The soft underbelly of master trusts

soft underbelly

The soft underbelly


Many master trusts are absolutely rotten – they are not fit for purpose. Lots of advisers are using them as a back door way of bringing in commission, dressed up as high governance charges.

The words of Barnett Waddingham’s Mark Futcher, as reported in Corporate Adviser.

“What oft was thought but ne’er so well expressed”? Mark’s strong words open up a new dimension in the scrutiny of small mastertrusts that’s part of the consultation on the Pension Bill 2016.

There is no way of knowing what and how the manager of a master trust is taking from the trusts, until audited accounts of the trust are put in the public domain. Many of the trusts we look at are so young that they have yet to file accounts and many of the accounts I have looked at are so abbreviated as to give no indication as to how governance is being financed.

In short, we can neither confirm or deny Mark’s assumption, though the burden of proof now rests with his consultancy to confirm or the master trusts to disprove.

So let’s look at the statement in more detail.

“Lots of advisers are using them”, this cannot be denied. From the major actuarial firms , Mercer, Willis Towers Watson, Aon through employee benefits firms such as Capita and Xafinity to the smaller consultancies and corporate IFAs such Goddard Petty, Wren Sterling, Corpad , Creative Benefits and Lighthouse.

“A backdoor way of bringing in commission”. In the context let’s assume commission means  a payment made  based on the value of sales achieved”. However we define “value” commission is almost always based on funds under management since this is the source of almost all revenues to a master trust.

“Dressed up as high governance charges”. The accusation is clear. What members aren’t getting is good governance, instead they are paying someone for the value of sales achieved”. Since commission is outlawed from qualifying workplace pensions, then David’s accusation is that some advisers are cheating and getting paid commissions from our funds, not – as pretended – for overseeing the fund – but for bringing in funds to the master trust.

“High governance charges” assumes that we have a value for money benchmark for governance. We don’t – what is good value for the services of a trustee? What is reasonable pay for an auditor? How much is the Master Trust Assurance Framework worth to a scheme and what should a scheme pay to get value for money?

The Chair’s statements of master trusts need to contain a statement on value for money. I will be interested to read them, especially as they touch upon the cost of governance, but since the governance issue may be with the “guvnors” (the trustees). I hold no great hope that a statement to the effect that the trustees believe the scheme is giving members value for money, has any validity. For it to have validity there must be a benchmark of what is good value and we do not have those measures (yet).

Can this be proven?

I cannot see, at the highest level, how you can reward the senior management of a master trust (big or small) on any metrics other than the increased or maintained value of the master trust. That is the way business works. If there is no value , there is no money to pay people (unless you are Dominic Chapple or his like).

But David’s issue is not with people being rewarded, but with people being rewarded on an “ad valorem” basis for sales rather than governance. And the problem is that it is virtually impossible to establish the dividing line unless we have a clear benchmark on what value for money looks like.

Even were we to see the accounts of the master trusts and establish who was getting paid what, we would still be none the wiser about whether the payment was made for increasing value to the master trust’s owner (let’s call it shareholder value), or to its members (let’s call that governance).

All that can be proven is that the amount being taken out of the scheme by way of “member borne charges” is no greater than 0.75% of the funds within the scheme.

In order for a scheme to prove this, it currently has to do no more than advertise that the annual management charge of the scheme is 0.75% or less or that the composite charge (where there is a split charge) is no greater than 0.75%.

But of course, we all know that this 0.75% price cap does not cover many items charged to the member’s fund but not declared in the AMC. And though these costs may not be great in a huge scheme , they can be well over 1% in a small scheme

Abuses that can only be curbed by a price cap

In 2014, legislation was put in place so that by April 2015 no workplace pension could have member borne charges greater than 0.75%. At the time I wrote that we had “scotch’d the snake not killed it“. If you follow this link you will see I argued nearly three years ago that we had three years to sort hidden charges.

In April 2017 , we are due to see the charge cap reviewed and strengthened, so that those hidden charges which were not included in the 2015 cap, are included going forward (presumably from April 2018).

Simultaneous to the work the DWP are supposed to be doing working out when members are bearing charges that are “hidden” and how those charges can be included in a “cap”, the FCA is conducting a market review of asset managers and consultants.

And a co-ordinated regulatory response

The results of the FCA’s review should be made public before April 2017 and should help the DWP determine whether there is collusion between advisers and fund managers.

The question of whether advisers are using master trusts as a back door way of bringing in commission, dressed up as high governance charges, should be on both the DWP’s scrutiny list and the FCA’s.

For the FCA, the issue is about treating customer’s fairly, for the DWP it is about abuse of the law. Either way, fair challenge needs to be made. lest Mark’s question is left hanging.

I am very pleased that Mark Futcher has brought this up. I think he is right but cannot prove it, he knows he’s right and cannot prove it. It should not be up to consultants to Regulate the market, but it is right that we bring these matters to the Regulator’s attention.

I hope this blog , the article in corporate adviser and Mark’s statements at his seminar, have done just that. I hope that we will see a response from the DWP who make the law and tPR who enforce it and I hope that the FCA who are make sure that customers are treated fairly, are aware of what the market is saying.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to The soft underbelly of master trusts

  1. John Mather says:

    Henry you need to provide a complete model and come away from the confrontational style sales bad governance good. The one cannot exist without the other.

    As an adviser I don’t want pity. I’m saying this to illustrate that, under the current economic models, even when business is won with the new risk reward profile the adviser will lose eventually. It’s the way compensation works About a five years ago, I realized this, and resolved three things: (1) that my work had value and deserved monetary compensation, (2) that I could not trust the existing economic models to give me that compensation, and (3) I had to find new ones.”

    New ones need some radical thinking for example Port Talbot is said to need £2Bn to remodel additional facilities to manufacture what the world wants to buy. The British Steel Pension fund has £15Bn and the money is not deployed sufficiently well to maintain its beneficiary population. Instead of taking tax payers money to prop up a failed business until it finally fails why not get the vested interests aligned and fund invest in the steel plant After all surely those members are most likely to have the expertise and the need to make this work.

    Instead we buy Gov Bonds and wait for them to melt in line with IMF objectives of Repression

  2. henry tapper says:

    I agree with what you say. I think the value for money formulation needs to cover this question. There comes a point where the cost of sale cannot be born within a governance budget and we need clear demarcation between what is being charged for the commercial good of the sponsor and what is being charged for the good of the member. Members should not be paying for the sale of master trust under auto-enrolment (though I acknowledge that the pricing cap does not extend as far as decumulators. But even for the decumulators, we need transparency so that we can know what we are paying for, financial services are difficult and demand a high degree of transparency, currently the bundling of charges into an AMC does nobody any favours. It is neither true or fair and just adds to the problem of trust.

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