Speaking with Aussie legend Nick Sherry, I asked him why he was merging the Transport Workers Super with a much larger scheme
“The optimum size of a Super is around $20bn AUS”, said the former minister, TWU is at about $7bn we need to get to scale”.
They think big in Australia.
In the UK we are setting the consolidation bar a little lower. The pensions minister wants schemes of less than £100m to consider their future and generally consolidate into master trusts. The vast majority of these schemes are single employer trusts run on a DC basis, a few are smaller multi-employer schemes.
In Australian terms, all are basket cases having no hope of spreading fixed costs over a large membership, having little leverage in negotiating fees with fund managers and lacking the resource to buy in expertise either through advisers or trustees.
But it comes as no surprise to find that very few of the defined contribution occupational pension schemes with less than £100m are shopping around for a master trust to take them over. The mechanism chosen by the Government to expedite the wind up of these schemes has yet to work.
Research from OMB and GO pensions and the relentlessly excellent Maria Espadinha of FT’s Expert, finds that despite new requirements that dictate small schemes need to assess the value for money they provide to members, only a handful of the 1800 in scope have benchmarked themselves against master trusts.
Master trusts report disappointing levels of inquiries with none reporting more than 50 and the majority reporting less than 10. 7 months into the first year of assessments, the maximum inquiries received by any of the researched master trusts is 32. This suggest that either
- The vast majority of the 1800 trust boards think they are providing value for their members
- The value assessments aren’t being done
Tina Oversby, head of master trust and consolidation consulting at Go Pensions, estimates that only 10 per cent of small schemes have contacted master trusts for their comparisons.
So what’s being asked of the trustees of small schemes?
The new value for member assessment must assess the following factors:
- Costs and charges (including a comparison with three large schemes).
- Net investment returns (including a comparison with three large schemes).
- Assessment against seven key metrics of how the trustees deliver value from their administration and governance of the scheme, noting that where certain aspects are delegated the trustees retain responsibility:
- Promptness and accuracy of core financial transactions
- Quality of record keeping
- Appropriateness of the default investment strategy
- Quality of investment governance
- Level of trustee knowledge, understanding and skills to properly exercise their functions and operate the pension scheme effectively
- Quality of communication with scheme members
- Effectiveness of management of conflicts of interest.
All seven key metrics should be met for the scheme to be deemed to deliver good value for members. If any are not met, trustees are asked to seriously consider the impact on the scheme.
The subjective stuff is relatively easy for trustees, it is easy to tick these boxes , which are a carry-over from tPR’s “31 characteristics of a good DC scheme” but do not count for much when considering the existential agenda set by the DWP. By comparison, the costs of maintaining a scheme relative to any excess value the scheme is bringing to members are the factors that will decide whether to “hold or fold”.
Trustees are being asked to commercially justify the existence of the scheme and are understandably reluctant to do so. That is not – historically – what trustees do.
So why isn’t more happening?
Clearly some trustees are complying and some complying in full. But they are likely to be the well funded trustees who have legal and investment advisors and a sponsor who will pick up the tab for a value assessment. But these schemes appear to be in the minority.
Most small schemes don’t even know what they are supposed to do and
- The Pensions Regulator is insufficiently resourced to enforce compliance
- Those who are trying , are struggling to complete reasonable assessment
The chart below is the Pension Regulator’s assessment of the percentage of schemes that are even aware of the new scheme VFM assessment.
While master trusts are ready and willing, awareness of duties declines sharply with scheme size , only a third of the 1800 schemes in scope know they have a responsibility to assess themselves.
As this blog has predicted, getting data on scheme specific net performance is simply not happening. Only 1 in 10 schemes is doing it in any way.
There’s plenty of appetite for all types of schemes from master trusts for whom assets under management are key
So we have the big fish with their jaws open but the little fish are hiding in the rocks
I suspect that smaller schemes have limited resource to do the complex comparisons required of them by the DWP. Clearly some parts of the job are easier than others , but comparing net performance looks to be beyond all but a handful.
Leaving the market to consolidate is likely to be a protracted business. If the Government is keen to move to a system of Australia-style Supersized Master Trusts, then it will need to adopt the brutality of the Australian Prudential Regulatory Authority (APRA)
So what can we learn from Australia on this?
In Australia things are done a little differently. What matters to Australians is outcomes, the performance of a Super is tested against a Government benchmark, a Super either passes of fails. The dashboard looks like this
I wouldn’t say it was black and white so much as purple and ultramarine, but it amounts to the same thing. In case you happen to be one of the million savers in a failing product, APRA remind you of the failing schemes.
Fail and there are three immediate actions for the Super
- Identify the causes of underperformance, and develop and implement a plan to rectify this underperformance.
- Assess the potential implications of failing the test on the fund and the sustainability of business operations.
- Develop a contingency plan to, if it becomes necessary in the best financial interests of members, close the product, transfer members to another fund/product and/or exit the industry.
So what can we learn from Australia?
Lesson one – If you want consolidation, make sure that performance analysis is based on a standard benchmark agreed and implemented by an authoritative body. There need to be winners and losers and for this information to be clear to the public.
Lesson two – be transparent in your dealings with funds, include everyone and do the testing independently. In Australia, running a DC scheme is a competitive business.
Lesson three – give clear steps for redemption and insist on closure if redemption isn’t achieved.
So how can we improve on Australia?
Apra’s Your Future, Your Super (YFYS) performance test does not measure member outcomes. Instead it measures how well a Super has implemented a strategy.
The YFYS annual performance test neither measures the return members achieve,
nor adequately measures the risks a fund took in achieving the returns. The performance
test compares each fund’s returns over the last seven years with its strategic asset
The test assesses how well a fund has implemented its chosen strategy, not whether it
is a good strategy.
• It ignores actual returns and the CPI+ objectives of funds that reflect long term member
• It does not incorporate most risk adjusted improvements from more diversified
• It is not a peer relative assessment of underperformance
The Australian system runs the risk that a fund with an investment strategy which will deliver poor long-term member outcomes, but is well implemented, will be judged better than a fund with a good long-term investment strategy but its implementation has been poor in the short term.
I am a firm believer in league tables, but those tables have to be based on metrics that people understand. The simplest benchmark is the return that the average saver got through a lifetime of saving. While this is complicated by lifestyling, the purest measure of a scheme’s performance is the average internal rate of return achieved by its members – relative to its benchmark.
Testing of value for risk-taken and of the various stages of the lifestyle lifecycle are also important to regulators, but it’s a league table that demonstrates experienced value – scheme by scheme that will count with employers and members.
What is likely to happen next?
The Pensions Minister has made it clear that he does not see £100m as the end point for compulsory VFM testing. If he follows Australia, he will include all schemes including Nest, other large master trusts and the few occupational DC schemes with more than £1bn of assets.
The Government is looking at VFM with a team of senior civil servants in the DWP. They will be looking closely at the Australian “My Super” performance testing. Do not be surprised if the next turn of the screw on small and medium sized DC schemes is “league tabling” with a standardised benchmark, imposed on schemes as it was in Australia.
The reluctance of small schemes to get to grips with VFM testing and , in particular, net performance benchmarking, should be a signal that a more robust approach is needed, an approach that is more intuitive to employers , members and regulators.