes who are earning less than £10,000 a year. They are paying an average of 7 per cent a year in contributions, and they do not get tax relief on that, whereas those earning more do. That is a far more significant issue than people currently missing out on tax relief on contributions of 1 or 2 per cent of band earnings.”