Beware the vanity master trust

 

community award winner

Hardly a week goes by without a request to research another vertically integrated master trust for inclusion on the list of employer choices offered on http://www.pensionplaypen.com .

It is harder to name an actuarial practice or employee benefit consultant that isn’t offering one of these products than is. Towers Watson and Aon are following Mercer in setting up a Fiduciary Model for their clients while the list of smaller consultancies with skin in the game now includes Xafinity, Lighthouse, Elston, LEBC ,Citrus, Close Brothers and Goddard Perry.

The proliferation of master trusts is not a response to market demand, there is absolutely no evidence of a shortage of capacity among traditional providers, it is part of a general trend among advisers to take a slice of the revenues from the annual management charge (and for the more sophisticated, the net asset value) of funds under fiduciary control.

The “vanity” referred to in the title of this blog, is the pretension to better governance, better investment management and better member services than is available from existing market providers.

So far, our research has revealed no evidence that the governance of these new master trusts is superior to that available from NEST, NOW and Peoples. As IGCs are set up  and as the DWP’s prescription on workplace pensions bite, the argument for a new kind of fiduciary recedes.

As for investment management, the cost of adding an extra layer of over-sight (typically to meddle with asset allocation), has seldom if ever provided value in the long term.

Nor am I convinced that the touch of an adviser, the employment of a third party administrator and the deployment of some pre-purchased technology applications adds up to a good reason for an employer to forsake established players and move to one of these new kids on the block.

Easy come and easy go

To set up a master-trust of one’s own, all that is needed is to set up a company to receive the revenues and wander down to one of the convenience stores that sells the necessary components. Mercer have simply bagged three insurers (Aegon, Zurich and Friends Life) and dressed an existing proposition up with a little tinsel. A trip to Carey Pensions can secure an off the shelf trust structure and a third party administration service while funds platforms are two a penny.

In short, the master-trust is now so easy to assemble that there is virtually no barrier to entry. But once set up, the master-trust is able, within the 75bps charge cap, to become an independent profit generator for advisors bereft of commission options (post April 2016).

If it is this easy to subvert the RDR, it is that easy for Government to close the loophole. Unless these new “vertically integrated” master-trusts can demonstrate value beyond the vanity of the advisor’s self-regard, I see no future for these trusts.

The proliferation of multi-employer master trusts, like the proliferation of single employer occupational trusts a generation ago, has no obvious justification. It cannot improve employer outcomes, member outcomes and it will use up a lot of regulatory time.

The Pension Regulator is worried, and the worries are along the lines of my worries in this blog. There is no obvious way to curb the weekly growth in master trusts other than by putting master trusts under the same scrutiny as group personal pensions. That would mean making them subject to Solvency II, imposing the same standards of governance on master-trustees as are being imposed on IGCs and it would mean advisers managing these trusts on a not for profit basis.

It would probably mean the Pension Regulator giving up any remaining pretence that a voluntary code can work. The Master Trust Assurance Framework would need to become compulsory and – with the need for powers beyond its current scope, the argument for a Pension Regulator supervising this part of workplace pensions becomes untenable.

The “vanity master trust” is not just a danger to employers and their staff, it is a danger to the system of dual regulation in place at present. Unless, the Pension Regulator takes steps to curb master-trust proliferation, it may find itself the architect of its own demise.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , , , , , , , , , , , . Bookmark the permalink.

7 Responses to Beware the vanity master trust

  1. Kevin Lyon says:

    Henry – its an interesting article you have written.

    What you haven’t addressed here is the motivation for setting up MasterTrusts?
    If it is commission by the back door? Then you have a point.

    But what if its about choice and the ability to take all employees?

    As a support function for employers, accountants and advisers – we have come across Employers who wish a choice other than NEST and NOW. In defaqto’s rating guide this is a 3 star and 2 star offering.

    While other MasterTrusts have been rated 5 stars by defaqto.

    So what’s the motivation for your article – is it to condemn all forms of bias – which would include receiving sponsorship and advertising from providers? The traditional providers having the deepest pockets – since they have been ripping off clients for the longest – as per your previous blogs?

    • henry tapper says:

      I am confused by Defaqto- Scottish Widows have a 5* rating and so do several master trusts that have approached http://www.pensionplaypen.com, none have been rated by us at this level while NEST, NOW L&G Standard and Peoples have consistently been among the top performers.

      The popular vote is with the big providers but that doesn’t prevent smaller players coming through. We have been very impressed by the attitude and aptitude of Friendly Pensions (as have many others), they are a little slow completing due diligence, but we hope that they will prove that this is not just a scale game, other smaller mastertrusts including BluSky, Supertrust and Smarter Pensions are all adding a lot of value and we are researching many other arrangements as I write.

      Our system is not Pay to Play and our only payment is from the customer- we think this makes us genuinely independent and while we support the aims of Defqto, we wonder how some of their ratings are so different from ours!

  2. Ian Forder says:

    Great article Henry.
    I agree that it is relatively easy for an intermediary, or anyone else, to set up a master trust and to target the AE market. What I find more difficult to understand is how most will make any money. Isn’t this the ‘HNW conundrum’ where every intermediary and provider is chasing the relatively few clients prepared to pay a premium for a ‘better’ service while ignoring the mass market as it is not commercially viable?
    My view is that there is room for a few specialist master trusts in addition to the major existing providers such as NEST, NOW and Peoples Pension but not that many.

    Ian

  3. Well, this is certainly a stimulating article and I suspect you are saying what many in the, errm, ‘established’ pensions industry might be thinking. It does however seem to betray a wish to erect further barriers to entry to protect certain parts of the old industry. “In general” wrote Adam Smith “if any branch of trade…be advantageous to the public, the freer and more general the competition, it will always be the more so”. You seemed to have turned this on its head and proceeded on the assumption that competition and new entrants are prima facie bad unless the contrary can be demonstrated: “People of the same trade seldom meet together, even for merriment and diversion, but for the conversation ends in a conspiracy against the public”.

    Firstly, you mention a number of established actuarial consultancies and administration firms. Please spare a thought for the niche consultancy where we help genuine new entrants ab initio!

    But in terms of those players, and of competition generally, where is your evidence that such competition is demonstrably harmful? You mention ‘pretensions’ that new entrants might offer better governance, investment management and services and then claim that your own research reveals no advantage here. So what? Where was the evidence that new entrants into UK supermarkets would score on such pre-defined set criteria? Or online retailers? Or the whole interweb thing? Discount brokers? Investment Platforms?

    Taking investment platforms as an example, you mention the existence of TPP and NOW as if these dispense with the need for new entrants. 10-15 years ago, would you have said “We don’t need those dangerous new Investment Platforms. Anglo Life and Scottish Death have enough capacity”? And yet the advent of these platforms has brought about a substantial shift – moreso than RDR – of adviser firms becoming, well, advisers in the pay of clients, rather than distributors in the pay of providers. We have seen service standards moves from waiting six weeks for a statement, to 24/7 online access and a decidedly more ‘studied’ approach to asset allocation. That revolution is yet to run its course: platform prices are still falling, and no doubt in time, technology and technique will develop (regulatory barriers not withstanding) such that custody and administration services are viewed as ‘ancillary services’ and taken in-house.

    TPP and NOW are themselves new entrants whose arrival is welcomed by many advisers, and who are already a cut above those insurers that hitherto dominated the SME market (and in many ways still do). But they do not make a market, do not command universal appreciation amongst independent rating agencies and do not give anything like full effect to the type of platform revolution that is needed in the group pensions market. Indeed, we currently see the same old insurers with the same old failings that would breach the ‘prompt’ requirements in the Charges & Governance Regs repeating those failings in the AE market. One employer with 1,000+ employees waited 9 months for a certain insurer to allocate contributions. Against this, NOW’s recent ‘fining’ of employers for having he temerity to use BACS perhaps looks quite positive, but is still an example of the sort of ‘provider whip-hand’ that employers and employees could do without.

    Advisers are in my experience looking to their own Master Trusts in reaction to this old-style provider dominance, to increase the reach of their advisory and investment services and to mitigate the risk posed by old insurers using group pensions as a platform for taking individual members as direct clients.

    Turning to the subject of TPR and FCA regulation, TPR offers by far the superior approach to ‘principles based regulation’ in setting out its DC principles, the risks those principles are to mitigate, and the quality features through which those principles might be realized. It communicates its expectations clearly and very well. There is no need for this to change. There is already a welter of (mandatory) pensions legislation, including the Charges & Governance Regulations, applying to Master Trusts to underpin their quality. Indeed, by focusing on the theoretical ease of assembling a Master Trust, you overlook some of the actual barriers that exist in requiring a certain scale to be viable. But yes, some of us are in the business of helping new entrants comply with all this. Your call for TPR’s excellent approach to be replaced by stricter regulatory barriers for no reason other than to “curb the weekly growth in Master Trusts” is simply perverse – a wish that turns the proportionality principle of ‘good regulation’ in on its head for starters [s.3B(1)(b), FSMA].

    Trying to push Solvency II on to such Master Trusts – an altogether more onerous regime in terms of base capital resources requirements than CAD/BIPRU/IFPRU applies to investment firms and platforms – is frankly extraordinary. You can hold non-pension wrapped investments as a platform with a base capital requirement of €125k [IFPRU 3.1.9 R], but on this basis would need a base of €3.2-3.7m to do the same with pension-wrapped investments [GENPRU 2.1.30 R; Art.129(1)(d)(ii) Directive 2009/138/EC]. Really?? Even though as you observe, new Master Trusts tend to arrange safe custody of assets through Platforms? This would be a highly retrograde step and certainly push SMEs back into slow-moving, administratively inept GPPs of the type I describe above. No doubt that’s OK as they’re FCA regulated, however poor they are in practice?

    In terms of FCA and Master Trusts, the FCA first needs to stick to the mandate laid down by Parliament. This does not include occupational pensions as specified investments, but does in general include an objective of promoting competition [s.1B(3)-(4), FSMA] and imposing regulatory burdens only where there is justification. That is not a mandate conducive to what you are aiming for here.

    For the typical FCA authorised firm, there is always the question of the extent to which unregulated activity should be ring-fenced from the authorised entity as such. But generally, two important TCF points should be followed. The first is to undertake the the type of product and marketing analysis demonstrating TCF Outcome 2. The second is to monitor investment performance against a meaningful benchmark e.g. in the investment advice given to trustees and/or direct to members.

    • kevin lyon says:

      Henry

      Recently I passed through kirkcaldy – the home of Adam Smith – in order to get to st andrews for a day out. As you will know st andrews is a lovely town with many fine established taverns and inns.
      I’m sure many people objected to the ultra modern seafood restaurant being built a stones throw from the old club house.
      But the food was excellent value, the service superb and the experience memorable.
      Innovation and modernity competing alongside the traditional and established.

      • henry tapper says:

        Very good example! Worth noting that Now, nest, peoples, smarter anf friendly pensions are all new and excellent as are supertrust, salvus and bluesky.

        But what is happening now is about the 2016 land grab and its not always edifying!

        We need choice but not to be swamped by cheap plastic imitations!

  4. Anthony Morrow says:

    Hi – this appears to be a similar problem to that which arose in the fund sector and Distributor Influenced Funds whereby it was all about taking a skim off what were pretty ordinary funds. The easiest way to address this I feel without too much regulation (extending COBS rules to cover trust-based schemes could be time-consuming if at all possible) would be to squeeze the sub-scale and lazy operators. The former by areas such as non-affiliate trustees and ICAEW assurance and the latter by increasing responsibility on the Sponsor.

    We started ours in reaction to concerns amongst advisory firms about the quality and terms (or not) being offered by traditional providers. This was an off-the-shelf arrangement you mention above and in that time we have engaged Eversheds to re-write the deed and rules, appointed externals to meet the TPR governance requirements and also Deloitte to help us meet the ICAEW standard. These sort of costs can only be considered when proper commitment is shown and would flush out those simply in it for the skim (as there needs to be real scale before it breaks even).

    We have Blackrock providing our default arrangements and are extending our non-default options on a regular basis.

    We have almost 15,000 employees across 140 participating employers many of whom were not given terms by their incumbent provider. Unfortunately many IFA’s do not “get” the non-standard providers such as Nest, Now or Peoples so we provide a legitimate alternative for them to consider.

Leave a Reply