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.