With growth in the DC pensions sector accelerating, the workplace pensions market is, 12 years on from the introduction of auto-enrolment, entering a new phase. As the market has matured, there is a marked change in what employers and consultants are looking for when selecting a provider, whether they are moving from own trust to a master trust or GPP arrangement, or exploring the nascent secondary transfer market.
At a roundtable event at the House of Lords to discuss the findings in Corporate Adviser’s Master Trust and GPP report, consultants, trustees and providers analysed what is driving transfer activity.
Cost has previously been a key driver for movement in the workplace pension market, but Secondsight partner Matthew Mitten said: “This is rarely a point of difference anymore”.
Competition has driven down charges on schemes significantly in recent years. “If you go back five years, charges were probably the main driver for scheme transfers. But when we are reviewing the market today, the price differential between the main providers is just a few basis points at best,” said Mitten. “To differentiate you are now looking at other issues such as investment performance, ESG factors, engagement strategies, technology and innovation.”
Many of these factors are not as easy to quantify as charges though. While Corporate Adviser’s Master Trust and GPP report has comprehensive information on the performance of leading schemes, Mitten said governance committees remain “nervous” about making decisions based on past performance, and he added “there remains no easy way to measure ESG on default funds”.
Johnson Fleming regional director Martin Parish said some issues have become less important when looking at provider selection: it is taken as a given that the major providers will offer competitive charges and be of a certain size, he said.
“It is more important to understand the client and what their objectives are. We know employers don’t want to be changing schemes regularly, so we want to work with a provider that is future-proofing their proposition— so you can perhaps stick with the infrastructure of that scheme in terms of engagement, but know the provider is developing and optimising outcomes for employees going forward.”
Engagement was seen by many as being an important factor when it comes to delivering better member outcomes, and something employers may be looking for when switching schemes. Parish said it was notable in Corporate Adviser’s report how the two GPP-only providers scored far higher when it came to engagement measures, such as nominating a death-benefit beneficiary.
Not all of those attending thought GPPs were superior to master trusts when it comes to engagement though. Willis Towers Watson director new business Stuart Arnold pointed out that these contract-only providers have a larger weighting of financial firms as clients, which may amplify these higher levels of engagement.
But Parish said the data in the Corporate Adviser report helped inform discussions with clients. “If they want high engagement in their scheme I would be inclined to point out that the statistics we have are telling us that they may want to look at these contract-based providers.”
Does size matter?
Auto-enrolment has turbo-charged the size of the UK’s largest workplace pension schemes, with the report showing most multi-employer master trusts and GPP schemes enjoyed double-digit growth last year, with some trusts doubling or tripling in size. The multi-employer DC sector grew by over £115bn in 2023.
While consultants at the event said scale alone was not important, it was seen as an important enabler when it comes to delivering other desirable features: be it investment in technology or a more sophisticated investment approach.
Zedra Governance client director Richard Butcher said that from a trustee’s perspective scale is important. “Size is a measure of sustainability, which is really important; it is a measure of efficiency and critically the ability of that provider to invest in that proposition.”
Aviva’s head of business development, workplace savings & retirement Simon Ellis agreed: “Scale can enable these things to happen. It doesn’t automatically mean they will, but it is seen as an important starting point.”
Capita director of pensions policy Anish Rav said consultants are looking for longevity, and there was an assumption that the better resourced providers were more likely to be around for the longer term.
This is particularly important against a backdrop of increased consolidation — although as many on the panel pointed out, this is not happening at the pace many predicted.
Legal & General head of DC strategy and development Stacy O’Sullivan pointed out that there were 38 master trusts authorised in 2018; today there are still 33 in the market. “Five years ago many people were predicting more significant consolidation. It is happening, but not as quickly as many expected.”
One reason may be that the process of merging existing master trusts is far from straightforward. BESTrustees trustee executive Rachel Brougham explained how she was on the trustee board of Creative Pension Trust, subsequently acquired by Cushon. “As a result I have been on the periphery of the process of consolidating Workers Pension Trust into the Cushon Master Trust. This has taken an inordinate amount of effort, in part because the regulations are set up to cope with a distressed takeover, not an orderly merger.”
As a result she said there was considerable cost and effort involved, with the process being more complex than might have been anticipated. This could have contributed to the lack of consolidation elsewhere she said.
Arnold added that providers initially focused on asset gathering — but the costs of acquisition have become more apparent with time, which may make consolidation a less attractive option, particularly given the statistics and demographics of some memberships. “Some of the big guys got burned by having too many platforms and trying to integrate them,” he said. “There’s definitely a bit more reticence now.”
While consolidation may have stalled, it is clear there is still a huge volume of money moving around the workplace pensions market, with a significant increase in bulk transfers. Primarily these have been in the single trust to master trust market, but consultants report there has also been an uptick in the secondary transfer market.
Bulk transfers
Last year was a big year for DC bulk transfers and consultants are not anticipating a slowdown anytime soon.
LCP partner Stephen Budge said: “The simpler schemes that were easier to transfer have probably moved now. The ones we’re starting to get into now are the more complex ones, and potentially longer-term projects as we work through these complexities.”
Many have DC and DB elements to the scheme, which can include ‘legacy’ components underpinned with guarantees. Budge said this complexity favours a move towards “master trust providers of a certain size”.
“We are probably looking at an increased amount of transfers into 2024 but given the complexity some might roll over into 2025.”
The improved funding of DB schemes is also driving this activity. But better funded schemes have added a new dimension to this process — with some employers deciding to stick with single-trust arrangements in order to make use of these surplus funds.
Butcher said the rules around this are complex, but it has been possible in some cases to use the surplus from a DB section of a pension scheme to fund future DC contributions.
Arnold say there is more interest again in running single-employer trusts, though this has been due more to these financial reasons rather than a paternalistic ones. “Some employers may want to run their own trust, as they value having their own scheme, their own branding and having control. But I think this is separate from the surplus issue,” he added.
Aon’s principle consultant Chris McWilliam said there will be a number of larger DC schemes who want to continue as single-trust structures. Others speculated whether this could become a more cyclical activity.
Sullivan said there has also been an increase in contract-based schemes moving into trust-based structures. “This is often driven by other business activity, such as a merger or acquisition,” she added.
Secondary switching market
Consultants said that innovation is one area which may encourage employers to switch schemes, and may help stimulate a secondary switching market.
Many were optimistic that AI had the potential to be transformative — whether it comes to devising more personalised default strategies or delivering guidance to members, particularly around retirement options.
But this remains in its infancy. “Predicting what might happen in the next two years is difficult at the moment, let alone the next 10 years,” Sullivan said.
McWilliam added: “There is clearly a great opportunity for AI to be able to guide people towards the right retirement solution.”
Budge said propositions are clearly going to change significantly in the next five years, although it remains to be seen which providers will lead the way when it comes to AI-driven services and solutions. “It would be good if providers offered some sort of roadmap to their future plans on AI and other developments. Offering services like personalised advice could generate a reason to change schemes,” he said.
Many consultants at the event agreed that this was another reason to favour the largest providers, who are more likely to have the resources to invest in this technology and innovation.
The two providers at the event — Aviva and L&G — pointed out that the bigger the provider the more data they have on users, which can be used to generate more personalised solutions.
Ellis said: “This kind of scale gives you a greater understanding of your client bank. And if you understand people you can hopefully service them better. It is not a given, but again is an important enabler to delivering better pension benefits.”
Getting a clear idea of a provider’s plans going forward may not only help facilitate switches, but it could also inform decisions to stay with the current scheme.
“I think giving clients an insight into provider roadmaps is absolutely critical,” said Parish. “The number of times I’ve seen clients transfer into a scheme to get a shiny new feature, only to find that their incumbent provider was doing that anyway, but they weren’t aware of it.
“I think the starting point for new clients we pick up who may be dissatisfied with current arrangements is not to jump for the sake of it. As the consultant we try to work out what the problems are and work with the incumbent to see if these can be improved, as opposed to the cost and hassle of switching.”
This dissatisfaction is often a primary reason for moving he said. Often this can be down to bread-and-butter basics, like service standards. “If HR people are getting phone calls from members saying they can’t get through to the helpdesk, or the app and website aren’t working then this can be a trigger to move.”
The workplace pensions market may be changing but delegates were clear that the current tripartite relationship — between employer, provider and adviser — is evolving, but remains key.
Mercer Marsh Benefits head of pension consultancy David Croker said: “I remember when it was critically important that employers had their branding over the pension scheme. This is less important now and many recognise that employees may have less loyalty to that employer, and may not be with that company for as long.
“Employers may have stepped back from running their own schemes but they still want to promote them and do what they can around engagement, so it’s important they work together for the best outcome. As advisers we tend to ‘gap fill’ and may focus more on wider benefits, such as budgeting.”
Employers may have less of a role in the pensions market but are still “the most trusted voice in the delivery chain” according to Butcher. This is something consultants said is important, and could be threatened by proposed ‘pot for life’ reforms.
Providers also have a key role to play said Brougham, particularly when it comes to deferred members, as all too often this will be their only point of contact when it comes to engagement.
Consultants agreed that the adviser, provider and employer need to work together to deliver better member outcomes, and added that access to accurate data, such as that published in the Master Trust and GPP report was an important part of this process.
