Consolidation across the workplace pensions market is not happening at the pace that many anticipated, particularly among larger master trust providers, and that may not be such a bad thing, say advisers.
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But, said delegates attending Corporate Advisers roundtable event on driving better member outcomes across the master trust and GPP market, this could result in renewed political and regulatory pressure to speed up this pace of consolidation — with more focus on larger schemes in the market.
Ahead of master trust authorisation many industry experts predicted radical contraction in this market, potentially leaving just a handful of large players within a few years. But these forecasts have proved to be wide of the mark. Data published in Corporate Adviser’s Master Trust and GPP defaults report shows that there were still 36 master trusts operating at the end of 2021, just two less than the 38 that achieved authorisation just over three years ago. Meanwhile figures from The Pensions Regulator show that there are still 140 occupational schemes that have 5,000-plus members — a figure that has not moved since 2018.
Hymans Robertson head of DC provider relations Michael Ambery questioned whether the regulatory focus on consolidating smaller schemes was correct. “I think the biggest issue is that we are hitting the wrong end of the occupational market,” he said. Ambery said that there may be bigger potential gains from regulatory attempts to drive consolidation among larger providers.
However, many of those attending the debate said it wasn’t hard to see why regulators were focusing on the consolidation of smaller schemes, particularly via the ‘Value for Money’ requirements, introduced in 2021, which to date only impact schemes of up to £100m..
Aon’s head of DC investment James Monk says: “The main motivation for consolidation is economies of scale, and being able to provide a better solution to members. The incentive is obviously stronger at the smaller end of the market, so it makes sense that there will be more consolidation here initially.”
However while consolidation is primarily happening at the smaller end of the market, there has been some reduction in the number of larger master trust providers. Cushon for example has recently acquired its third master trust.
The company’s head of workplace savings Danny Meehan said: “We expect to see more consolidation in the master trust market in the years ahead for ourselves, and for others.
“Is consolidation happening fast enough? I must admit it really hasn’t moved as quickly as I thought it would, but it’s probably moving as fast as the market can take at present.”
However he added that this may not be as fast as the Department of Work and Pensions would like. He added that some larger single-owner trusts are “not reading the writing the wall” when it comes to consolidation. The DWP might be focusing at present at sub-£100m schemes he said but those with assets north of £100m are “firmly in the eyes of the DWP” and can expect to be brought into the value for money regulations at some point. Trustees should be evaluating future options he said, which may include consolidation within a master trust structure.
Willis Towers Watson co-head of DC consulting Jayesh Patel says the speed of consolidation will be accelerated by these new VFM regulations. “One of the reasons it hasn’t happened sooner is that some schemes are looking for bespoke solutions, not just vanilla master trusts. But these new regulations will accelerate this process for schemes who may not have fully got to grips with what they should be doing. I think it is a good thing.”
Mercer partner and director of consulting Brian Henderson added: “I feel a lot of the trustees are going to be throwing the towel in soon. There is a lot going on, be it ESG regulations, issues around sustainability and coming down the line more about biodiversity, climate and social impact. In addition to that you have the private market stuff going on. It is a challenge to keep on top of all this.” However he adds this isn’t just an issue for trustees of smaller schemes. “This is a challenge across the industry, with trustees of even the largest master trusts grappling to keep on top of these issues.”
Politicians, providers and consultants attending the event agreed consolidation should deliver better outcomes for members with larger schemes able to offer better governance, lower costs and the scale to invest in both a richer asset mix and better communication and engagement tools.
Was there an inherent conflict of interest though, with greater consolidation effectively putting many smaller providers — and corporate advisers – out of work? Muse Advisory chief executive Ian McQuade said he did not think such perceived conflicts of interests were the reason consolidation was not happening as quickly as expected. “Consolidation is in most cases in members’ interests and it should be something that we as an industry are helping to facilitate.”
Lord Davies of Brixton, a former actuary and trade unionist pointed out that he hoped this process would help support many smaller legacy schemes, whose members may be under-served by both providers and consultants. These smaller schemes may be expensive and not offer the same choices around retirement he said.
McQuade pointed out that there are still thousands of occupational schemes out there. “The top 20 per cent of these schemes are probably well looked after, by the sort of companies that attend events like this.” He says it is the other 80 per cent that are more of a concern. “These schemes were probably set up by an accountant with an old insurer, and are just sitting there. The corporate sponsors don’t want to spend the money on sorting it out and ensuring members are getting the best outcomes.”
However while McQuade pointed out that many of these schemes could benefit from consolidation he pointed out that there will be anomalies. For example he said he was recently approach by a local firm of accountants about conducting a value for money assessment for a scheme. He said that the scheme in not providing value for money on a whole range of metrics, however it did offer a guaranteed annuity rate of 10 per cent. “All members are within eight years of retirement so it does not make sense to move and lose
this guarantee.”
Those attending the debate pointed out there were specific issues for hybrid schemes. Many of these schemes sit outside the value for money regulations, as the total assets exceed £100m, even those the lion’s share of these funds are in the legacy DB funds.
Henderson says there are a lot of hybrids where it may make sense to pull out the DC component and roll that into a master trust. There are often though complications to doing this.
Buck principal and DC proposition leader John Yates says that often with these hybrid schemes the focus of the trustees is on the DB component. He says: “This is certainly an area that is getting overlooked at the minute because it sits outside the regulation.”
Isio head of DC pensions Richard Birkin agreed. He said that trustees should potentially start looking to move assets now, before they come within VFM rules.
“If the pace does pick up, then trustees need to think about the choices there might be in the master trust sector.” Moving sooner rather than later may provide more options, he said.
However McQuade pointed out that regulation was potentially hindering this consolidation for hybrids. To date the DC part of these hybrid schemes have been able to roll into a master trust — potentially giving members lower costs, improved administration and systems. “Until now when members come to retirement they are allowed to take their pot back into the DB scheme to pay the lump sum, as this is better for them financially than commuting some of their DB pension,” he added.
However, McQuade said a number of master trusts were now requiring members in this situation to go through a formal advice process before they can access these benefits. This “ridiculous wrinkle” is causing problems he said. “I am not sure if it is ambiguity that people are reading into the regulations, or whether it is ambiguity in the regulations, but it is causing problems for some schemes that have already gone down this route.” If it is not addressed he said this could potentially impact on further consolidation of hybrids.
Baroness Ros Altmann, a former pensions minister, said it was important that consolidation did not disadvantage workers, particularly those on lower pay. She asked the consultants attending the event what sort of provision was made to ensure the receiving master trust offered tax relief at source arrangements, rather than net pay. The former ensures that employees earning below the personal allowance — which may include many part-time workers and women — get 20 per cent added to their AE contributions, even if they don’t pay tax.
Barnett Waddingham partner and head of DC and workplace wealth Mark Futcher said that if consultants were advising a scheme with a significant number of employees on lower salaries, they should only be recommending schemes that offered this provision. As he pointed out there are now a number of master trusts in the market — including Legal & General — that offer both relief at source and net pay options.
Altmann said that there have also been concerns raised about the accuracy of scheme data, with incorrect client records. She asked if sufficient checks were being made to ensure details were accurate, prior to a consolidation exercise. Futcher added that often consolidation can actually flush out potential errors or problems with the originating scheme’s data.
Patel said that trustees have a responsibility when initiating a transfer to ensure that the data they pass on is fit for purpose. “They need to communicate with members, and to ensure addresses are correct and so on.
“When we think about auto enrolment 10 years ago many employers put in place a process for the first time, which, in some cases may have neglected systems and payroll processes. What we are seeing now as part of this consolidation process is that time is now being spent making sure these process are fit for purpose. There’s been a review from top to bottom in some cases. It has been a real benefit of consolidation.”