The Pensions Regulator has made its ambivalence towards smaller single employer trusts crystal clear. For example, last August it described what it saw as the unacceptable scale of under- performance in its annual defined contribution survey suggesting such schemes had to “improve or leave the market to protect savers”.
It contrasted well-run, larger schemes with smaller schemes which were, it said, failing to meet standards of governance and trusteeship adding that only 4 per cent of micro schemes (which have between 2 and 11 members) and 1 per cent of small schemes (which have between 12 and 99 members) met all of the required governance standards.
A consultation ‘The future of Trusteeship and Governance’ in July last year, included an interesting appendix summarising telephone research about winding up with 18 smaller schemes represented variously by administrators, trustees and IFAs.
The qualitative results found there were many perceived barriers to winding up and, perhaps unsurprisingly that many trustees had an emotional attachment to their scheme, suggesting it could cloud their judgement on what is best for savers.
It also found that when win ding-up was actively considered, consultation with experts was common, as knowledge and understanding of winding-up was inconsistent.
It also noted that external advisers played an integral role, but advice from third parties wasn’t always scrutinised and challenged for conflicts of interest.
The wind-up process was seen as time-consuming partly due to the need to gather information, to track down members and was often delayed by slow responses from providers and/or advisers.
In October, it became clear that TPR was ramping up the pressure, asking the trustee boards of 400 schemes to conduct a data review within six months, as the schemes concerned had failed to review their data in the previous three years.
Clearly the regulator is intent on driving significant change.
Rona Train, partner at Hymans Robertson and a specialist in DC investment and governance, says: “It is now very clear that the regulator is looking to drive down the number of single employer occupational schemes. Even among the larger schemes, the regulator has been doing a lot of one to one supervision, drilling down into how schemes are governed.
“We do, as an industry, tend to talk about small schemes and arge schemes. I would make the point that you can still get very well governed small schemes. But there is a tail that is poorly governed. They are the ones the regulator is looking to move towards master trusts and other forms of consolidation.”
Train foresees a dramatic shift in numbers from the region of 2,500 occupational schemes now to between 300 and 500 within the next five to seven years.
Mark Pemberthy, head of DC and wealth at Buck says: “TPR is actively encouraging consolidation for reluctant sponsors or trustees of occupational DC schemes. TPR has raised the bar on the expected standards of trusteeship and there is active enforcement on sub-standard chairs’ statements, which can be indicative of disengaged trustees or sponsoring employers.
“New transfer regulations help make wind up a bit easier for many schemes. However, there can be complications due to issues such as investment guarantees or penalties, scheme rule quirks, and hybrid schemes where DC benefits sit alongside defined benefits in the same trust. A high-level feasibility study can ensure that all parties are aware of any barriers or hurdles before triggering consolidation and wind up.”
Train says: “We mustn’t forget the complexities. I work with one scheme with a DB underpin. That makes it very difficult to move.
“There will also be paternalistic employers, who still want oversight of governance though where there are larger schemes that are moving, companies are setting up governance committees to oversee that.”
She says her own firm is moving ts GPP to a master trust: “I chair the governance committee of our staff pension plan. We are having quarterly meetings dealing with benefit adequacy issues, looking at expression of wishes, dealing with things that are important for members, but without the need for the regulatory burden you get with a single employer trust.”
She says that in most cases the decision to move is driven by the employer rather than the trustee, although reports that there will always be some cases where the trustees will themselves say that they don’t believe they can govern this arrangement anymore.
She notes TPR is looking for trustees to be more challenging – in cases they could even challenge a transfer – but clearly it will be the employer that finally determines things. In those cases, the trustees must focus on securing the best outcomes from the move.
“We have been doing a lot of work with clients looking to move and selecting the model which best fits their needs. We look at a number of criteria, administration, communication, investment options and we get them to weigh the most important things to them.”
She says a larger scheme might want its own bespoke investment strategy so may weigh the investment options higher, whereas a smaller firm may pick the off-the-shelf default.
She also says that while charges have been a key driver, she feels that across the industry there has arguably been too much focus on such costs.
“A company may say to the trustees ‘we have a great deal and are saving you £x on your members’ fees’. Trustees have been accepting that, but we think there has to be a focus on member outcomes too. Just because you have lower fees, doesn’t mean you have better member outcomes. You should be looking at the investment strategy in the current trust and the investment strategy in the receiving master trust and looking at the impact on investment returns in the long term. It has been missing on some of the transfers.”
On costs, Pemberthy adds: “The explicit costs of consolidation or wind up are generally met by the sponsor, or from unallocated funds within the trust. Even if scheme rules allow members to bear the cost of wind-up, this is generally a last resort. Depending on the size of the scheme steps should be taken to minimise the impact on members of transaction costs and out of market risk.
“Members often benefit from consolidation through lower ongoing charges and more product features, such as retirement flexibility. Where administration or investment costs have previously been met by the sponsor, there may be an increase in ongoing member charges. In these circumstances, particularly if the wind up is instigated by the sponsor, some enhancement to transfer values, or future contributions for active members, may be sought by trustees to ensure that the project is not detrimental for members.”
Train adds: “With a lot of the cases, the move will be a company project. Some trustees will rely on the advice given to the employer, but for more active trustees will want a piece of their own advice, although it doesn’t now require actuarial sign off. Trustees need to be sure it is best for members. There is a cost of members of moving to a different strategy, depending on the circumstances, some of the providers will pay all of the costs to members of the move.”
Some master trusts are setting out their stall to potentially take the new money.
Dave Lunt, head of business development at The People’s Pension, says: “Given the fact that some single employer trusts are finding the increase in relevant regulations and reporting a big a hurdle to overcome, we are already having conversations and are seeing onboarding to master trusts such as The People’s Pension. We expect to see more of this in the future as we believe data requirements for the dashboard will add further cost and difficulty for many smaller trusts.
“Such moves will need clear project plans to ensure smooth transfer and that the best interests of affected members are taken into consideration.”
Aegon head of master trust Kate Smith says: “We think master trusts are now leading the way in governance. We have to get authorised, to demonstrate governance, the trustees have to show they are fit and proper. We have system controls and risk metrics. Given that, you then think shouldn’t other schemes come up a level? I am of the view that something needs to be done about that, particularly if they are very big trusts.”
However, for smaller schemes, she is sceptical that they have a home in the commercial market other than Nest.
“There needs to be a market to take on these schemes. A lot are very old, they may have guarantees, which make it difficult to transfer over. We are not interested in complex guaranteed stuff and the small schemes are not our target market and there are data quality issues. We are not in that market. So, it may be something that Nest needs to do.”
Other organisations are seeking to make such moves easier. Pensions Administration Standards Association chair Kim Gubler says: “When PASA was looking at master trust transitions, we could see a lot of the principles would apply to moving a single DC scheme into a master trust in terms of what needs to be done.
“We acknowledge that members can be moved from a single employer trust into a larger operation and because of the authorisation regime, one would expect that there is a greater degree of oversight and control on administration.”
She says that when it comes to DB, the regulator has been pretty silent on consolidation.
“We still expect that all schemes regardless of size should adhere to good member outcomes. Should DB consolidation come about, we would want consolidators to adhere to PASA standards at the very least. If they do get the go-ahead, we would expect them to look at an enhanced experience for members, like the PPF have looked at the customer experience, to ensure that people who have moved not through choice get a high standard of care. Our expectation is that consolidators would do the same.”