Geof Pearson told the NAPF conference in 1998
“I have looked over the cliff and seen DC”
22 years later DB trustees can argue that they still have the weight of past money but they are dependent on employers, not members, to sustain their schemes. Outside of the public sector, future accrual into DB is looking slim and the Pension Regulator’s DB funding code looks set to limit the trustee’s discretion to the point that they may become little more than compliance officers.
The focus has moved to defined contribution plans and here it was hoped, the employer would continue to promote its scheme to members through trustees who acted for the member but in the interests of all. The assumption that occupational DC plans would continue to operate on an “own occupation” basis is now being challenged not – as originally expected, by insured contract based plans, but by multi-employer occupational schemes run on a commercial basis, typically by insurance companies and consultants with the occasional outlier – the most obvious being the Government’s scheme- Nest.
Yesterday brought further news of the corrosion of the status quo – from a most reliable source. Sackers- one of the City’s top pension law firms have surveyed their larger clients finding that a quarter of own occupation DC schemes have already switched to DC master trusts with a further half planning similar move.
This of course refers to schemes large enough to employ pension lawyers and that rules out the vast majority of the 42,000 schemes recognized by the Pensions Regulator. But this news is significant for a number of reasons, not least the large number of people making a living selling to DC plans – the prospect list is shrinking by the day.
More importantly , it begs the question – in who’s interest is this scheme consolidation?
Improving member outcomes or just more de-risking ?
Running a trust is not cheap to the employer. The trustees have their own expenses but also incur expenses to the employer from third parties (such as lawyers, accountants, pension consultants and communication specialists). These bills are on top of the contractual contribution rates to member pots and they do not arise with master trusts.
Running a trust is not without risk, members can and do sue trustees for maladministration. They can also claim false expectations were given them about the benefits of the plan. We have seen the courts rule against some DC plan for intimating that target benefits might be defined benefits, famously KPMG found itself on the hook for pensions that it had never promised, but were seen to have implied. This is why most occupational pensions do not offer drawdown from the scheme, they are terrified these payments will be considered scheme pensions by members and turn into an employer promise. These risks do not arise in a master trust.
Thirdly, the nature of trusteeship has changed. Where once it was part of the old boy’s network, a cosy club for senior managers , ageing consultants and the odd union rep, now they are dominated by pension experts – often lawyers – who call themselves professional trustees and charge substantial fees. Master trusts employ the same people but they are paid for by the members.
Finally, there is little evidence that own occupational schemes are actually producing better outcomes than master-trusts. To be fair , there is little evidence that they aren’t either but this is because there is no metric that allows apples to be compared with apples when it comes to value for money paid. AgeWage research is still at a genetic stage (we have analyzed around 2m workplace pots) but what is beginning to emerge is a picture of consistent out performance (in terms of member outcomes) from large schemes and a much greater variability of outcomes among smaller schemes. We are also seeing a much higher range of risk taking in the defaults of small occupational schemes.
What we think we are beginning to see – is a homogenization of pension practice driven by consolidation into a few large master trusts , all behaving in a similar way.
Answer – both!
The driver for consolidation into master trusts appears to be employers looking to shed risks associated with extra cost and liabilities running their own trust. But so far, it looks like this is not harming member outcomes. Members appear to be getting more consistent outcomes from large master trusts than from small own-occupation pension schemes.
The key battleground is going to be the decumulation of pension pots. So far, the master trusts appear to be intrepid in offering drawdown from the fund, but this may be the exuberance of youth.
It will be interesting to see whether master trusts adopt the nascent investment pathways that now need to be offered by unadvised stakeholder and GPP workplace pensions. They don’t have to yet and the DWP may well be holding out for the arrival of CDC regulations which may allow master trusts to offer non-guaranteed scheme pensions , pooling mortality and smoothing risk from a collective fund.
What is clear, is that master trusts are looking to become the next superfunds of UK pensions. Nest is closing in on 10m members, People’s and Nest both have well over £10bn in assets and there are several up and coming master trusts including Legal and General’s and WTW’s Lifesight, which could take on any single occupational pension – and have. Vodaphone is now a participating employer in Lifesight, Tesco in L&G’s two master trusts.
With growth comes responsibility and not just for the management of investments. The master-trusts will soon have responsibility for well over 50% of future pension saving and with it – the hopes and expectations of the nation’s retirement savings.
The employer DC pension trust looks like a dead parrot, it has morphed into the master trust and in these multi-employer schemes we must trust, like it or not.