With papers from the OFT, DWP and FCA all examining the way consumers are charged for their pensions and investments, zeal for reform is at an all time high.
While life insurers, asset managers and commission-based advisers have taken the brunt of the flak to date, The Pensions Regulator is keeping a sharp eye on all corners of the market, including occupational schemes, blended fund solutions and master trusts.
Speaking to Andrew Warwick-Thompson, executive director for DC, governance and administration at The Pensions Regulator, it is clear that he is prepared to take the principles of transparency, alignment of interest and pursuit of good member outcomes into corners of the market that seem far from the centre of government reforms.
Pointing out that there are trust-based schemes out there that pay consultants charges out of members’ contributions, he outlines a number of potential conflicts that anyone – intermediary or provider – thinking of setting up a master trust might want to reflect on.
“Now we have these vertically integrated providers where you have a master trust, effectively with its own sales force, in which case you will get a sales force being remunerated out of the pot. So when we have the consultation around commission and consultancy charges generally we have to be aware of the fact that this is not just an issue across the insurance industry,” says Warwick-Thompson.
For Warwick-Thompson it is all about whether scheme offerings, including the one launched by Mercer recently, should have the right to call themselves truly trust-based.
“When it comes to the big EBCs setting up master trusts, it will be very interesting to see how they are structured and I am looking forward to talking to them about that.
“How do you as an EBC extract revenue from these things? They have a huge administration business so I would assume them or any of the big EBCs would want to use their own administration system. From our perspective we would say, OK that’s fine, so you have a bunch of trustees, can they fire that administration service, and under what circumstances?
“And if you are offering investment services and blending funds, could the trustees look at the performance of that blending process and say, this really isn’t good enough, we are firing you, Mercer, Aon, or whoever, as the investment adviser. Because if you can’t do that then actually we don’t think you have any business calling yourself an occupational scheme.”
The former Aon Hewitt man is determined that occupational should not be seen as a soft touch.
“I don’t want master trusts to be seen as the easy regulatory option as between GPP and the occupational schemes market. We don’t want people saying ‘it’s a real hassle dealing with these people at the PRA and FSA. I know what, that nice fluffy regulator called TPR, we’ll go and work on their side of the fence.’”
He cites concern over the proliferation of master trusts as his top priority right now.
“These will be big beasts – we can’t afford to have them set up by cowboys. If you think of all the regulation the insurance companies have to go through before they can set up a GPP, such as capital adequacy requirements, nothing like that exists on the master trust side,” he says.
For this reason TPR has been working with ICAEW to create a new assurance framework to help trustees of defined contribution master trusts demonstrate to potential and existing customers that their scheme is being run to a high standard.
“We will expect master trusts to comply with this voluntary process. If you want to be a serious player in the market you should have this accreditation. And we will say on all our marketing materials, if you are choosing a master trust, choose one with the ICAEW accreditation,” he says.
So does he think it fair that life offices should be allowed to keep their potentially sub-standard investment options when master trusts will not be allowed to? Some fund managers are arguing that services should be completely unbundled for auto-enrolment.
“One of the interesting things from the OFT report was that there should be management committees for GPPs. So it will be an interesting debate as that feeds through to see where that lands. You could get to a situation where the management committees in a Scottish Widows or Legal & General or whichever GPP might actually have to have some teeth and say ‘we don’t think you are doing a very good job, in-house manager, so we will bring in another manager’. Open architecture exists already, so it should be open for the governance committee to say you don’t cut the mustard. That might happen, in the same way that you might say to a trustee board, if you don’t have the power to sack then we don’t like that, then you would have to ask the question how does that work in the contract-based environment,” he says.
The counter-argument is that the government needs master trust providers to come into the market to deal with capacity.
“Yes, but my question back on that point is that we are looking for master trusts with scale, so do we really want 70 master trusts, which is what we have got at the moment. I have serious reservations that even given the growth in the market we are likely to see, whether there is space in the market for 70 players.
“Our number one risk for the pensions market is poor master trust provision, along with poor administrators. All the money passes through the administrator. I personally find it perverse that they are not regulated. So we have worked with Margaret Snowdon at Pasa with a code of practice and submit yourself to an audit. Ideally you will want the ICAEW and the Pasa.
“Someone came up and said, why would this just apply to a master trust. Shouldn’t this apply to any pension scheme, to which my reply was, ‘well spotted’. We don’t want these people taking in a load of money and then falling over,” says Warwick-Thompson.
He welcomes the recent moves towards greater transparency in fund management charges, acknowledging even in the roles he has held in his career it has never been 100 per cent clear who is charging what.
“I suspect that even if you are someone like Aon Hewitt and you go along for a fee negotiation you never truly get to the bottom of it. But even if we never get to the bottom of it we can do a lot better than we are at the moment,” he says.
The bigger issue for the pensions industry itself is around AMCs, where Warwick-Thompson prefers an approach that reflects the complexity of the situation.
“What I am worried about is say we set a cap at 100bps, and then people start charging 95bps. I don’t mind people charging 95bps if you are giving a Rolls Royce service to the members. What I don’t want is people to say I will charge 25bps but then have rubbish service and no communications. We need to put charges in the context of what service is being given.
“In theory it is fine to charge 150bps if you give a really good service. But the other thing is that you don’t just measure it when you set the scheme up. You need ongoing monitoring. So again we could have a situation where providers low-ball at the outset, and will do a loss-lead to get the business, but charges will go up without any change in service,” he says.
Warwick-Thompson talks of bringing trust and contract closer together and the need for contract-based schemes to have the ability to change things without getting express approval from every single member.
“They are workplace pensions and we need to wait to see what the FCA come up with in their new pension strategy. We look forward to speaking to them when it is ready, perhaps early next year.
“But the way they are treated at the moment, which is as retail products, where all the information is delivered at the point of sale to an individual is clearly the wrong way to look at them in the way GPPs operate. They are not sold to individuals,” he says.
He talks enthusiastically about defined ambition, despite some arguing appetite will be limited.
“I don’t think DA is an if, I think when we get DA it will transform the landscape. And what we currently think of DC and DB maybe are the end stops to the spectrum but there will be a whole lot of other stuff going on in the middle.
“All the DWP is trying to do is say lets make sure we free up the regulatory and regulatory landscape in a way that will liberate those companies that want to offer DA, make sure there are no regulatory barriers in front of them,” he says.
But is there an appetite from employers?
“Do I think that is going to result in a huge big bang and explosion in restructuring of schemes? No, I think it is going to be a slow burn. But the government is trying to liberalise the regulatory framework to allow innovation and some form of risk-sharing,” he adds.
Advisers may be pleasantly surprised to hear a regulator talk positively about the concept of drawdown done in bulk. Warwick-Thompson is all for it, and sees a potential new market for master trust providers.
“I really like the idea of mass drawdown and this is one of those regulatory barriers I would love to see pulled down. We know annuities are not the right solution for many people because they just represent very poor value.
“One of the reasons why you can’t do income drawdown unless you have a very big pot and an adviser who is prepared to take you on, is because it is such a heavily regulated area. If you look at the trust-based environment of say a master trust, and you have trustees who are experienced in running decumulation, which of course DB trustees are, then why wouldn’t you try to industrialise the management of that individual drawdown pot for a fraction of the cost.
“If you have a £5bn scheme it is a nonsense to take this £100,000 pot out and give it to an IFA to run a drawdown for you or give it to an insurance company. Why not keep that £100,000 within the £5bn pot, but have it managed in a way that switches it from accumulation to decumulation at an appropriate time. That is a difficult thing at the moment for a trustee to do. I think it is also unattractive for employers to run individual occupational schemes in that way, which is why I think big commercial master trusts could have a role to play,” he says.
And what about the contract-based world?
“In the contract-based world you are always going to be dealing with people on an individual basis because of the way we regulate and legislate,” he says. “So why wouldn’t you when you come to retire switch your pot to one of these big commercial master trusts.”
Warwick-Thompson is equally positive about the much talked of capacity crunch.
“We don’t think there will be one. The work we are doing talking to employers, providers, payroll providers, master trusts, advisers, suggests that there is capacity in the market. Our fear is not around the capacity of the market to absorb but in the inertia of the employers to get set up to hit their target dates. So the message to them is you need to plan ahead.
“There are enough tools coming on stream in the coming months that will make it very difficult for an employer to be able to complain that they did not know what to do. Yes it requires investing some time and effort, but it’s a statutory obligation,” he says.
With the capacity crunch manageable, it is cowboy master trust providers that are his public enemy number one.