The Mansion House reforms are giving workplace pensions a welcome kick up the bum. I can see four strategies taking hold over the next 12 months
- Renovation through acquisition
- Re-energising pensions for small employers
- A flight to quality for large scheme consolidation
- Repurposing to CDC
Renovation through acquisition
Some master trusts have got to critical mass through smart distribution strategies in the last decade but do not have the clout to compete going forwards. In recent week we have seen National Pensions Trust and Evolve acquired by SEI and Smart respectively. Disruptive Capital have made a £42m offer for Options (formerly Carey) Workplace Pensions Trust which has been recommended to shareholders.
The idea is like buying a dilapidated house on a prime piece of land. Renovate or rebuild , the value is in owning the master trust licence and the relations with customers. These acquisitions are to be welcomed, they offer members the chance of better.
Re-energising pensions for small employers
When NatWest purchased Cushon for a reported £122m , they threw down the gauntlet to NOW, Nest , Peoples and Smart. The small employer market buys using a different scorecard from larger employers. They need more operational support, an attractive offer to their employees and a clear and simple investment value proposition.
NatWest clearly see their relationships with their small corporate customers as an opportunity to provide pension and other workplace saving schemes. While there are new employers arriving each month, the value to NatWest is in existing businesses.
There is a lot of complacency around auto-enrolment. Small businesses don’t want to be taken for granted, competition in this space is very welcome. HSBC may have missed a trick. The VFM Framework will help – but it will take time to implement, in the short-term we should expect better choice metrics making it easier for a small scheme secondary market to develop
A flight to quality for larger schemes
I do not see the race to the bottom on fees continuing. The Government has made it clear that its Value for Money not price that matters and it’s now up to consultants to demand better purchasing from employers. The principal advisers will have to address this issue through investment consulting and stop current practices of promoting value defaults to get on shortlists then producing down-valued defaults to win on price.
Investment considerations should focus on the Statement of Investment Principles, the Implementation Statement and the Chair’s Statement. The TCFD report should be a part of the analysis of the proposition. Above all, the purchasing of external and organisation of internal asset management should be the key consideration of large employers and trustees switching assets. Upgrades of member services may catch the eye but it is the investment proposition that is the engine of good outcomes.
Repurposing to CDC
Some DC master trusts are quite mature in terms of membership. That’s because they have been created from consolidation of mature single employer DC schemes. Many of the participating employers of these schemes see DC as unsatisfactory and are looking for more. This is fertile territory for the CDC master trust.
The Pensions Trust (TPT) announced yesterday that they are in talks with 18 participating employers in the social housing space with a view to setting up a CDC section of TPT’s DC master trust. It may be that David Lane, the future-thinking CEO of TPT may look to switch to a CDC model over time. He should keep a close eye on how this is working in Canada, the Netherlands and Australia.
I would be surprised if Aon and WTW, both of whom have been CDC advocates and both of whom have relatively mature master trusts, are not watching with interest.
My verdict on the direction of travel
The Mansion House reforms contain much that is helpful to master trusts
- The emphasis on value rather than price is commercially attractive to master trusts being squeezed on revenues. They need to raise their investment games.
- The small pot consolidation measures , being consulted on, offer a way out of the potentially existential problem facing those master trusts who built their business on auto-enrolment
- The Government’s encouragement of CDC and of better retirement decision making , opens the door for master trusts to offer default decumulation services that allow them to retain assets for longer
There’s a great deal to play for in the DC master trust space and it’s clear that things are moving. We need to make sure they are moving in the right direction – which I think they will.