The Department for Work and Pensions’ value for money (VFM) framework promotes increased disclosure by providers across a wide range of metrics in a bid to drive improvements in defined contribution (DC) pensions, shift the focus away from cost and accelerate industry consolidation.
The policy initiative aims to make it easier for employers to compare the value of their scheme and consider alternatives. But changes to industry practices and regulations could help improve processes, remove obstacles to switching and drive a more competitive market between providers. That was the view of experts gathered at a recent Corporate Adviser round table. DOWNLOAD THE ROUND TABLE SUPPLEMENT HERE
Delegates identified a range of challenges to DC bulk transfers, particularly in relation to master trust-to-master trust transfers.
Exit cost
Ross Willmott, head of workplace new business, Standard Life highlighted several challenges his organisation had encountered, including potentially-ceding master trusts putting a very high charge on the cost of them carrying out their own value for money assessment on the transfer, a charge that employers would likely baulk at paying.
Paul Tinslay, professional trustee, Dalriada Trustees, shared his concerns at this, saying: “If the trustees of a master trust want to charge north of a six-figure sum for a VFM assessment to transfer to another master trust, that sets a precedent for trustees of own trusts to go to a similar level of due diligence. This would then act as a blocker to the primary market, let alone the secondary market.”
Andy Parker, partner, Barnett Waddingham said he wanted to know there was a clear exit route from any master trust transferred to and stressed the need for defined criteria for leaving, especially in cases of mergers.
He said: “I believe that the decision-making process should be guided by the current master trust, focusing on value rather than solely on price, investment performance, or even administrative performance. Instead, the emphasis should be on the overall proposition and someone else’s subjective assessment
of value. We don’t have one that’s written down for us yet.”
Speakers at the event agreed that the industry needs to raise standards in the switching process if friction on the journey to finding a better provider is to be reduced.
Helen Dean CBE, CEO, Nest added: “It’s not just about removing friction, it’s about creating impetus. We need to find a way in which schemes have to consider these things and make it clear at the outset who’s going to pay.”
Gurmukh Hayre, director Grove Trustee Services agreed: “We’ve seen some of these costs surfacing much later in the process and not being understood when the initial decision is made around do we change the master trust provider and if so, who to? That decision from what we can tell is then being inhibited by what’s learned in future through that process, often beyond the point that active members have already been moved and contributions have already started going into a new master trust.”
Trustee duties
Jacqui Reid, partner and specialist pension lawyer, Sackers pointed out that a VFM assessment is not legally required as such, instead the requirement was that schemes be assessed annually.
Reid explained that trustees faced with a transfer request must address two key questions: Can they make the transfer based on trustee rules and transfer agreement terms, and should they make the transfer, involving a discretionary decision? She noted that while costs, charges, and investment performance are crucial, governance plays a significant role.
“You can have stellar performance and cheap charges but if the member takes all their benefits all in one go, that’s because they haven’t had proper engagement, education and comms,” said Reid.
Beyond charges
Donna Walsh, head of master trust, Standard Life agreed that less tangible but very important factors such as engagement, vulnerable customer support and governance were often given a low priority. She said: “When looking at value, there is also the wider financial wellbeing part, which can mean helping people understand other unclaimed benefits they are entitled to. Our team recently shared an example where a member supported their mum in getting an extra £400 a month in unclaimed benefits. That’s got nothing to do with the pension but from a value perspective, how much does that help that family?”
Dean added that fraud prevention and cybersecurity were also other factors that needed to be taken into account when considering the robustness of a scheme, as highlighted by a significant member data leak at one pension provider.
Reid said the industry struggles to define and quantify these elements, which include engagement tactics and weak customer service. She said that regulators recognised the complexity here but hadn’t yet reached agreement on how to address it.
Who pays
Walsh said that different sets of trustees have different processes and mechanisms to deal with assessing transfers. She said: “Our trustees have a very clear process – they engage their legal advisers and their investment advisers, so there is a cost – a resource cost and an actual fee cost. Providers need to decide ‘are we meeting that cost for those exits?’, or is it a case of passing it on to the employer, when it then becomes a barrier to moving.
“The employer wants to move, the adviser has recommended a move, and you end up with a situation where all the new monies are sitting in the new master trust, and all the existing money is sitting with the old master trust, and the only way to get that money across is by trying to engage those people through direct offers and transfers.”
Walsh also highlighted the potential clash between potentially ceding trustees doing their VFM assessment and the adviser doing their own VFM assessment for their recommendation. She said: “Could there be a conflict if the adviser says ‘we think you should move’, and the ceding master trust says ‘actually, no, we don’t agree – we think that this offering offers better value for money’. What happens then? The employers have made their choice, the advisers have recommended it, and the current trustees say no.”
Hayre said in an ideal DC market there would be one independent body doing VFM assessments that all parties would abide by. He said: “You shouldn’t have the conflicts that we used to have in the DB world of employer and trustees. If you’re trying to do the right thing by the members, surely there’s a way where you can buy that advice for the benefit of the whole project. That would be the ideal.”
But Shabna Islam, head of DC provider relations, Hymans Robertson said: “That would be tricky. This reminds me of the bulk transfer regulations in place historically before authorisation came in. Those rules say you don’t need to get advice on bulk transfer without consent if you’re moving from own trust to master trust. So could those rules come into play for master trust to master trust?” Hayre said that in the previous regime any bulk transfer needed an actuarial certificate that said members’ benefits are broadly unaffected by the transfer, and suggested something similar for the DC market could evolve.
But Reid said: “For bigger transfers it would be a brave set of trustees that took that decision without taking investment advice, which is required by legislation. You would still want something in your pocket saying, ‘my professional adviser tells me that my members are going to be no worse off in the receiving scheme’.”
Trustee conflicts?
Delegates debated the potential conflicts of interest where trustees sat on the board of more than one master trust, and a consensus emerged that there was a concern here.
Parker said: “With master trust trustees on multiple master trusts, they could find themselves on different sides of the battle for assets.”
Dean said she would be uncomfortable about being a trustee to two master trusts.
Walsh said Standard Life’s trustee recruitment process ensured that candidates were not affiliated with competitors of master trusts or the IGC. She noted that the DWP review of the regulatory regime for master trusts has highlighted concerns regarding conflicts of trustees. Walsh predicted possible rule changes from the DWP in response to these concerns. She said: “It’s good to see that in the DWP review of the regime for their regulatory approach to master trusts called out potential conflicts of trustees as well. So we might see some change to the rules here.”
All or nothing
Debate moved to the contentious subject of whether providers should be required to take all members with them when they moved, or whether they should target more profitable sections of the scheme, leaving others behind.
Walsh emphasised the discretionary nature of trustee assessments, stressing the need to ensure no detriment to any group of members during transfers.
Reid said: “From an employer’s perspective, it’s much more compelling to request a transfer where there are active members in the receiving trust due to consolidation. However, there are concerns about costs and responsibilities for managing ‘true deferreds’ who have never been part of the receiving trust. Employers may hesitate to transfer such funds as they don’t want to bear the costs of managing pots for employees who are no longer with the company.”
Parker drew attention to the possible disagreement that may arise between trustees and providers over the transfer of active members into a master trust and the retention of deferred members. He said:
“I can see that the trustees could get themselves perfectly comfortable that retaining the deferreds was reasonable and the actives moving was reasonable. And I can absolutely see the organisation that priced that in the first place saying, we didn’t price it based on that part of the membership, we priced it based on the whole. I guess the question is, is there anything that the provider can do about it if that’s what the trustees decide? For me, there shouldn’t be.”
Walsh said: “It all comes down to open transparent processes for all parties, so the adviser and employer are both on the same page, that they want to move all actives and deferreds, and everyone quotes on the same basis.
Reid highlighted the complications around more complex DC arrangements which were linked to DB. She said: “I have seen providers quite understandably refuse to take members in if there’s any kind of underpin, where members have DC benefits with DB elements to them. That is a problem, particularly if the DB goes to wind up.
“The other issue is around block transfers and transferring deferred benefits in. Trustees have got to have done that deferred transfer within a year for members to retain any protections around the minimum pension age and tax-free cash. This rule is also a blocker to transfers. The government could put legislation in to make this easier.”
Parker added that if someone had been a member of a master trust for two years six years ago, they would lose their protection on a block transfer. This then necessitates a trustee buyout policy, which was not, Parker suggested, the intention of the rules.
As the secondary master trust continues to develop, it is clear the industry needs new approaches to managing conflicts of interest and ensuring tendering processes are effective.