On 1 November 1997, at its world premiere in Tokyo, Titanic was launched to the world.
Rather than sinking without a trace – like the titular ship – James Cameron’s film started the industry trend for mega-budget movies, propelled Leonardo Di Caprio and Kate Winslet into the Hollywood A-list and inspired memes that live on to this day (“I’m the king of the world!”). Apparently, James Cameron is still regularly confronted about why Rose didn’t share her buoyant piece of wreckage with Jack (no thanks to Mythbusters[1]).
Even if you haven’t watched the film, the facts of the Titanic’s sinking are well-known. One of the best-equipped ships afloat at the time, she was generally considered unsinkable due to her advanced safety features. However, the Titanic was only carrying 20 lifeboats when she could have carried 48 lifeboats – and the lifeboats that were launched on that fateful night were typically only half-full. Tragically more than 1,500 people died that night, potentially unnecessarily.
I do wonder if the DC pension market is approaching its own Titanic moment. There are definitely icebergs ahead – but are we steering between them, or being driven towards them ‘full steam ahead’?
The parallels with occupational DC pension schemes
The Department for Work and Pensions (DWP), the Minister for Pensions and Financial Inclusion and the Pensions Regulator have all made it very, very clear that, when it comes to the governance of occupational DC pension schemes and the member outcomes from those schemes, they believe bigger is better.
I last wrote about this topic in October 2019[2] and the message of “improve or consolidate” that was being launched to smaller DC pension schemes in 2019 has now been enshrined into law.
The introduction of the new holistic value for member assessments from 31 December 2021 will likely drive a high proportion of the c.1,200 DC schemes with assets under £100m to consolidate and wind up in the next few years.
This doesn’t seem to be enough for the Government, though – the rate of consolidation is slower than the Government thinks is needed. To increase this rate, the Government has taken two actions:
- First, by removing just seven words from the regulations put in force[3], the Government is ensuring that the new holistic value for member assessments will come into force a full year earlier for a large number of the c.1,200 schemes caught by the new requirements; and
- Second, the Government launched a call for evidence[4] over Summer 2021 with the aim of driving consolidation ‘further and faster’, by seeking ideas to incentivise consolidation of schemes with assets under management up to £5 billion. This could potentially mean that the overwhelming majority of occupational DC schemes will be required to “justify their continued existence”4 on an annual basis (the PLSA has estimated that fewer than 20 DC schemes have assets over £5 billion[5]).
But we have enough lifeboats, right?
Master trusts are typically seen as the consolidation vehicle of choice – and there are a lot of benefits to moving to a master trust.
With in-built governance and strong financial backing, most master trusts can deliver high-quality administration, engaging communications, in-scheme flexible retirement options and wider financial wellbeing solutions, all supported by the latest technology and well-designed investment propositions, particularly around incorporating ESG principles into default investment strategies.
Buck regularly help trustees and employers establish whether a master trust is right for them, before selecting the master trust appropriate to their own particular circumstances and objectives.
For a lot of DC trustees suddenly being told to “improve or consolidate,” a master trust may look like the perfect lifeboat. But what if it’s not that simple?
Will trustees be able to find the master trust that they think will be best for their members?
Only 1 in 5 master trusts polled by EY are interested in schemes with assets under £10m and only 1 in 3 are targeting the £10m-£50m range[6].
Selective targeting of different markets by master trusts may limit the options available to some trustees. Will the trustees be able to find a master trust with charges and features that will improve outcomes for their members and, crucially, that is also willing to actually take on their membership?
What guarantees are there that the master trust selected is a long-term solution?
Wind back the clock a few years and there were 90 master trusts. The authorisation process over 2018/19 brought this down to 38[7] and the Pensions Management Institute estimate there will be only 20 to 25 Master Trusts by 2025[8]. That’s only four years away. Just this year, Cushon have acquired the Workers Pension Trust and SEI have acquired the Atlas Master Trust – big changes in the master trust market can happen very suddenly.
For a set of trustees, what happens if they choose a master trust and it gets swallowed up by a larger master trust before the final transfer value is made? Would you start from scratch? If not, what work would need to be undertaken to assess whether members would still get the value and outcomes that were anticipated? Would the consolidation still be in the best interest of members (particularly if the purchasing master trust was one that the ceding trustees had ruled out as part of any competitive tender)?
Even if consolidation to the master trust being purchased still made sense on its own terms, what if the terms negotiated or the features available to members were now uncompetitive versus other memberships in the new purchasing master trust? Many master trusts have charges that vary relative to the size of the membership or assets under management and smaller schemes may suddenly find themselves being at the less competitive end of any pricing structure, potentially paying charges that are much higher for the same benefits. Is this still good value for members?
Is this solely a decision for trustees?
Some of the DC pension schemes that will need to be consolidated will have active members. Selecting a DC pension vehicle for current staff and new hires that is automatic enrolment compliant has never been a trustee duty – it’s an employer responsibility.
If a single consolidation vehicle would be desired for all scheme members, then trustees and sponsoring employers will have to work in collaboration to select the most appropriate vehicle.
This process would ideally be given the appropriate length of time, with no artificial external time pressures, in order to fully understand the membership and agree joint objectives, before undergoing sufficient due diligence to select the desired features and provider for any new pension arrangement.
If, however, a sponsoring employer decides that a contract-based scheme is the most appropriate vehicle for current and future employees, then two separate procurement exercises will be needed – this would mean an increase in costs and could also mean different outcomes for different elements of the transferring membership.
The trustees would then potentially go to market with a reduced scheme membership and also facing a smaller opportunity set (NEST would no longer be an option for a start, as its Order and Rules means it cannot currently accept deferred-only memberships).
Hard to starboard?
The sinking of the Titanic was a tragedy – but important lessons were learned. Inquiries were set up in both Britain and the United States that led to crucial improvements in safety practices and an international convention aimed at ensuring the safety of life at sea.
In a recent post-implementation review of Chair’s Statements[9], the Minister for Pensions and Financial Inclusion noted that “It is clear that the current format [of] the Chair’s statement is not working…”
The message to the DWP and TPR was clear – five years after changing the requirements for Chair’s Statements, they need to go back to the drawing board “…to provide clarity to the pensions industry to remove collective confusion and ambiguity”.
There may be some lessons that can be learned before we enter the new ‘value for member’ regime then.
The Government’s thoughts on consolidation include: “It is not acceptable for savers to be enrolled in arrangements that do not deliver value in terms of costs, investment returns or secure and resilient governance”[10]. I don’t think anyone disagrees with that.
But given that the master trust market is still maturing and significant changes are expected in the next five years…
…and given the time constraints the new ‘value for member’ regime places on trustees, particularly the short amount of time they will have to improve or consolidate…
…and given the associated choices that employers will have to make, potentially also under time pressure…
…and given the far greater consequences that could arise from the new ‘value for member’ regime “not working” compared to the consequences of Chair’s Statements not fulfilling their achieved aims…
…might the Government be going ‘full steam ahead’ and driving DC schemes towards icebergs? And might this inadvertently end up producing outcomes that the Government itself considers ‘not acceptable’?
Pension scheme members, like Titanic passengers, are just looking for a better life in the future. Might ‘hard to starboard’ be a better approach?
In the absence of an unexpected change of direction, though, trustees and sponsoring employers of occupational DC pension schemes under £100m should start working together to look for a lifeboat – fast.
If you are a trustee or sponsoring employer of an occupational DC pension scheme between £100m and £5bn, then get your binoculars out and start scanning the horizon…
[1] https://www.youtube.com/watch?v=JVgkvaDHmto
[2] https://buck.com/uk/sympathy-for-the-devil/
[3] The original draft regulations found at https://www.gov.uk/government/consultations/improving-outcomes-for-members-of-defined-contribution-pension-schemes/annex-c-draft-regulations contained requirements that applied “…from the day after the last day of the first scheme year…which ends after 5 October 2021” [our bold] while the regulations laid before Parliament apply the requirements from “…the first scheme year…which ends after 31st December 2021 “ – see https://www.legislation.gov.uk/uksi/2021/1070/regulation/1/made
[4] https://www.gov.uk/government/consultations/future-of-the-defined-contribution-pension-market-the-case-for-greater-consolidation
[5] https://www.plsa.co.uk/Portals/0/Documents/Policy-Documents/2021/Future-of-the-DC-Pension-Market-The-case-for-greater-consolidation-Jul-21.pdf
[6] https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/advisory/ey-master-trust-survey.pdf
[7] https://www.thepensionsregulator.gov.uk/en/document-library/research-and-analysis/master-trust-market-post-authorisation-final-facts-and-figures
[8] https://www.pensions-pmi.org.uk/knowledge/pensions-aspects-magazine/the-changing-landscape-of-pensions-and-master-trusts/
[9] https://www.legislation.gov.uk/uksi/2016/427/pdfs/uksiod_20160427_en.pdf
[10] https://www.gov.uk/government/consultations/improving-outcomes-for-members-of-defined-contribution-pension-schemes/chapter-2-encouraging-consolidation