The crocodile’s jaws
11 Jan 2022
One of my colleagues was telling me a “shaggy dog” story recently. Well, it was about a shaggy dog which had decided to lie down on her daughter’s bed after a long and very wet walk. Not only was the duvet cover soaked, but the actual duvet itself needed to be washed too. Unfortunately, the label said that it could only be washed in an industrial washing machine - so she couldn’t use the washing machine at home. Off she trooped to the laundrette, deciding to get her other duvets washed at the same time. But even the industrial sized washing machines couldn’t take three duvets at a time. What she’d done, therefore, in many ways was to simply move a problem from one place to another without really solving it.
Controversially perhaps, that’s what I believe the Government has done, at least in part, by actively encouraging single occupational trust-based schemes to move into master trusts. It’s moved an issue from one form of pension delivery vehicle to another.
Although I don’t know for sure, my strong suspicion is that the Government had a vision that when single trust schemes moved into master trusts, they would all the get the same, competitive fee and high-quality governance. This would get rid of the problem of large schemes offering lower fees - and better governance - than small schemes.
Differences between smaller and larger schemes
For many smaller schemes, they have undoubtedly seen an improvement in governance. Master Trust trustees spend a lot of time ensuring that default arrangements are appropriate for the membership and that service levels and communications are continually reviewed and improved. But what has become increasingly obvious is that many master trusts offer better deals, and lower fees, to large companies to attract their pension schemes assets in. This is particularly true at the current time when they are in asset gathering mode.
For those large employers which are well advised when moving into a master trust, they will have negotiated a good deal for the members. For smaller companies, their bargaining power will have been less and therefore the fees they will be paying now are likely to be, in many cases, higher than larger schemes. Larger employers are also likely to have been offered a raft of “extras”, for example additional budget for member engagement. Smaller employers are much less likely to have been offered these “extras”. Whilst this may not be the case in all master trusts, it certainly is for many. So, we have already started to see the crocodile’s jaws open between large and smaller employers.
In my view, this situation is only going to become more polarised over time. Larger employers are generally establishing company Governance Committees to oversee their outsourced pension arrangements on an ongoing basis – and they’re likely to have appointed advisers like ourselves who know the market well and can help them negotiate competitive fees and more “extras” over time. At the same time, many smaller employers will have seen the outsourcing of their pension arrangements as “set and forget” for their pension strategy going forward. They are likely to have little or no ongoing governance - and certainly no external advisers who know how the master trust market is developing and can help them challenge whether they are receiving value as time moves on.
That means that no one is keeping those companies up to date with the latest developments in the marketplace. No one is suggesting that they challenge their provider on whether their fees remain competitive. And there’s little or no commercial incentive for the master trust to come to them and offer any of those things.
What this will mean is that the gulf that already exists between the fees and services offered to large and small companies within master trust arrangements is likely to increase over time. And whilst we may have solved the issue of poor governance in smaller single trust schemes, we’re likely to end up with exactly the same issue in terms of “value” that we have at the moment in single trust world. The crocodile’s jaws will be even wider open over time. And we should remember that, while individual members in the Australian market can chose which “Super” their employer contributions are paid into, individual members in the UK don’t have the ability to move between master trusts if they want to continue to receive their employer’s contributions.
Does an “off-the-shelf” default strategy offer good value to everyone?
I do wonder how trustees of master trusts will deal with this issue. If we look closely at illustrations in the Chair’s Statements, it’s already obvious that fees differ by employer. Does this mean that the “off-the-shelf” default strategy, for example, could end up offering “good” value for some employers and “poor” value for others? I wonder how that will be reported in the Chair’s Statement...
Is there an answer to this? One way to tackle this would be to require all employers who use master trust arrangements to review the value of these against the market on, say, a three or five yearly basis. That would certainly help to some extent and would mean that smaller employers don’t lose sight of the importance of the pension arrangement and the value it offers for both themselves and their members. As many of you have heard me say before, in no other part of your business would you put thousands if not millions of pounds a year into something that you don’t look at on a regular basis.
From a member’s perspective, fees and services are clearly only one part of achieving a good income in retirement. We all know that the level of contributions is by far the biggest driver. But all the same, why should a person working for a large company benefit from a lower fee, and therefore a better outcome (all else being equal) than a person working for a smaller employer?
This issue is clearly wider than pensions with larger employers often offering better rates for other benefits than smaller employers. I also acknowledge that some smaller employers are paying higher contribution rates than large employers. But it does leave the issue of “value” as one that remains open for debate.
I’ll be keeping a close eye on developments in this space. I’d welcome other people’s thoughts on this topic and what, if anything, the answer might be.