In the world of workplace pensions, the mantra of the day from policymakers is that bigger is better.
But despite this general trend, in relation to scheme size and default funds, the Pensions Regulator is asking searching questions about concentration in other parts of the chain including the booming sector of professional trustees.
A speech on 27 November last year from TPR chief executive Nausicaa Delfas welcomed the latest Mansion House proposals and outlined a shift in approach towards more prudential regulation as a result of ongoing consolidation.
But there were other significant remarks. “As the system shifts towards fewer, larger schemes, the need for critical challenge becomes ever more important,” she said.
“You should expect us to be holding people to high standards and really understanding how your trustee board is operating.
“Our first step is to go into the market to look at how trustees are operating, in particular, the 10 professional trustee firms that now govern over £1 trillion of assets under management.”
The speech outlined plans to “establish formal relationships” with each of these firms, adding that TPR’s goal was to “understand good practice but also identify risks, including but not limited to, ownership structure, skills and experience, knowledge and understanding, diversity, equality and inclusion, conflicts of interests and fees.”
Delfas added that TPR saw “real benefits in professional trusteeship in terms of the ability to raise standards. But we must also guard against risks”.
She cited one example of a small, closed DB scheme. “I can, of course, see the real and practical benefits that an all-encompassing trustee firm could provide. Pensions management, project management, communications services, procurement, data services, and fiduciary management oversight – a one-stop shop.
“But clearly there is an inherent risk of conflict of interests when these firms offer ancillary services, which needs to be carefully managed. We want to make sure that buying decisions are always made because the service is best for members, not best for the firm.”
Trustee top 10
The regulator may well be helped in its work by the fact that professional trustees are subject to significant scrutiny and cooperate with two big annual surveys covering the top 10 and top 15 firms respectively.
Consultancy Isio has conducted four annual surveys, the most recent published in April 2024, largely covering data for 2023.
It shows a remarkable record of commercial success. The survey identified the 10 largest firms, in alphabetical order as BESTrustees, Capital Cranfield, Dalriada, Entrust, Independent Governance Group, LawDeb, Pan, Pi, Vidett and Zedra.
The number of trustee appointments has grown from 1,900 to 2,300 in four years. The number of trustee directors had grown by 246 in 2020 to 320 in 2023. The market share of DB scheme business had grown from 31 per cent to 39 per cent .
Average revenue growth across the four years was 17 per cent in 2020, then 21 per cent, 14 per cent and 16 per cent in 2023 and covering 2,300 pension schemes and £1.1 trillion in assets.
The top three in terms of the number of independent trustees were Vidett, then IGC and Dalriada — although IGC and Dalriada have grown at the fastest rate over this period. Pi and Zedra numbers fell slightly due to scheme wind-ups.
It is also interesting that the number of professional corporate sole trustees, where the firm acts as the only trustee of the pension scheme, increased with 28 schemes moving to this set up and with responsibility for £73bn in assets.
LCP’s survey, entitled the Sole Mates report, showed that for the first year since the report’s launch in 2021, schemes with a professional trustee are now the slim majority making up 51 per cent of UK schemes. A quarter have appointed a sole trustee. The LCP survey suggests that sole trusteeship saw a 30 per cent rise in the past year alone.
LCP also reports that 88 per cent of schemes appointing a sole trustee had less than £100m under management. At a higher level, the LCP report also showed that five professional trustee firms hold 90 per cent of DB assets.
LCP also produced statistics for market share including by assets. Interestingly, LawDeb comes out on top with 27 per cent then IGC with 23 per cent, Capital Cranfield is third with 14 per cent, just pipping Apex on 13 per cent by assets.
The report also notes a significant recruitment boom. “We saw the greatest levels of recruitment over the year by IGG, Dalriada and Vidett – which may indicate that they are increasing headcount to scale up to support further growth. We also note that Vidett has recently set up a new finance function (noting they were previously within a wider business and were able to access the infrastructure of that firm). The responses indicated strong recruitment amongst the larger firms into non-trustee director roles, in part to support succession planning and developing the future trustees of tomorrow but also reflecting expansion into delivery of wider governance services.”
And given TPR concerns regarding the selling in of additional services, this comment from LCP is also interesting.
“We can see with the answers indicated by headcount and recruitment trends, some firms are expanding to offer a broad range of standalone services – including to schemes where they are not trustee.
“Most of the firms also provide project management and pensions management services with around 50 per cent of the firms also supporting procurement exercises. A number of firms have specialist communications teams with standalone appointments – for IGG this is through Like Minds (part of the IGG group).
Dalriada also provides data services, leveraging on their sister company Mantle which employs data management and IT specialists. IGG have extended their offering to include fiduciary management oversight through the acquisition of IC Select. IGG have also recently launched their own software IGGiQ which provides trustees with data-driven insights on their schemes.”
Regulation challenge
So, what might regulation hold for these trustee firms? We approached several firms but there was some reluctance at this early stage to comment on potential changes.
The Lang Cat’s director of public affairs Tom McPhail says that the concentration and market risk certainly suggests a need for close scrutiny. He also suggests there may also be an argument for regulatory review of TPR and FCA — and questions whether trustees should fall under the FCA. Currently, there is voluntary trustee registration with TPR.
LCP also notes the increasing involvement of private equity in the market.
LCP partner David Fairs — who previously worked at TPR — says: “TPR’s increased focus on the professional trustee market reflects the growing influence of a small number of professional trustee firms. The 2023 and 2024 LCP survey showed significant increases in the appointment of professional trustees and a rapid increase in professional sole corporate trustee appointments.
“The 2023 survey highlighted the consolidation in the trustee market funded by PE investments, with the 2024 survey showing that just five professional trustee firms had oversight of 90 per cent of assets where a professional trustee was appointed.
“TPR will be looking closely at the governance of professional trustee firms, how decisions are made, remuneration policies and also the management of conflicts. TPR might be particularly interested in conflicts arising from consolidation, how trustees are appointed, PE investment and the broadening of services that some trustee firms are pursuing.”
When asked for an update on this work TPR’s chief executive provided us with the following response.
Delfas said: “We have engaged with 10 professional trustee firms to understand more about five key areas: ownership structure, skills and experience, knowledge and understanding, diversity, equality and inclusion, conflicts of interests and fees.
“One area we’re really interested in is how these firms manage any conflicts around in-house advisers – because healthy challenge and independence, has to be at the forefront of good trusteeship.
“We are building and testing a new framework for engagement and developing relationships with increasingly significant professional trustee firms.
“We will publish our findings and look to start more targeted, expert-to-expert risk-based engagements. Firms have been open in their engagement with us, as we would expect, given the role they play in governing more than a trillion pounds in assets.”
Voluntary options
The LCP survey explores the possibility of voluntary supervision in this sector, which it says may come to pass. The report quotes a number of trustees, including LawDeb which described this as “an opportunity to further articulate what we believe is industry best practice.”
Firms which felt they were doing things right also hoped that increased regulatory scrutiny could level the playing field with, presumably, less rigorous firms.
The LCP report also noted the following: “A key concern for around half of our respondents was the additional governance burden placed on firms resulting in resource constraints and additional costs which would ultimately be passed on to clients.
Certain respondents highlighted that the potential for regulatory overreach, for example regarding PT remuneration models, were also of concern.”
