My blog yesterday set out the case for cutting out DC trustees from the pensions body politic. I compared them to the appendix in the human body that does little good and occasionally does a lot of harm. We all know about the acute harm “trustees gone wrong” can do , but they are few and far between, but I’d like to focus on the chronic weakness of DC Trusts and why we have to ask the same question of trustees as we do of other parts of the pension schemes
What do DC Trustees cost?
I don’t know, and I wonder if anyone has actually done a proper estimate of the cost of running a DC board. It will of course vary according to scheme size, but the simple logistical costs surrounding convening four meetings a year are substantial. Consultants, investment managers, lawyers even actuaries, attend DC meetings. Most are on hourly rates , most claim travel expenses and that’s just the start of it.
Increasingly trustees are expected to be reimbursed as professionals – independent of the scheme. This is right and proper, there can often be savings by having professionals on the board, where those professionals reduce the need for external consultants. But all too often the paid trustees result in ever more consultancy and I say this as a consultant.
How is the cost met?
The answer is that it’s met by the scheme sponsor, by the employer, unless the trust board is acting for multiple employers, in which case the cost of the governance is spread and so diluted that it becomes a part of scheme expenses and loaded into the annual management charge – in which case trustee expenses are met by the member.
It would be wrong to leave it there. The cost of running an own occupation DC scheme where the employer sets up , manages and pays for the trust board, is ultimately met from a pensions budget. Were this money not spent on governance, it would be available to boost employer pension contributions. It would be naive to think that ultimately there is a difference, the cost is always met by the member and the member should be asking, is the cost worth it?
Why don’t members query trustee VFM?
The short answer is that that question has never been asked (to my memory). There is no accountability amongst DC trustees to the people they serve. When a Chair writes a statement on value for money, he or she does not have to assess the trustee and the trustee retinue. The emphasis is on what members are getting for their investments.
But maybe this is wrong. If members knew that contributions from the employer are reduced to meet the costs of the trustees, they would legitimately ask whether the trustees were worth it. They might also ask why the scheme they were in needed its own trustees and why it might not be part of a multi-employer scheme where the work was done once for hundreds of sponsors.
We neither know the costs of trustees or the impact of those costs on scheme funding rates. Since the common mantra amongst trustees, sponsors and consultants is that we need to get more money going into pensions, wouldn’t an examination of the money lost to fiduciary management, be factored into the equation?
Members should be questioning what the cost of having their own trustees is and what that means in terms or reduced outcomes when they come to take their pot.
What is the value of DC trustees?
I expected push back on my assertion that DC trustees add about as much value as the human appendix.
I’ve worked with many, and they were almost all very good at their jobs. Good Trustee Boards, whether DB or DC add value to members, so to tar all single employer trusts with a ‘bad’ brush is lazy Henry. There are bad and very bad … and that is what TPR is rightly targeting!
— Ian McQuade (@IanMuseTweets) 14 July 2019
I would expect trustees to be supported by Ian and his fellow consultants, they are part of the fiduciary ecosystem – paid for by sponsors out of trustee budgets or directly by sponsors as trustee support.
What the Pensions Regulator is consulting about, albeit in a rather pussy-footing way, is whether we are maximising the value of trustees.
My blog of yesterday was not an attack on individual trustees, who are individually very good, but on the collective value they give to DC savers. I use the word “savers”deliberately, trustees have all but given up on helping people to spend their savings.
As regards investments, the cartoon at the top of this blog suggests the public’s awareness of what DC trustees do with regards investment decisions. In my experience they put themselves in the hands of their platform managers and consultants, the amount of conviction-based trustee decision making on investments is woeful- as witnessed by their collective failure to adapt defaults to a modern world where responsible investment is the member’s primary requirement.
Nor are Trustees the champions of the user experience as their trade bodies might have us believe.
Trustees, who should be at the forefront , lag at the back when it comes to helping people move their money around. Four of the five named DC providers operate exclusively through occupational pension schemes, the fifth – NOW Pensions, employs JLT- now a part of Mercer.
By refusing to join Origo, the consultancy TPAs are putting their customers at the back of the queue, they are also at the back of the queue for pension dashboard adoption. Far from being a the cutting edge, trustees are presiding over administration which is decidedly 20th century.
My conclusion yesterday is my conclusion today. That trustees are by and large busy doing nothing. By “nothing”, I mean nothing that couldn’t be better done by switching to a master trust or abandoning members to insurance company group personal pensions and the protection of IGCs.
DC trustees may not be adding enough value to justify the expense of maintaining them, at least not in the numbers of DC trust boards that survive.
Even modern master trusts are not exempt from scrutiny – I take NOW as an example of a Trustee Board that has had to take account of itself and move with the times.
Compare and contrast the shape of their trustee boards 18 months ago and today.
This change did not happen organically, it happened at the Pensions Regulator’s demand.
I think there are very real accountability questions for NOW pensions and I hope that Joanne Segars will work with her new board to get NOW back on track.
The new Trustee Board (below) is there because of Government intervention. I suspect that such interventions will become increasingly common.
Trustees cannot be allowed to fail their members – and that is what is happening in many schemes today.
What is the benchmark for value and money?
As the FCA keep telling us, there has to be something to compare trustee costs and value to. In the case of single employer occupational trusts there are two benchmarks, one is the work of master trust boards and the other the work of insurance company IGCs. While neither are doing exactly the job of a single employer trust, there are enough similarities for tPR ,DWP and FCA to make some meaningful comparisons.
I mention these Government organisations because they seem to me the only independent arbiters of the questions raised in this blog. Expecting trustees to determine for themselves the value they offer for the money they cost is unfeasible. It is unfeasible for consultants or the PMI or the PLSA or AMNT to opine independently.
This is where Government needs to exercise its role as an independent champion for the consumer and if they can’t work out what the VFM of trust boards is , then they should get the OFT and even the CMA in.
We need greater accountability and proper VFM benchmarking of our DC trustees.
A very specific inquiry
I do not want to conflate here the roles of DB and DC trustees. DB trustees have a quite different role to DC trustees. They are responsible for the funding of scheme promises.
DC trustees have no responsibility for the outcomes of DC pensions which is the existential threat they face. They simply have no proper role.
I believe that in challenging DC Trustees as I want them challenged, we will see them having to find a new role. It could be that they want to take on the challenge of helping members provide themselves with a Wage for Life, in which case they should be pushing to upgrade the scheme to CDC. It could be that they hand over their responsibility to a multi-employer mastertrust of GPP (and its IGC).
Either way, doing nothing is not an option. In an ideal world DC administration should be part of the blockchain, DC investments should be managed as NEST manages them. In an ideal world, DC members should have control over their money with the ease and precision they get from internet banking. There are examples of good practice in all areas, but by and large DC schemes are lagging and lagging badly.
In my view, DC Trustees are holding the member’s user experience back. That is the argument that I will be presenting to the Pensions Regulator in my response to its consultation and I look forward to pursuing this conversation with anyone who choose to challenge that view!
This is a very specific inquiry. I would like to feel comfortable by the end of this year, that it gets a very specific answer.
Now certainly thought so back in 2013