I find myself violently agreeing with Nico Aspinall, something that rarely happens but is good when it does.
In the first of what I hope will be a number of briefing notes, Nico weighs into the hegemony of life company platforms which dominate the mastertrusts so important to workplace pensions. I hope to publish Nico’s article in full, but as he is currently away, will simply post this link, I urge you to read it!
Nico’s argument is simple. For want of a better alternative, most mastertrusts , when they started, using a life insurance platform provided by LGIM, Aegon or Phoenix to manage their member’s money. I exclude Mobius from the generality though it too suffers the constraints Nico is talking of.
Nico argues that as they have grown, they have stuck with the life platforms and not explored other ways of delivering members value – ways that could in his opinion deliver better value.
He argues that these trusts need to break free from the life companies who are restricting their investment and charging an unnecessary layer of fees and instead use the custodian who holds the assets of the fund to unitise and price the funds its members use.
In a passionate piece of writing, Nico urges trustees to be more ambitious and take back the control given to life companies. He concludes the opening part of his briefing, speaking directly to DC trustees
For these assets you could go back to being a true investor, one who only cares about net returns, not cost and net returns.
“Net returns”, what members actually get from sacrificing pay can only be seen by comparing contributions with the outcome of saving (technically the net asset value). What Nico is saying is that NAVs will increase if trustees disintermediate the life companies and work directly with the trustees. We’ll get more pot – and pension – for our money.
Not all master trusts use life companies, two don’t – NOW and Nest. They’ve had different levels of success but both have by-passed insurance company “investment only” products. Doing so does not guarantee success, but Nico goes on to argue that it improves your chances of doing better for your members.
In the second half of the briefing, Nico explains why life company platforms are failing DC trustees and members. He hones in on three issues, 1) they obscure the true costs of management (transparency). 2) they stifle innovation by restricting investable assets (sophistication) and 3) they stop trustees exercising control over asset allocation, hedging and so on (flexibility).
I’d add a further good reason and that’s stewardship. So long as assets are held in a pooled fund , they are under the ownership of the insurer who wraps the fund. The layers of ownership are extended by reinsurance treaties making it extremely hard for the ultimate asset owners – the trustees – to exercise their rights of ownership. Delayering all the wrappers surrounding the assets means that trustees can be stewards much more easily.
So Nico is of course right, where there are investment experts in-house (as at Nest and NOW) there are huge advantages in moving away from life companies and indeed custody platforms can allow Nest which now rivals all but a handful of DB schemes in its size, to use its muscle.
And here we need to think about what can be done and by who. Nico was CIO of People’s Pension and resigned last year to do better things, those things haven’t happened yet but it looks like he has lost none of his passion. With £16bn in assets, People’s Pension has listened and I understand they now use the custodial platform of Northern Trust to manage saver’s money.
But there are several other large master trusts that have no ties to life companies and could move to a custody platform with ease.
If master trusts want to break out of the doom-loop of being judged on price, they are going to need to break the “status quo bias” which is concentrating their assets in a few funds on a small number of insured platforms.
Clearly if your master trust’s funder is a life company, this is less easy. If you are a start up master trust, you may not have the assets to move to the approach Nico is advocating. But one wonders how much longer LifeSight and the other large trusts where consultancies are funders, will use a life company platform. Those consultancies specialising in helping the market consolidate have an important role in making such innovation happen.
A final word on thinking about “to and through”. My thinking so far has been that any decumulation fund that provided a “done for you” pension that “paid more than an annuity but lasted as long as you do” would need to sit on a life platform. I still believe this, because life platforms will continue to dominate the workplace and non-workplace spaces.
But there is nothing stopping a master trust , operating a default on a custodian platform offering their own CDC pension offering, provided it was comfortable that it could do so on its own (technically as a segregated fund). There is nothing stopping a segregated fund from employing its own pricing and underwriting teams to manage a CDC approach going forward.
Though Nest does not use an insured platform, it still uses some pooled funds but is moving towards segregated mandates which give it greater voting rights (I suspect some Tumelo involvement). NOW also uses the segregated approach
Nest has an interesting comparator in the PPF, which has abandoned funds and now invests directly in the market. Nest and the PPF are similar in size. Though of course DC makes different demands in terms of liquidity, it is good to hear that it is using its muscle on our behalf.
The PPF is of course also taking longevity risk on behalf of its members and managing that risk equitably between them. It would be interesting to hear Nico’s thoughts on just how far towards that model, Nest and its peers could go.