In this article I look at the legacy of old company pension schemes, set up by employers for staff as an alternative to defined benefit schemes. In a report in 2018, the Pensions Regulator looked at these schemes and found that most of the problems were with small schemes which had little or no value to employers. I call these schemes company pensions, most pre-date the arrival of auto-enrolment in 2012 and the workplace pensions that dominate the market today.
Do employers have proper choice when choosing a pension for their staff?
We are now two years on from the end of the auto-enrolment staging period , it is getting on for eight years since staging began and, other than the loss of a few minor contenders, the make-up of those offering services to employers is much as it was when Smart entered the market in 2015.
NOW Pensions wobbled, Salvus and Carey went to the wire on authorisation and Legal & General radically restricted its market by not taking small employers. But only SuperTrust had to withdraw its application for authorisation. Contrary to expectations – there remains a wide range of providers competing for the 10.5m new members from 1m new employers, as well for those schemes set up in advance of auto-enrolment by mature employers.
Employers can now choose from 37 authorised master trusts which have more than £36bn in assets under management between them, 16 million memberships, and total financial reserves of £524m.
They can choose from 5 insurers, Aviva, L&G, Aegon, Standard Life, Royal London and Scottish Widows who offer Group Personal Pensions as workplace pensions and there remain a handful of SIPP providers , most notably Hargreaves Lansdown, who offer SIPPs to employers under auto-enrolment.
There is a proper choice for employers choosing workplace pensions today
A market increasingly dominated by master trusts.
The trend towards consolidation continues. The master trusts that did not apply for authorisation are being absorbed into larger master trusts.
HSBC has been authorised as a master trust but has yet to state its intentions for new business. It is generally assumed it will seed with the HSBC staff scheme and there’s considerable speculation as to where it will predate. HSBC may well disrupt the existing order but has yet to show its hand.
Master trusts have the capacity to absorb new business through bulk transfer where deals can be signed off by employers and trustees without the consent of the transferred members. Groups of Personal Pensions (GPP’s) cannot transfer pots from one provider to another without member consent. Setting up a new GPP involves setting up a new policy for each member of staff, for consolidation to happen, each pot needs to transfer at the individual policyholder’s consent.
When it comes to consolidation (which is the commercial driver for change) it is the master-trusts and not the GPPs which are on the front row of the grid. The last time that HSBC made a predatory play was as a personal pension provider – some fifteen years ago – times have changed.
… for most employers with a failing scheme, master trusts will be the obvious answer
How are master trusts competing?
There are large numbers of workplace pension schemes which look inefficient and ripe for consolidation. The competition for consolidation is driven by consultancy owned master trusts, primarily those of Aon, Willis Towers Watson and Mercer, but followed by a range of others – including Salvus, Creative , Atlas and Nations owned by Goddard Perry, CBS, Capita and XPS respectively.
These schemes are today building their business plans around expansion. They see the low hanging fruit as the 41,000 occupational pension schemes established as DC plans and maintained by employers under their own trusts.
For the workforces of large employers like Tesco, competition is fierce. But for the fat and long tail of legacy DC schemes (including GPPs), I already see the likelihood of market failure
My worry is once again about the consultants (and to some degree the insurers) . They compete for these schemes like whales compete for plancton, they open up their mouths and the schemes swim in , primarily because the employers have used the consultancies as advisers or have no adviser and are in the hands of the insurers.
Insurers are keen to compete with their master trusts. Aviva, Scottish Widows, Legal and General and Aegon all have master trusts and HSBC will join them.
NEST, People’s Pension , Smart and NOW are potentially competitive in this plancton hoover-up. However they don’t have the pre-existing relationships of the consultants and insurers and may struggle to repeat in the hoover-up what they achieved during the staging of auto-enrolment – when they had most of the market to themselves.
The big four, are either suffering from indigestion – from a surfeit of new business in the past eight years, or (in the case of Smart) looking abroad.
Competition for old DC company pensions is more likely to come from younger entrants than the big four
How far does competition go?
What I haven’t seen develop in the UK is a utility that puts the employer in control of the purchasing decision.
If an employer wants to tender the scheme it has established (occupational or GPP), it is pretty well bound to use a consultant. But most consultants would rather compete as providers of master trusts than as the organisers of tenders. Those few consultants who are independent of master trusts (Hymans Robertson, LCP, First Actuarial and the accountancy practices) are likely to prosper where competitive tendering is going on. But much of the acquisition of “plancton” is not going through the competitive tendering process. DC schemes are simply passing into the mouths of consultants like Krill.
I suspect that the mistakes of fiduciary managers in the DB space are being repeated and very much hope that tPR and FCA will have a look at what is going on – especially where schemes are unloved, employers uninterested and the money of members is a secondary consideration.
In such cases – the secondary market for failing DC schemes may not always be competitive.
What needs to change?
The Pensions Regulator recognises that many occupational pension schemes are unfit to meet today’s challenges. Many are overly-expensive, poorly governed and badly managed. They are struggling to deliver value for money to members, to comply with rules for tougher disclosures and worst of all, they often have poor data controls meaning many members may not have accurate records. These problems will come out when these schemes are mandated to participate in the digital data-sharing with the pensions dashboard
For such employers to be in control, three things need to happen
- Employers need to recognise (or be told) that the schemes they set up , are their responsibility
- Where employers aren’t prepared to sponsor their own scheme they need to access a secondary market of providers which enables employers to tender their schemes to the benefit of members.
- Someone needs to set up such a tendering facility on-line for the benefit of employers, members and competition.
- For orphaned schemes (where the employer is no more), tPR needs to become the tenderer and should use this service.
Access to a competitive secondary market for employers wishing to dispose of their DC pension schemes is limited.
Lessons to be learned
Millions of us have pension pots in schemes run by former employers. These schemes are hard to find and harder to get information on. Many of these schemes are ripe for change and they will be absorbed into master-trusts.
Members will have very little say in the matter and there is insufficient impulsion on employers to get a good deal for our money. This is a recipe for poor practice and it is easy to see competition failing as it did with fiduciary management.
The FCA and tPR should look into the market and in particular the tendering process for schemes where the employer is reluctant to pay fees.
There is a market opportunity for the industry to set up a tendering utility for the disposal of failing DC schemes into viable authorised master trusts.