Demanding to know from a provider the process for leaving just when you are joining may sound contradictory, but a clear understanding of exit procedures is just one element of a standardised approach that needs to be developed to make the secondary master trust market more competitive.
That was the view of delegates at a recent round table on creating a low friction, competitive secondary master trust market. DOWNLOAD THE ROUND TABLE PDF HERE
Andy Parker, partner at Barnett Waddingham, said he wanted to know how he could get an employer out of a scheme before he put them into it.
Professional trustee at Dalriada Trustees Paul Tinslay agreed, arguing that it was important to have clear contractual terms to ensure obstacles were not put in the way of employers looking to seek a better deal elsewhere. Where older agreements did not have such clauses, he was critical of the practice of providers improvising punitive exit terms, deeming it “egregious”.
Standardised approach
Helen Dean CBE, CEO of Nest urged the sector to consider a simpler, more uniform approach to reviewing schemes. She said: “There’s an opportunity for us as a sector to think about how we make things simpler, smoother, and perhaps more standardised.”
Delegates debated the practice of incumbent providers lowering costs at the end of the tendering process to maintain business, switching the focus of the process to charges, at the expense of other equally important factors.
Ross Willmott, head of DC workplace new business, Standard Life said: “It isn’t currently possible to get an aligned understanding of what VFM is across all parties because of the timing and sequencing of some of the discussions.” He said that the adviser would do the VFM assessment, which might conclude that the scheme should move to a new provider, but then the incumbent provider drops their charges and so the switch doesn’t happen.
Willmott said: “Obviously a feasibility study is needed at the outset to determine if it is appropriate to change master trust provider, and if so, to who. But we’ve seen instances where additional costs were uncovered much later in the process, meaning that any decision taken might be undermined. This presents a problem for the provider, for the incumbent and a bigger problem for the member, especially if the transition of active members has already commenced and contributions have already been made to the master trust. So the more we can do to ensure awareness of relevant information at the start of the process, the better, especially if we’re to avoid surprises further down the line.”
Tinslay said: “This should be made part of the contract – if you want to exit, this is the service you will get. Lots of old contracts are silent to this, which enables providers to be able to make it up as they go along, which is egregious.”
Experts at the event also debated whether it would ever be possible to get providers to give a definitive ‘guaranteed best price’ charge figure, to stop incumbents cutting their charges at the last minute to keep business.
But Gurmukh Hayre, director at Grove Trustee Services expressed scepticism about securing pricing stability guarantees from providers during tendering and suggested it was probably not feasible to ever stop providers trying to cut deals later in the process.
Hayre underscored the importance of conducting feasibility studies at the onset of any plan, emphasising the role of advisers in facilitating dialogue between employers and existing schemes to ensure alignment and prevent surprises later on in the process.
Tinslay suggested the DC sector could evolve an approach in the same mould as the industry template established by the Pensions Administration Standards Association (PASA) for changes to DB administrators. “That model says ‘if you are a DB administrator and the scheme asks to move, here’s the process’. Most decent administrators signed up to that process.”
Shabna Islam, head of DC provider relations at Hymans Robertson suggested an evolution of the own trust to master trust model as a starting point for a new approach.
Islam added: “The Pensions Regulator needs to be really careful and do something here. They have been encouraging own trust arrangements to move to master trusts. But if some of the bigger master trusts start to say ‘no, actually I am not happy with this master trust but now I can’t get out of it,’ who are they going to point the finger at?”
Tinslay suggested making master trusts be more open about their failings could support the market.
He said: “If master trust providers were required to disclose by way of their chair’s statement or some other document in the public domain, how they treated the last three or four employers that wanted to exit their trust, it would create a certain amount of pressure, not just from the regulators, but also from the membership.”
But Jacqui Reid, partner and specialist pension lawyer, Sackers was cool on the idea of a formal industry best practice code. She said: “I’m a fan of regulation and codes, but I think the industry should put its best foot forward rather than prescribe, because if you prescribe stuff, there’s always going to be exceptions.”
Trust and contract
Donna Walsh, head of master trust, Standard Life highlighted that master trust providers regulated by the FCA but also governed by trust law were subject to consumer duty rules when TPR-governed master trusts were not, and suggested all master trusts should be governed by the same rules. She said: “It is important that we move to create a level playing field with the same requirements so good outcomes are delivered for all members.”
Tinslay agreed, adding: “When employers are choosing master trusts, do they lean too much on TPR’s authorisation? Do they truly understand what was assessed during the authorisation process and very importantly, what wasn’t assessed? If you’ve got masters trusts in the market and they’re not being measured in the same way – some with the consumer duty and some without the consumer duty – that’s really important for an employer to actually understand.”
Hayre also highlighted different concerns in the contract-based arena. He said: “At the same time there are still very large values of assets stuck in contract-based providers where it is very difficult for the IGC or the provider to move them en masse to something better. There are solutions, but the bar is quite high.”
Walsh added that another blocker existed in the shape of some providers being unable to accept transfers of active members if they have crystallised benefits, for example where they have taken cash but are continuing to work.
Contract conundrum
Delegates debated the challenge of requiring member consent for the transfer of GPP assets to a new arrangement. Reid said that Sackers was working with insurers to move contract-based schemes into master trusts.
She said: “It is not always an employer-driven exercise. It can be done in bulk, without consent. There are quite stringent things that we have to look at. It is complicated, but it can be done, and people are doing it now and we are in the process of giving that advice. Could it be made easier? Absolutely.”
She pointed to the issues raised when PS20.2 – Publishing and disclosing costs and charges to workplace pension scheme members and amendments to COBS19.8 – unveiled back in 2020.
“There was an idea around if the IGC decides that at a granular level the scheme doesn’t offer value for money, they should go and tell the employer. That is all well and good where there is an active employer scenario. But where you have the majority of your assets in deferred contract-based arrangements, telling the employer the scheme doesn’t offer value for money isn’t going to do any good. Making changes that employers sign up to is fixing the problem for the future but not the past.”
She added that involving the IGC blessing of a transfer is challenging because IGCs are not legal entities so the buck will ultimately stop with the provider.
“The problem in making any transfer where a member doesn’t consent is that you risk the member complaining. But ultimately, if you know that what you’re transferring them into is a well governed, much better environment, the better place for members to be, particularly consumer DC. I think the risk of the FCA complaining is greater, and that’s why we look at those transfers.”
Different dynamics
Delegates also discussed the difference in approach between own trust to master trust versus master trust to master trust. The former is driven by an employer’s decision to reduce costs for their business, so the trustees inevitably have to get on board. Master trust to master trust on the other hand, is based on very different reasons, for example service levels or commitment to the market.
In this latter scenario, said Walsh: “The ceding trustees don’t get wind of the move until a decision has been taken, at which point they are asked to do their value for money assessment, or use their discretion to say we think there is no detriment to moving.
“So is there a way of bringing those trustees into the process earlier, so they can get on board with the move and do the assessment, possibly in line with the adviser?”
Reid highlighted the difference between the trustees’ duty in managing the transfer of existing pots from a trust to a master trust and the employer’s decision-making power over future contributions. She said: “The most successful provider selection or master trust selection exercises we have been involved in is where there was a joint working group between the employer and the trustees.”
She noted that trustees keep an eye on transition expenses and make sure that members’ retirement options and default and self-select alternatives are comparable, while employers prioritise investment performance, fees, and wider benefits.
Willmott questioned whether, in a master trust-to-master trust project, that working group would include the incumbent master trust from the start.
Hayre added: “This is where we need evolution in the market. If you’re transparent from the start, you’d encourage trustee involvement from the existing master trust early on. They might not be able to participate in a joint working group for of all kinds of reasons. But involve them, get them on board and tell them what’s been planned so you avoid the issue at the end.”
Employee benefits
Dalriada Trustees professional trustee Paul Tinslay emphasised the importance of pension schemes as part of employee benefits. “They are part of what employers offer to differentiate themselves from their competitors in the marketplace, and that is vitally important.”
He highlighted the way that automatic enrolment had resulted in a disengaged membership. He also stressed the significance of employer involvement in engaging employees and expressed frustration over behaviours that hinder member engagement and better outcomes.
Tinslay advocated removing obstacles and encouraging providers to focus on improving member outcomes, calling for a more collaborative approach towards achieving better member outcomes.
He said: “Numerous studies have shown the most trusted source of information for an employee is their employer. If you remove the employer from the equation, you’ll never get members engaged.
“It’s not just about value for money; it’s about treating customers fairly. If there are barriers, they shouldn’t be there. Because if, as a master trust provider, you’re not performing as you should, and there are advantages in moving across to another master trust, then it creates better member outcomes. If you are putting barriers in the way of better member outcomes, you shouldn’t be playing the game.”
Hayre agreed and pointed out the challenges associated with legacy business in contract-based schemes and the limitations that exist for transferring employees into more advantageous arrangements. “Contract-based schemes were a positive thing because employers had influence, and their communications were good. But one of the problems is that employers are stuck, because they can’t move en masse those employees to a master trust or a new own-trust scheme. Which is why a lot of leading providers have huge legacy books which are under the remit of IGCs. “Speaking from experience and having sat on an IGC, as I have done in the past, seeing that there are members in old legacy schemes where the value could be better, but you can’t do anything about it, is not a good place to be.”