Chair of the Pensions and Lifetime Savings Association, governor of the Pensions Policy Institute and MD of PTL, one of the most widely used professional independent trustees, Richard Butcher can accurately be described as sitting at the centre of the UK pensions sector.
Add to that his place on the boards of master trusts, IGCs, trustee boards and policy and advisory committees, Butcher is at the sharp end of making big decisions that will impact the retirement fortunes of thousands. As such he is extremely well qualified to talk about the pivotal position trustees find themselves in today, and the increasing scrutiny of their role that will inevitably flow from the huge increase in membership through auto-enrolment.
The shift to defined contribution arguably makes the role of the trustee harder, not easier. There is far more potential for members to feel pain if DC trustees get it wrong, particularly as there is no guaranteed income, top-up or lifeboat for DC savers to rely on. For Butcher, fulfilling this responsibility is all about staying on top of the various providers that make up pension schemes, and in real terms that means a range of issues including forcing the debate on charge transparency and holding managers’ and administrators’ feet to the fire on performance and admin.
In the world of DC, performance is a particularly visible metric, which impacts members directly. But without the benefit of hindsight, how can trustees decide whether a spell of bad performance is going to turn from temporary to terminal?
“It is entirely appropriate that different schemes have different approaches to reflect their membership, and performance will differ. Fund managers will make bad decisions as well as good ones,” he says.
But – in the light of certain providers in the master trust sector in particular – how bad do things have to get before trustees will switch, and is this threshold higher where the asset manager is the same entity as the pension provider?
“There is always pressure to consider switching, but you do not want action for the sake of it. It’s not hard to manage the conflict of interest where pension providers use in-house asset managers because the board of trustees has the executive ability to, if it decides the proposition is not good value, take the ultimate step of removing the manager. We are regulated by law to do that. It would be odd if a provider fired the trustee board just after a change in investment strategy,” he says.
Does Butcher think the increased visibility of default fund performance, including the analysis done by Corporate Adviser, is making the job easier or harder? “You cannot legislate against different performance outcomes unless you put everyone into one single default scheme. We don’t want to benchmark funds against funds. We did that in the 1980s, and everybody coalesced around simple strategies,” he says.
Butcher is currently working on what he calls a ‘scale of unhappiness’ – a process for trustees to measure their dissatisfaction with providers, and the proportionate responses they should make.
“At one end of the scale of unhappiness is wanting to fire the provider of services, and at the other end is absolutely loving them. The responses as you go along the spectrum start with enhanced monitoring and finish with termination,” he says.
But, he adds, that does not mean that poor performance need be of itself any reason to switch asset managers. “We accept that there will be multiple philosophies, and some of these will be wrong. It is very easy to pick holes in people with hindsight. The hardest thing is working out what the right thing in the future will be,” says Butcher.
But Butcher accepts the charge that master trust boards can be slow to switch provider.
“Yes that is true, though in the master trust world it is politically more difficult to switch as if you want to fire a fund manager you have to go through the scale of unhappiness,” he says, acknowledging that schemes such as Supertrust UK, which while small, has managed to change its asset managers five times over the last 13 years, (and coincidentally currently tops the Corporate Adviser Pensions Average leaderboard).
“That scheme is different – it is run more like a self-invested master trust. But it is true that trustees can be quite slow and deliberate about changing a fund manager. It is a difficult judgement call, weighing up the pros and cons. But in the absence of a really compelling story of poor performance, the appetite is typically not there,” he says.
Butcher is fully behind the charge transparency agenda, and was a member of the Institutional Disclosure Working Group (IDWG). He does, however, see reputational pain down the line, but believes this will be necessary to restore faith in the pensions industry over the longer term.
“Cost disclosure is difficult, but we shouldn’t hide from these difficult questions. As long as we are saying ‘we can’t tell you how much we are charging you’ then people will be suspicious. They will look at people in the industry with their well-paid jobs and nice cars and wonder where they have got the money from,” he says.
He sees the work of the IDWG as a step in the right direction but far from the finished article. “The templates are a good step forward. Their use is voluntary. If they are not voluntarily adopted, they could be made compulsory,” he says.
Part of the problem is the complexity of the information provided. Having been passed this hot potato of mountains of data potentially showing higher charges than had previously been understood, trustees and IGCs will have the unenviable task of translating it into something meaningful. Just sitting on it will not be an option.
“Instinctively I feel we should tell people what they are paying, but we want to avoid unintended consequences where people avoid more expensive schemes that might be better for them,” he says.
So will people be upset when they find that they have been paying more along all along for something that they are now told is my expensive? And could we even see legal action against providers for having not disclosed all the costs in the past?
“We have got to get over the hurdle of the first time that we disclose all of this. It may be painful but it has to be done. When it comes to litigation, I suspect that providers will have the winning hand, in terms of what it says in the contract. But we will have to be honest about charges going forward. This is one of the rough edges that needs ironing out,” he says.
He singles out slippage costs, the methodology used by the FCA, brought in by Mifid II, for particular criticism.
“It is better than nothing, but it is flawed. It looks at the entry price and the execution price so you can end up with a negative transaction cost, which is illogical. But this is the first stage of the journey,” he says.
“You might get the slippage cost from one manager, but it might be might not be for the same time period as another manager, so you may struggle to compare managers. Or in due course you may be able to compare intra manager but comparing inter manager will be difficult,” he says.
“Slippage cost does not tell you how good managers are at achieving performance. So you need to try to get to an absolute assessment. This can be around looking at the control environment they have to exercise around transaction costs, whether the asset manager has got a conflict of interest policy and how that is being followed,” he adds.
Unlike some speculating on the master trust sector, Butcher is not convinced that most UK master trusts will achieve massive scale. “The jury is still out on whether we will get there. How many master trusts are there in Australia? 150. The average super is AU$5-6bn. Some are huge, but if you take them out, the average is between AU$2-3bn. I am not sure we will even get to that scale. Will investment strategies become more esoteric? Yes in part because of the benefits of scale. Big providers like Nest are already trying more esoteric asset classes and we may see insurers buying in specialist expertise or creating their own funds,” he says.
When it comes to the dashboard, Butcher supports the idea of a single utility. He says: “The government is thinking of the dashboard looking like open banking. I don’t think there is demand for that. I am a strong supporter, but it has got to be all- inclusive, including state, DB and DC. You need to be able to do something with the data – press a button and merge pensions or switch. For as long as that is not possible, people will come and look at it and then maybe not come back at all.
My preference is that we delay the launch until we can deliver everything. We talked about the dashboard five or six years ago, in terms of a virtual aggregator, during the pot follows member debate,” he says.
The automatic generation of quotes by DB schemes is another bugbear of Butcher’s, something he sees as fuelling an unhealthy level of DC transfer activities. “Some trustee boards are in favour, and some are against. But if you automatically quote transfer values you will inevitably get some members being swayed by the big numbers. Some of my colleagues have a different view, but I personally don’t like it.”