The Pension Regulator is actively supporting – if not quite championing – pension scheme consolidation for both DB and DC pensions.
For DB the aim is to increase the financial resilience of the sector, and the regulator’s goals clearly chime with the government’s recent defined benefit white paper.
But when it comes to DC schemes, it is governance that is TPR’s key concern, and it sees consolidation as the fastest route to better practices. So frustrated is the regulator with the poor standards that persist amongst some of the small schemes out there that it goes so far as to describe them as ‘the unwilling and the unable’.
This is why TPR says it wants to ‘maintain an open discussion with government partners and industry on how scheme consolidation can play a part in driving up standards amongst small schemes which consistently fail to meet standards’.
Several standalone auto-enrolment master trusts stand ready to absorb both single trust schemes and master trusts unable to meet new standards, provided the data is clean enough and the pot sizes financially attractive enough. So too do a number of life offices – some of which have recently bought master trusts into their suite of products, in anticipation of what is likely to be a significant year for consolidation. Aegon has acquired the BlackRock master trust, while Scottish Widows has taken Zurich’s corporate pension platform.
Aegon head of pensions Kate Smith says: “There are undoubtedly too many small trust-based schemes and the governance standards of some, although not all, aren’t in line with the Pension Regulator’s ’21 century trusteeship’ expectations. Many of these smaller trust-based schemes were set up before the turn of the century. Since then, regulation and expectations of governance standards has greatly increased. The Regulator believes consolidation will raise governance standards, and by doing so, lead to better retirement outcomes for members.
Smith says master trusts are likely to become the main consolidators for these schemes, but much depends on the process that is needed for this to happen. Some believe TPR could find itself acting a broker for smaller trusts that struggle to find a trust to transfer to.
“Master trusts are likely to become the consolidators for these legacy schemes, if they are willing to take them on. The alternative is that they are wound-up and members’ benefits are ‘bought out’ with individual policies.
“This isn’t a simple process – trustees will need to evaluate their options, choose a master trust or pension provider, make sure they follow the scheme and legislative rules and keep members informed of their choices. This all takes time and effort.
“We’re expecting to see consolidation of master trusts as the new regulations start to bite. The authorisation process will be onerous for some master trusts and some will exit the market.”
“One major stumbling block will be if they are unable to find an authorised master trust willing to take this on board and effectively mirror the benefits and charges. In extreme circumstances the Pension Regulator may have to act as a broker to help find a new home for members’ benefits.”
However corporate advisers are more circumspect as they consider things from a client’s viewpoint and worry about costs.
Lift Financial head of corporate pensions Noel Birchall says: “A lot depends on the corporate client’s attitude to pensions. We are fortunate to deal with clients who see the scheme as a benefit and who are generally paying above the AE minimum – even those who have only recently started.
“These clients are happy to pay for some form of governance and for smaller schemes this is principally around default suitability and performance. Larger, more established schemes get a more comprehensive review. For these clients we are providing good quality contract-based schemes with competitive charges so I cannot see much benefit in consolidation. From a practical point of view I don’t think consolidation works because it will involve moving provider and then transferring member’s funds. Who is going to pay?”
That view is echoed by LEBC Group’s director of public policy Kay Ingram. She says: “There are practical obstacles. What happens if you have got two employers and one employer doesn’t agree with the investment strategy? I can see how it might work say at the level of a payroll bureau, but when it comes to managing the money and communicating with the members, I don’t see how that would work in practice.
“If companies are offering just DC benefits, I would say why don’t you just have a group personal pension, source all the administration to the provider and outsource the communications to an adviser. They would probably save money in the process.
“I get why people are talking about this, but although it has worked well in the public sector, I am not sure it will work in the private sector.”
Looking at the broad DC pensions landscape, PTL managing director Richard Butcher says that a huge number of pensions are likely to remain untouched – the vast majority of executive pension plans or small self-administered schemes.
Likewise, there are many very big single-trust DC schemes, for example, HSBC with billions of pounds under management, that would not be interested in consolidation because they already have economy of scale and want to be able to shape their proposition exactly how they wish.
When it comes to the mid-tier schemes, there can be divided into two main types – stand-alone DC and DB/DC hybrid schemes. There may be appetite for consolidation among the latter group, but it is difficult to uncouple the DC from the DB.
“With many stand-alone schemes, you don’t see appetite for this. A lot of these are small schemes, the advice has been of a retail nature, and trustees are not professional. They wouldn’t know about the agenda for consolidation or how to go about it, and where they aren’t familiar with something it can even breed suspicion,” says Butcher.
This is why he is only seeing a trickle of schemes going for consolidation.
“They tend to modestly sized – a few million up to a few tens of millions. There are a few exceptions. Tesco moved from standalone to a master trust and that is a pretty big scheme. But by and large it is those modest schemes with a bit of governance and a bit of expertise, they can rationalise the advantages and the disadvantages and then make a decision.”
However, Butcher believes ramping up of governance standards could turn the trickle into a tide with the requirement to produce a chair’s annual statement addressing value for money.
“If you decide it is not of value, in the regulator’s eyes that implies you are the sort of scheme that actually need to do something about it. If you don’t do a proper assessment and write a proper chair’s report, there is every chance the regulator will come after you.”
Creating a chair’s statement is not a straightforward matter, but has become even more complex since the arrival of Mifid 2 and Priips. These regulatory changes mean that asset managers are now generating more data that trustees could, if they chose to, make sense of in a bid to getting the bottom of whether their scheme is receiving value for member.
But while TPR pressure for better governance will push schemes, will the market respond by offering a haven for those unable to stay afloat in the ever-rising tide of regulation?
Butcher says most commercial, including not-for-profit master trusts – aside from Nest – are willing to help schemes consolidate. He says the difficulty for bigger master trusts is often identifying where the smaller DC schemes are and then approaching them with a convincing story.
A lot also depends on the state of the data within the merging scheme.
“You might see a DC trust where the admin has got into a mess. They say can you take this off our hands and sort it out. The commercial provider has to look at it and say we estimate it will take us x number of days to sort out and compare it with the money they might make.”
He adds: “None of these things are really simple. There are always considerations around making sure the data is clean and tidy, properly identifying the liabilities, do you understand the liabilities from the perspective of the trustees, seeing that assets and liabilities are properly allocated and you can work out who owns what and that those assets can be liquidated and/or moved across to a new master trust.”
He says the biggest headache can be mapping one fund across to another especially with more esoteric funds, while for older schemes no consolidator is offering a with-profits fund.
He adds that the Department for Work and Pensions is looking to repeal the need to get an actuarial sign off but hasn’t done so yet.
The picture painted by Butcher is one of significant if not insurmountable barriers.
Andrew Cheseldine, now a professional trustee at Capital Cranfield, but speaking in a personal capacity, is convinced that outside the SSAS, or DB/DC schemes where they may be cultural and commercial reasons for keeping both going, a huge number of schemes will merge. Numbers could halve in five years.
“Ignoring the merits of whether it should happen or shouldn’t happen, it is going to happen. If you take out the SASS’s, let’s say there are 15,000 smaller DC schemes. I don’t think there are enough trustees who know what they are doing to manage those. If you go and look on the regulator’s website, there is guidance they prepared late last year on how to complete a chair’s statement and what good looks like. That was aimed at master trusts but it applies just as much to ordinary trust-based DC. The requirements are really onerous.”
“There are lots of DC schemes where the employer set it up and has been keeping it going for a while but there is no real reason to keep it rather than having a master trust. If you are a trustee running a DC scheme and are not offering terms that are lower than a master trust typically 50 or 75 bps, why are you going to this effort to produce something that isn’t as good as a master trust?”
He lists a growing range of costs, including a pension regulator levy upwards of 83p per member including deferred members, as of this year a PPF levy for a new fraud compensation fund in the order of 25p per member, again including deferred member, the accounts cost and the cost of the annual chair’s statement. “I don’t think you can do an annual chair’s statement for less than £10,000, not in fees but in terms of time. You can’t just make it up. You’ve got to do it. All these ancillary costs are building up.”
He concludes: “If you are a DC scheme with a thousand members how much money are you spending on governance if you are doing it properly? Would you not be better shifting that money out of governance into contributions and putting it into a master trust or a GPP?
Master trust regulation timeline
Under the Pensions Schemes Act 2017, TPR will be responsible for authorising and supervising master trusts against a number of criteria in areas including systems and processes, financial sustainability and that people running the schemes are fit and proper. Authorisation will start from October 2018.
From this month schemes can apply for a master trust readiness review, where the regulator will give feedback indicating whether authorisation is likely to be unsuccessful. TPR will respond with feedback by the end of August.
New master trusts will be charged a registration fee of £23,000 while existing ones will have to pay £41,000. Deciding whether to pay this is predicted to be a key nudge for the 80-plus master trusts currently in existence to decide whether they wish to continue over the long term.