In 2013, Pension PlayPen founded a choose a pension service for employers needing to designate a workplace pension so that staff could be auto-enrolled according to the staging roll-out. At the time, we predicted that once the heavy lifting had been done, a secondary market would emerge for employers , re-considering designation. This article looks at the current workplace pension market and asks how far we’ve come towards a secondary market for workplace pensions.
During the next five years I learned a lot about employer decision making, principally that where no decision needed to be taken, no decision would be taken. Towards the end of the auto-enrolment staging process, Nest had become the default for micros with People’s Pension running a not too distant second. The insurers, for whom micro-employers were neither profitable or accessible, had pretty well withdrawn from the fray while a host of small master trust hunted for scraps, keen to have sufficient scale to be consolidated by larger commercial schemes.
The auto-enrolment workplace pension consolidation event was the launch of the Pension Regulator’s Master Trust Assurance Framework which ensured greater consumer protection for schemes that got accreditation but set the bar high enough for many schemes quit while still ahead. Today, auto-enrolment is dominated by a handful of large schemes whose growth will largely be from ongoing contributions. These stand to gain from the implementation of the 2017 proposals from the auto-enrolment working group which will increase the scope of AE to cover younger savers and the self-employed and improve the average contributions by doing away with the lower earnings band ensuring contributions from “£zero”.
Consolidation is far from over, many of the commercial master trusts are sub-scale and will struggle to compete in another lucrative market, the consolidation of mature occupational DC plans. This consolidation is partly happening through market forces and partly through Government intervention. I estimate it will leave all but a handful of single occupation DC plans in place by the turn of this decade. By then the average master trust will be to scale with a minimum of £30bn in assets , having grown fat on AE contributions or from consolidating other schemes. There may be some master trusts that grow through contributions and through inorganic acquisition but most will polarise.
By and large, those schemes that will win in this will have “funders” from the insurance industry or from the global insurance consultants – WTW/AON, Mercer and perhaps XPS, the insurers capable of offering master trusts will be Aviva, L&G, Scottish Widows, Aegon and Fidelity. There may be wild cards beyond these who do what Smart has done and carve out a niche – Cushon is an example. One or two very large occupational schemes operating in niches as “multi employer” – ( The Pensions Trust and Railways Schemes for instance), may raise their games and become consolidators , though they will find it tough to compete against predators and could well be consolidated themselves.
The P/L of many large occupational schemes is determined by the average pot size and the future profitability by the projected growth of what are today small and unprofitable pots. Understandably, pots that have stopped growing , because the member has left service, are only marginally profitable, after the payment of the levy and with rules changing about what can be charged to members for their maintenance.
The Government recognizes that small pots threaten the future viability of some schemes and create inefficiencies that reduce value for money for both deferred and existing members. The DWP launched a small pots working group in 2020 which is due to report in June on what the industry wants to do with small pots. What is likely to happen is that non-commercial schemes will jettison small pots to master trusts in bulk and commercial organisations will seek to do two way deals known as “member exchange” , where small pots are exchanged making for bigger pots all round. The net result of all this will be more consolidation – albeit partial consolidation with the insurers and consultancy funded schemes being the big winners.
Opportunities for GPPs and SIPPs.
The current proposals from the DWP’s aimed at consolidating small schemes into bigger ones , proposes that the small scheme trustee compares his/her scheme to three others, to include a workplace GPP , a master trust and an unbundled arrangement. At least one of these should be capable of consolidating the small scheme.
It is possible that GPPs will take on some consolidation but it will be rare as – to wind up an occupational scheme, both deferred and active members need to have transferred pots. It is extremely difficult to transfer deferred pots to individual contracts, the issue being finding members and getting their consent. Occupational schemes can exchange members without these constraints.
However, many members who have the chance can and are jumping ship either with or without advice into non-advised self invested personal pensions such as Pension Bee’s and Hargreaves Lansdowne’s or advised arrangements typically managed by IFAs on wealth management platforms.
The picture I am painting suggests a shift away from the insurer as the provider of the personal pension and this is overtly the case, however many of the platforms in question are owned by insurers who also own the fund platforms that sit behind the master trusts, insurers remain very important going forward.
Whether insured or non-insured, self-directed decisions to consolidate pots into personally owned pots looks set to be the mainstay of retirement savings for the mass affluent and though they are relatively small by number, the mass affluent own a substantial part of this nation’s retirement wealth.
The role of Government
I have talked of the role of the DWP in accelerating consolidation, this is partly driven by an expectation that economies of scale will lead to better member outcomes and partly driven by a wish to see larger schemes participate in new opportunities presented by a burgeoning array of illiquid investment opportunities. It is clearly in the nation’s interest that pension funding takes over the private financing of Government initiatives and – since Government partially offers these opportunities, it is easy to see how both a carrot and stick could incentivise such investment.
But the FCA also have plans to improve the value policyholders in workplace GPPs are getting from their money. In last year’s CP20/9 paper it put forward proposals that in some way mirror those of the DWP, requiring IGCs to demonstrate to employers with schemes within the GPPs, the value they are getting for their staff’s money and offering alternatives, including large master trusts.
This is very much the “secondary market” that I envisaged happening nearly 8 years ago and suggests that the FCA still consider employers poor buyers. Think back to the 2012/13 OFT report on workplace pensions that led to the formation of IGCs.
The role of consultants and advisers
Advising employers on their choice of workplace pension is not a regulated activity
But telling individuals what’s best for them is.
Most of what will happen to people’s pension pots over the next twenty five years will happen through “disclosure” rather than “consent”. Members of occupational schemes with small pots will find their money moving from trust to trust with only the option to opt-out.
Advisers will be on hand but they will be an expensive luxury for those with small pots who will increasingly have to self-serve using technology available through pension dashboards which will enable them to see their pots in one place.
Getting the permissions to run such dashboards will be via the FCA who will maintain control of personal consolidation. They will have total regulatory control over the advised wealth market and will continue to have oversight of the work of IGCs and GAAs , including their new found responsibilities with investment pathways.
Meanwhile the Pensions Regulator looks to be getting a lot more power over the decision making of occupational DC trustees, ensuring they shape up or shape out. They will have increasing power over large master trusts, through the master trust assurance framework.
TPR will also have control of how occupational schemes return money to members in retirement , either by adapting the work of contract based providers on investment pathways or by collecting pots together and distributing money as scheme pensions.
How far have we come?
In 2011 when Steve Webb came to the throne, he brought together a group of people to discuss the potential for competition to Nest for auto-enrolment business. At the time it seemed that there wouldn’t be much , but first L&G and then others stuck their hands up and the insurers agreed to play. NOW and People’s Pension were created as direct competitors to Nest and a market was formed. We have lost a few schemes along the way, but they have generally been swept up into larger schemes and we have had no major failures. Nor do I see any failures to come .
But I do see considerable change in the shape of the DC workplace pension market in the next ten years and I hope it will result not just in better returns on our savings, but a better way of returning money to us when we stop saving.
The Pension Schemes Act gives us an opportunity to return to a workplace pension system that actually pays pensions and commercial master trusts look capable of doing the heavy lifting to make that happen.
While I think we will see, as we have in Australia, a great deal of money voluntarily transferring out of workplace pensions into SIPPs, I expect workplace pensions to grow in size and shrink in numbers over the rest of the decade, with big consequences for the way our money is invested.
This article finishes on that point and it is perhaps the most important for the longer term. The creation of a consolidated secondary market in workplace pensions is one of Britain’s best hopes for hitting our 2050 climate change goals.