Vertically integrated mastertrusts? – “my arse!”


 

Pardon my Scouse!

I throw Mick Royle at Mercer’s master trust (and the incipient Aon Hewitt master trust).

“Vertical integration” is where the supply chain of a company is owned by that company.

Mercer have set up a master trust where they are both advisers and product managers. This article points to the conflicts and the risks created (all of which revert ultimately to the members- who have no say in the decision to use “vertical integration”.

What have I got against master Trusts? …..nothing – they’re good

What have I got against consultant’s setting up and running master trusts?…… plenty.

Here’s why vertical integration sticks in my craw

1. It legitimises the practice and will lead to a proliferation of poor governance

Mercer and Aon sit at the top of the advisory food chain, they are supposed to be the gate-keepers who set the standards that the rest of us follow. By setting themselves up as both advisers and providers, their status legitimises the practice.

On the basis that “Mercer do it , we can do it”, they’re all at it. Lighthouse are doing it. Lighthouse yesterday had a mini-shareholder spring when it was revealed that their senior management had paid itself £10m in bonuses over a period when the firm had lost £15m. Try picking the governance out of that! And yet Lighthouse are running a master trust.

2. It is a model fraught with political risk.

It was only ten years ago that MMC, Mercer’s parent was embroiled in litigation from Eliot Spitzer , the New York Governor that nearly brought it to its knees.

The issue?

MMC were banking client money as their money, confusing consultancy with custody, treading on the wrong side of the line from “vertically integrated consulting”.

Mercer have already had their collar felt once over vertically integrated products, last year they had to pull a GPP which was paying them fees under the quickly repealed “consultancy charging” regulations.

The practice of earning from the product is only a tiny step from taking commission , a practice banned for new schemes from 2013 by the RDR and for existing schemes (if the DWP Command Paper is enacted- by April 2016)

How different is this? Not different enough in my book

 

3. It is not a durable model.

Without independent oversite (and organisations like mine have no way of commenting on what is going on within this master trust),Mercer is a law unto itself.

But the seeds of its own destruction are embedded in the flower that shineth today. The best idea of 2013 may be abandoned in five years when new management arrives, a new regulatory regime is established or when the legal writs fly from customers who have no-one else to sue.

Pensions are long term investments, they are not to be entered into lightly. Mercer’s core business is consultancy, it is not asset management. Those who choose Mercer over dedicated master trust managers must be aware that they are backing the the stable’s third string.

 

4. It does nothing for Mercer’s advisory practice

For all the embedded value in “sticky assets under advice”, the Fiduciary model is corrosive to the advisory practices within Mercer. The concept of the independent consultant is prized by those consultants, kill off the independence in your consultants and what are you left with? Wage slaves with no heart in it, good consultants whose integrity has been taken from them.

 

5. It creates “asymetric risk” – the people taking all the risk have no say in the decision.

The people who take the risks in DC are the members. Sponsoring employers take the corresponding DB risk and they are big enough to understand what is going on and to do something about it if it goes wrong.

But a DC master trust is different, it is not the company’s risk to offload, yet that is what companies do when they transfer their employees retirements into the hands of master-trustees.

Those employees have no idea about points 1-4 of this blog, which means that they are having risks piled upon them by employers who have abrogated responsiblity for providing them with pensions. This is known in common parlance as a “stitch up”.

 

Hear this debated!

Tomorrow at 3.35 I sit on a panel with the Chairman of NOW Pensions- (a properly constituted master trust-IMO) and a representative of Mercer.

The last time I saw Mercer on such a panel was two days before their previous effort at vertically integrated DC management was thwarted by the ban on consultancy charging.

I still remember the squirming as it became obvious that Mercer’s product was soon to be consigned to the dustbin.

Do Mercer (and that other American consultancy Aon) think that they are above criticism?

They are not! Come along to the Pension and Benefits 2014 and here the debate. I intend it to be robust.

 

 

This article first appeared in http://www.pensionplaypen.com

 

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly and the Pension Plowman
This entry was posted in actuaries, advice gap, pensions, Retail Distribution Review and tagged , , , , , , . Bookmark the permalink.

2 Responses to Vertically integrated mastertrusts? – “my arse!”

  1. Good Lord! Are you suggesting MMC’s intentions are not strictly honourable? Are Best Trustee’s not independent and able to spot jiggery pokery?

  2. Apologies for the errant apostrophe!!!

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