Should trust-based providers and schemes be given legal obligations to offer minimum withdrawal functionality? That was one of the key questions debated at a retirement round table hosted by Corporate Adviser at the House of Lords this month.
With the absence of a pensions bill in this year’s King’s Speech it is now questionable as to how trust-based schemes can be mandated to require any decumulation solutions or functionality before the next General Election.
Corporate Adviser’s recent DC Pensions into Retirement Report highlighted the wide discrepancy in the availability of drawdown functionality, or post-retirement investment options, across trust-based providers. FCA-regulated contract-based providers’ functionality – in terms of offering drawdown and partial UFPLS, as well as access to advice and other support, is generally widespread. But while many master trust providers and single employer trusts have excellent decumulation functionality, there are some glaring examples of those that do not.
FCA-regulated providers’ obligation to offer four different investment pathways, while not perfect, said delegates, at least offers retirees a range of pre-selected investment options – even if a single, directed approach might work better. Some trust-based providers meanwhile require members to leave the scheme altogether if they want to withdraw a single pound of their tax-free cash. So do we need uniform regulation?
Regulatory arbitrage
Simon Redfern, business development director, First Actuarial said: “Under the bonnet, in regulatory terms, there is very little difference between The People’s Pension and Legal & General, so they should be regulated in a similar way.”
But questions were raised about how some providers had managed to achieve regulated status given the paucity of the decumulation flexibilities they offered.
Lee Hollingworth, head of UK retirement, Franklin Templeton raised the question of how regulators should respond. “You could make it a requirement that either you either offer an in-house solution that meets certain standards, or you partner up with a third party and recommend a that that solution from a third party, or you’re required to do a certain level of value for money due diligence on the transfer out to make sure that the the member is still getting fair value if they transfer away to avoid the risk that they end up going to a poor solution,” he said.
Head of DC at Legal & General Investment Management Rita Butler-Jones added: “Whatever we put in place needs to be future proof because retirement in 20 or 30 years from now is going to feel very different to what it does today.”
George Currie, senior consultant at LCP, agreed this approach could work. He said: “Regulation on things like transfers, which is still really bedding in is clearly moving in that direction. And with the latest round of of consultations on decumulation, we could see trustee potential trustee duty to offer a broadly equivalent experience, which will lead to some of these issues being ironed out.”
Single regulator?
Recent comments from former executive director at The Pensions Regulator Andrew Warwick-Thompson that the FCA would be better placed to oversee master trusts as commercial entities led to speculation about the different regulations between the two jurisdictions – FCA and TPR.
Suzanne McGowan, LIFT-WorkWise highlighted the scheme member perspective. She said: “From the employees point of view, they don’t have a clue whether they’re in contract-based scheme or a trust-based scheme. If they are with L&G they could be in a master trust or a GPP. From the member’s point of view, of course there should be a single set of regulations.
Martin Parish, co-head UK advisory, Aon said: “If we look at it from an employer lens, having a single point of regulation, let’s say under the FCA, which in my opinion is more robust, is going to provide some clarity on the future direction. Employers are making decisions on the financial welfare of thousands of people, and having a single body that looks at functionality, member behaviours and regulation has the potential to produce better outcomes for members both pre retirement, at retirement and into retirement. What was interesting for me in this report is the the huge variety in functionality that exists. So how are employers meant to choose what’s best?”
Ian McQuade, CEO at Muse Advisory, said: “The expectations now of master trusts should be higher, and the leading master trusts are giving options to members, so let’s not tar everyone with the same brush, but let’s make sure that we we actually set standards.
“The biggest challenge you’ve got is that trust law is so well established. The reason consumer duty wasn’t put into into trust schemes is because they’ve already got a higher standard that they’re measured against. Having a having the regulatory arbitrage between master trusts is not helpful. So some minimum standards should apply across the piece. But do we need a single regulator? Well, if we’re regulating two different beasts that are covered by two different sorts of law, then you can’t apply the same regulation.
Meanwhile Stuart Arnold, director, new business, WTW, said: “We must remember that a significant number of employers don’t get advice, and we need to make sure the framework’s there to support them.”
Retail or occupational
Parish highlighted the increased requirements in relation to the treatment of FCA-regulated scheme members as customers. He said: “Dealing with the client as a retail client, there’s a higher level of compliance requirement in terms of engagement. If you look at trustee engagement over the years it’s been pretty poor, whereas there’s a higher level of oversight required in the retail market because you’re treating people as individual consumers.”
Jeanette Smith, senior pension consultant at Capita Pension Solutions, pointed out that the vast majority of master trusts are commercial businesses. “It was with that lens that Andrew Warwick-Thompson was challenging for the FCA to regulate them – as commercial organisations. So is there a compromise here where the FCA has some oversight of the master trust as a business, as opposed to how the master trust is run as a trustee?”
Butler-Jones added that Legal & General’s master trust trustees had adopted its contract-based proposition’s investment pathways. She added: “If you compare a master trust board versus an independent governance committee (IGC), the IGC is there in an advisory capacity. Don’t get me wrong, they have power and they do affect change. But trustees have power of a different type, under trust law.
Business case
Currie said: “The concern I’d have with the move to a single regulator is that we would lose focus on the things that really matter actually, which is what can we do in both sectors to get the best outcome for consumers, for members. If we went for what would inevitably a rather protracted process of integration of two regulators, we might lose focus on that.”
Butler-Jones added that in her view the area where FCA regulation may be more useful is in ensuring master trusts’ business plans are on track. She said: “To be an authorised master trust, you have to have a business plan and you have to meet those business targets. Are all of the commercial masters in the market today on target to meet those business plans? And is TPR enforcing these? So that’s the bit that I think where the FCA, from a more commercial perspective, could be well positioned.”
Bolt-on solution
Marie Blood, DC consultant at Barnett Waddingham said: “From a standalone trust employer perspective what we see is they take them up to retirement but they’re not looking to look after them beyond that, other than to make sure that they actually do have something. Our research has shown that seen the bolt-on master trust approach at decumulation is becoming a lot more popular.
”As advisers we’ve got a duty to be sitting down with all trustee boards or standalone trustee buyers and talking to them about that post-retirement solution and making sure that the member journey is smooth.”
Smith added: “A lot of trustees are wanting to make sure there are advisory firms in place to give the right support.”
Nest drawdown
Delegates debated the potential for Nest, the giant government-sponsored master trust, to enter the drawdown sector.
Currie said: “Nest can’t offer drawdown, but it already is in the post-retirement space through its guided retirement fund. So it’s not that they don’t have a solution. And it’s not that their members can’t use that solution. It just isn’t allowed to offer the full range of functionality.”
Delegates were asked whether they should remain subsidised by the government if they enter the at-retirement space in earnest.
Arnold said: “If the government wants to achieve [good retirement outcomes for DC members], they’re going to need to put in place a backup plan because the commercial market is not going to do it because there’s no there’s no money in it.”
Providers asked whether Nest’s decumulation offering should be only available to its members or whether it should be able to compete across the entire drawdown/decumulation space.
Hollingworth said: “If they were able to compete in that way wouldn’t it enable them to pay the loan back quicker? I would back allowing them to compete across the market. And there is a separate stream about consolidation vehicles and Nest would be an obvious candidate to do that.”
James Monk, investment director, Fidelity FutureWise countered: “I’m not sure that paying off the loan is the solution. Firstly I am a bit surprised that the loan and contribution charge are still in place after however many years it’s been running. And secondly, they still have access to a preferred rate of borrowing through the government, So the commercial competition is not ideal.”
Hollingworth said: “Nest is clearly gearing up to provide a guidance solution. The retirement plan has the operational mechanism to do it. It talks about a wallet which effectively is converted to income. You’re investing the other portion in a different fund for growth. What’s missing is kind of a prescribed conversion from B to A, but that’s clearly what they’re going to look to do. They’ve built the fund. They built the mechanism to do it. They just haven’t executed yet. I think they’re moving in perhaps more of a directive way than adopting pathways or pathways.”
Cash-out concerns
Hollingworth highlighted the high levels of withdrawals across the DC sector revealed by the report. He said: “There are some really worrying behaviours around what individuals are doing with that pot now. We need to try and change that behaviour – people cashing in their pot and the risk that cash-out at 55, taking tax-free cash and paying debt down becomes the new normal. What’s the vehicle actually there to do? Converting it into a form of stream of