“In an advised world – do workplace pensions need trustees”.

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The quote is taken from a recent interview of Steve Webb of Royal London. It is a critical question which deserves an answer.


The Workplace Pension Governance landscape (is changing)

Something very odd is happening in DC Governance, something that nobody foresaw and a happening that will have a profound impact on the various vendors keen to tap into the workplace pension supply chain.

The governance for workplace pensions can be defined by three structures

  1. Employer managed; historically larger employers set up their own trusts and supply trustees to supplement member nominated trustees. The idea of such schemes was originally to offer a wage for life, though this has radically changed (as we will see).
  2. Multi-employer (master trust); smaller employers often clubbed together to get shared governance which led to a loss of control but less costs. The master trust has become the favoured structure for most employers staging auto-enrolment.
  3. Contract based (GPP); here there are no trustees and Groups of Personal Pensions are set up by employers. Larger employers set up independent governance committees , smaller ones rely on financial adviser. These kind of workplace pensions have (in place of trustees ) independent governance committees (IGCs)

What is happening that is odd?

Large employers were traditionally happy to take on pension risk, establishing defined benefit pension schemes which became ever more generous till they were brought to heel by tough new accounting standards which required employers to consider the solvency of such schemes at the front of their commercial strategy.

Occupational DC schemes were usually set up to mitigate the risks of defined benefit schemes (by taking away the guaranteed benefits and replacing them with defined contribution (DC) rates. Trustees of these schemes thought of their role as to maximise the outcomes from contributions through sound investment strategies. They did not think that helping people to buy an annuity was core to their duties, where any help was given, it was usually a link to a corporate IFA like Hargreaves Lansdown.

What is happening that is odd, is that employers now see these occupational DC schemes as potentially risky in themselves. Members have an expectation from a workplace pension of getting a pension. Employers are worried that this expectation could come back to bite them. T.  They see the increased options from the pension freedoms (where no one need buy an annuity) as imposting further obligations on them,.

What is odd is that instead of looking to improve their own schemes to meet the challenges of the pension freedoms.

Instead of upgrading DC schemes to offer drawdown – or even consider CDC, many employer trust DC schemes are looking to switch to outsourced governance arrangements – either using master trusts or group personal pensions.


A shift in the value chain

This process of outsourcing risks is known as “de-risking” and it has been encouraged by pension consultants who have set up master trusts and advise on GPPs.

The question of whether the master trust or the GPP governance model is better for employers , is discussed here by Steve Webb and Ewan Smith of Royal London, a discussion chaired by Corporate Adviser’s John Greenwood.

Royal London’s position is to promote independent financial advice over the master trust model – at least in their product offering. While all  other major insurers offering workplace pensions (Scottish Widows, Aviva, Legal and General and Aegon) offer both mastertrusts and GPPs, Royal London is unique in only offering a GPP.

Meanwhile, insurers are finding themselves competing for large employers with their consultants offering master trust governance structures. Mercer, Aon and Willis Towers Watson all now offer master trusts which provide fiduciary management of vertically integrated investment propositions in direct competition to insurers.

Mid tier consultants including Capita, XPS, Goddard Perry and Creative Benefit Consultants are offering smaller occupational DC schemes a get out option .

For the smaller employee benefit consultant  and the corporate IFAs (for whom the cost of entry to provide master trusts is prohibitively high, the only option to commercially advise on workplace pension looks like the GPP.


Aligning distribution to capabilities or the other way round?

Most insurers still seem to be taking each way bets on distribution. They are looking to compete for new business through consultants and advisers. However, with most larger consultants promoting their own master trusts, the workplace is looking difficult for these insurers- certainly at the top end of the market.

GPPs offer several advantages to large employers which Webb and Smith are keen to promote

  1. Unlike most master trusts and almost all single employer trusts, GPPs offer a relief at source tax relief service which means all savers get the promised Government incentives.
  2. GPPs have progressed their decumlation options much faster than master trusts.  While some of the smaller master trusts (Blue Sky and Salvus) are already offering guided pathways , most – including NEST , People’s and Now, look to be behind the curve.
  3. The break between employer and its pension obligations is much clearer with a GPP. Many large employers worry that by bulk transferring staff benefits into a master trust, they have some residual responsibility for outcomes. Voluntary transfers into GPPs (if this can be achieved) is much cleaner in terms of de-risking.
  4. Aligned to this third point is the thorny issue of charges. Many occupational DC schemes picked up member charges. If members are to be transferred into a commercial master trust , it is much harder for employers to continue to provide this subsidy. If members choose voluntarily to transfer to a GPP, that risk is also transferred

Moving to an adviser world

Most policyholders in insured workplace pension schemes are not getting ongoing financial advice. This despite many having paid for it in advance through indemnified commission structures established before the abolition of commissions in the RDR.

Employers who set up a GPP with Royal London, have to do so through the agency of an IFA and these groups of personal pensions become “advised” and to some extent the responsibility of the adviser. There is however no obligation on an employer who sets up a GPP to continue paying the adviser after implementation. Nor can advisers whistleblow on employers who don’t pay their fees and leave staff in GPPs with no adviser to help them out.

By comparison , setting up and running a workplace pension as part of a multi-employer mastertrust does not require advice or the need of an ongoing adviser.

Unsurprisingly, many employers see transferring to a master trust set up by their consultant as the best of all worlds since members get both the benefit of a trust based governance structure and advice.

Here, NEST, NOW and People’s pension risk missing out on the high value schemes by actuarial benefit consultants and corporate IFAs – busy pushing advised solutions.


So what of the rest of the market?

Of the 1.2m employers who have staged auto-enrolment, only around 10% have paid for financial advice in setting up the pension and I suspect a smaller number are paying ongoing advisory fees. A few employers may have encouraged staff to take out individual advisory contracts (known as adviser charging) but there is little evidence of this catching on.

So the rest of the market, not being protected by advisers – is protected by trustees and (where the adviser has “gone away”) by IGCs. It is clear that in the non-advised world, policyholders and members of master trusts need all the protection they can get.


But in the advised world – do we still need trustees?

I am unsure. I am dubious about the role of many trustees in advised master trusts. These trustees are often ex-advisers and will tend to agree with former colleagues who run the investment, administrative and communication strategies for members.

I question whether there is sufficient separation between trustees and product providers on the really tough decisions that impact member outcomes (charges, asset allocation and fund selection).

Are these trustees really holding provider’s feet to the fire to get best in class investment pathways in decumulation? Are they looking to a future world where CDC might be a decumulation option and do they have the power to demand such a radical decumulation strategy even if they wanted it?

And of course the same can be said of GPPs. Are IGCs really protecting policyholders who lose their advisers and are the advisory solutions we see in many advised GPPs scrutinised by anyone. I know of many IGCs very concerned that employer specific defaults set up by IFAs have not recently been reviewed, especially in the light of pension freedoms.

While it is possible to asses the work of trustees , it is hard to assess what an adviser is doing for the money and there is a question of accountability of advisers that worries many employers.


My conclusions

Employers are looking to outsource the fiduciary aspects of their workplace pensions to trustees , advisers and to IGCs. It’s any ship in a storm.

With limited advisory budgets, most employers choose the cheapest option which is a non-advised master trust.

Those employers who pay for advisers tend to end up either with a vertically integrated master trust or a GPP with ongoing advisory obligations. Both models are dependent on advisory performance more than trustees.

There is limited capacity from corporate advisers prepared to take on workplace pension schemes and a full advisory service is not cheap either in fees or in lost productivity as advisers engage staff.

So propositions such as Royal London’s will be unlikely to become mainstream. However, Royal London , by focussing on one distribution strategy – the IFA, may well be more successful than others.

Many providers such as Standard Lie (now part of Phoenix), Scottish Widows (part of LBG) and Quilter (formerly Old Mutual) are looking to build their own advisory capacity.

This may in time be able to offer more capacity to smaller employers wanting their staff to receive some financial advice or at least education.

But for now we are seeing a two tier workplace pension market with advice being focussed on the few employers prepared to pay for it (or with DC schemes with existing assets) and the rest.

My conclusion is that the only way that insurers can responsibly offer GPPs to smaller employers is with effective IGCs as a second line of defence. The only way that employers can rely on vertically integrated master trusts , is to be sure of the trustees capacity to govern.


The Fiduciary as backstop – challenging advisers.

Simply outsourcing the risks of workplace pensions to advisers is not a strategy that I’d advise employers to take. We need governance backstops and in the non-advised world on which most employers and employees rely, we need proper master trusts and IGCs prepared to challenge not just providers – but advisers too.

good-governance

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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