PENSIONS
UK workplace pensions set for more consolidation
Henry Tapper, chief executive officer for AgeWage, talks about potential changes to UK workplace pensions, and whether they’re in the consumer’s best interests
A fter a quiet period, I foresee the rate of consolidation of defined contribution (DC) master trusts picking up over the next few months with announcements over the summer. This article asks what’s driving consolidation, and what that means for a pension system rocking from its failure to consolidate data onto a pension dashboard. What’s driving consolidation? I recently had breakfast with the chair of a small master trust, who’s been involved in workplace pensions up to and through the introduction of automatic enrolment. He reminded me that chairing a master trust is a full-time job and that many of the decisions he must make are as tough as those for schemes 50 times his scheme’s size. His problem is a microcosm of a wider problem – his trust is too small to compete for consolidation and can only grow by keeping existing clients happy. ‘Clients’ in this case means participating employers, who are increasingly looking to the secondary market to find members better deals (typically on price). In short, the small master trust, as a commercial entity, is toast – it’s better off selling itself now – rather than in three or five years when its clients have left. Medium-sized schemes with powerful private equity backing are looking to compete with the bigger schemes (especially the larger consolidators) and need the assets to cut the deals to make them credible at the top of the market. Now is a good time to offload your smaller scheme – there are buyers. Finally, the direction of regulation is towards delivery through scale of value. Value comes from a high quality of service along the way (important to employers in the short term) and from high quality investments over the long term (to drive better outcomes). The access to capital available from well-funded master trusts allows regulators to feel comfortable when consolidation is put to them.
Think minimum normal retirement dates. But more importantly, the proliferation of charging structures, platforms and funds, as well as ‘scheme rules’ mean that it’s never as easy for schemes to transfer ownership as it seems. And then there are the vested interests that get lost: l jobs (not just in operations but in governance) l lucrative advisory deals l the consolidation of professional service contracts for lawyers and auditors. Everyone has notice periods, no-one is happy to lose work. And many small schemes can legitimately argue that they’ve pioneered innovation. Master trusts, such as Malcolm Delahey’s SuperTrust, for instance. Many small schemes which are now part of Cushon and Smart had features they could be proud of and which may not survive as the consolidators combine investment and service propositions. Many of the smaller master trusts we’ll lose in the months and years to come have built up special relationships with their participating employers which will end, or at least change. With so many stakeholders tied up with each master trust, there are many more things to consider and many more interests to serve. Towards a better market We sometimes forget we have a highly sophisticated professional services market in the UK – one that’s the envy of the world. We may feel we’re making heavy work of consolidation – but we’re making a good job of it. Member’s interests are being looked after, the master trust assurance framework is working and consolidation is happening in an orderly way. At a time when there’s plenty to be worried about, the state of our workplace pension market is improving at pace. For that, we should be thankful. n
So, ready sellers, ready buyers and a benign regulatory climate mean that any master trusts with less than £1 billion of assets (and some with more) are considering selling up. Is consolidation in the consumer’s interests? The Pensions Regulator must consider these interests in the short and medium term. No one can look much further than the end of the decade, and it’s likely consolidation will continue beyond then if we move towards an Australian system of DC superfunds. Australia is touted as an example of consolidation working for the consumer. The pensions dashboard is an example of a lack of consolidation, meaning savers can’t see their pots and pensions in one place in the timescales previously confirmed. A consolidated pension market makes sense for the consumer in the longer term, though in the short term, many will lose options they cherish. And for employers (who carry the responsibility of administering workplace pension contributions compliantly), a simpler system where there are fewer and easier choices makes sense. The small pots problem becomes manageable when the feeds needed to operate systems such as ‘pot follows member’ are reduced in number to the fingers of one hand. Ultimately, members will benefit from a simplification of the system, as a result of employers finding ways to understand their pension choices. The value for money framework operates properly where there are tens rather than thousands of schemes under assessment. What’s stopping us consolidating? The complex system of checks and balances which ensures schemes consolidate without ‘member detriment’ can be a curse, rather than a blessing. The technical wrinkles which differentiate schemes are often of more consequence to lawyers than members.
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| Professional in Payroll, Pensions and Reward |
Issue 93 | September 2023
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