The influence of a handful of independent consultants in determining winners and losers in the reshaping of DC workplace pensions cannot be overestimated.
The big deals- the consolidation of large single employer sponsored occupational schemes into master trusts are determined through selection procedures run from their proprietary research and shaped by their best ideas on what will best meet corporate and member needs.
“Independent” is important here, as many consultancies including WTW, Aon, Mercer and XPS offer their own workplace pension and therefore find themselves conflicted from competing in selections they organise. This further contracts the consultants who directly select providers and influence decisions. In a fast consolidating market of consultancies, Isio, LCP , Barnett Waddingham , Hymans Robertson and Redington lead, Buck , First Actuarial and a few others aren’t far behind.
The “big three” of Aon , WTW and Mercer are still very powerful, especially in influencing decisions among their own client but the reality is that there is – because they have decided to play as fiduciary managers, that this is now a much more dispersed market for advice.
This new diversity needs to be maintained. Innovation comes from competition. If there is a convergence of thinking between consultancies then we risk the kind of concentration that created group-think around DB de-risking.
If, as a provider, you are looking to get a place at the table and be put forward for big-ticket wins, then you can develop your proposition in a number of ways, so long as there is diversity of thought, if consultancies end up agreeing with each other, we lose innovation and end up competing on the wrong things – typically the capacity to charm. Where marketing wins over substance , there are further risks of bad decisions.
The consultancies provide forward looking measures
These thoughts come after spending two very interesting hours listening to the propositions of six master trusts , in conversation with Hymans Robertson. I won’t comment on the presentations other than that they are getting considerably better than in previous iterations of these “pitches”.
It’s worth concentrating on the influence that Hymans have on their audience. At both meetings , the audience poll suggested that 90%+ of the audience put value ahead of cost and would rather pay more for a better outcome . This is a highly nuanced conversation, as Hymans have to be aware that any bet on a higher AMC has to be justified over time, if the value for money framework does its job. Fiduciaries and sponsors need to feel comfortable that any extra cost is justified on a forward looking basis.
I am now firmly of the opinion that decisions around investment into illiquids, into active management of publicly quoted bonds and equities and bets on currency, need to be understood , documented and eventually accounted for. It is not good enough, employers, trustees and consultants taking decisions on behalf of billions of pounds of other people’s money without an understanding of the risks that providers are taking.
I am equally sure that this kind of analysis cannot be included in a value for money framework which necessarily has to be backward looking.
We should recognise that the research from the consultancies, whether it ends up inside a fiduciary management product – the consultancy’s workplace pension -or whether it is used to advice and select from the pool of workplace pensions, ultimately benefits all employers participating in master trusts and workplace GPPs. It raises the bar and makes it harder for small occupational DC schemes to justify themselves. It increases the rate of consolidation and reduces the risk of bad outcomes to members in outlying schemes.
Despite there being a small number of firms driving research, I do believe that there is sufficient diversity of thinking between them to create the innovation the market needs and the Hymans presentations did suggest that even where the gatekeeper clearly has house views, the workplace pensions have views of their own which can be quite different.
While only a small number of schemes will get the benefit of expert advice, a large number of employers will get the trickle down benefit – that is the nature of multi-employer arrangements where investment and operational advances are shared by all. What is important is that we do not get to a point where some employers get caught in legacy sections of master trusts or in master trusts that close to new business.
A functioning market that will be underpinned by the VFM Framework
I have recently said that the VFM Framework is for the million + employers who need to know if the workplace pensions are any good, rather than for the couple of thousand employers that engage directly with firms in the magic circle of consultancies.
I have also said that there is a danger that consultancies will try to over-extend the scope of the VFM Framework by introducing forward looking measures into the framework itself.
The message to people reading the results of the DWP’s three tests on investment, costs and quality of service should be based on what has happened and should not be speculative about the future.
So the consultancies should take a step back from the VFM Framework and offer help where it is needed – principally on making sure that the measures are operable and can lead to clear certification on whether value is being achieved.
That leaves them to focus on driving up standards at the providers that remain.
Why no mention of DWA whose clients sailed through the LDI crisis and our MT clients tend to lead the risk adjusted performance tables?