Fraser Smart, Buck Consultants’ managing director, wants to develop his firm’s business around independence and value. John Greenwood asks him how
Fraser Smart is a man on a mission to ensure Buck Consultants offers a differentiated proposition to the big EBCs. The marathon runner and racing car fanatic is steering his firm clear of provider tie-ups and in-house investment funds, is supportive of consultancy charging provided it is done properly, and is a strong advocate of pension schemes that do more than the bare minimum.
Fast and nimble describes him in his spare time – he’s run across Scotland recently and has also raced down to the bottom of the Grand Canyon and up the other side again. But it is also how he sees Buck Consultants, which he says has been winning new DB schemes from all sectors in the market, particularly from the top three.
“We think we can provide all the services they do but in a more nimble way. We are more able to put forward our top people on similar sized accounts,” he argues.
Smart sees a trend towards conflicts of interest from other players as offering opportunities for his firm to exploit, most particularly in relation to pensions investment.
“We differentiate ourselves in the investment market because we are not seen to be pushing our own funds. We are genuinely trying to find the best solution in the market rather than trying to push a particular fund with an annual management charge associated to it, which is a way of other organisations trying to protect against the future,” he says, arguing that intermediary-linked funds will come under greater transparency in future.
“It is fine when performance is seen to be good. As long as they are adding value, they will be able to argue they are taking risk away. But the day they start falling short, these competitors will end up in a difficult place,” he says, warning that where an intermediary manages the money, logically, you should need another intermediary there to check that they are doing the right job.
“If we look at fiduciary management generally we see one of the big opportunities as somebody who is able to review what the performance is doing. If you become the fund manager then you need an external party checking that,” he says.
And what about other provider tie-ups that other EBCs have gone for?
“If you say you are going to be stuck with any particular strategy, that is a pretty stupid thing to say in such a fast changing market. It is a case of never say never. But as things stand we like our position of being able to look across the market. But I am conscious the providers are being much more specific about the people they want to work with and what I don’t want to find is we end up being cut out of a large part of the market because they are only going to operate where there is a tie.
“Everyone is jockeying for position in this new world. We will start to see certain players saying they don’t want to work with certain partners.”
Smart remains confident that providers aren’t going to sew up the market by going direct in the post-RDR world. “Much as they would like to do that, EBCs have such a high proportion of the market and it is still quite difficult to be your friend, have your arm around your shoulder and stab you in the back at the same time. Providers will try extremely hard to cut intermediaries out of the equation but the EBC position has grown because we can have really good quality consultants looking after the clients. With the best will in the world it is not possible based on the charging structures that are out there for them to offer the same service.”
Smart is concerned that TPR’s determination to push employers towards larger schemes could ultimately do a disservice to some employees.
“That sounds to me like we are being pushed towards master trusts, but I am not sure that is necessarily the best solution. It might be if we get a few super master trusts that really achieve economies of scale and are extremely well run. My concern is there is a proliferation of what is going to be modestly-sized master trusts and they suffer from lots of the same problems as small DC schemes. You are going to have so many small groups coming into them that they will not necessarily meet their needs,” he says.
He is also concerned about conflicts of interest in master trusts. “The market is being set up on the basis of schemes trying to make sure they get funds under management. It is not about looking after the end user and their needs. The right master trust with the right scale can be good for the market. And maybe is right for aggregating the market for a lot of employers who are not prepared to put the governance in.
“But if you are not an employer who really wants to engage, then master trust might be right. But if you want to get the most from your workforce then there are much better solutions out there. And the extra cost is not necessarily that substantial.
“Our Auto-enrolment Pro solution has been built with this in mind. It is built around a flex solution. It does the workforce assessment and links into payroll, cost effectively, but for a modest extra payment you can broaden that out to total reward, flexible benefits and I see that as being the way forward for employers who genuinely want to incentivise and motivate staff.
Buck is set to publish research into the lack of preparation of some employers, and the likelihood that many more than previously anticipated will simply level down to the auto-enrolment minimum to keep their costs capped.
“Our research shows there are people who are so unprepared they haven’t even thought about what it will cost them. They haven’t thought about contribution levels, or whether they are going to level down to keep their budget the same.
“The sense is those who have thought about it will level down much more than I have seen evidence of elsewhere. The message is auto-enrolment is good. But the price of auto-enrolment is the people who look after their finances generally will be worse off than they would have been before. From a consumer angle, that means if there is an option open to join today, then you should really take it up,” he says.
Smart also believes the debate around consultancy charging needs to be more measured.
“Most of our clients are fee-based. The instances of commission we have taken have reflected the fees we would have taken, so we do not see the RDR having a massive effect on our business. But the consultancy charging debate is a fascinating one. Is it right that you can’t take charges out of an 8 per cent contribution? I can see that side of the argument. But it depends what is in place pre-RDR. If you have got a horrendous charging structure in place, modest consultancy charging could actually leave members better off. So I struggle for that. So it is a dangerous thing to have a one size fits all argument that consultancy charging is bad.”
So would regulating the sale of workplace pensions be a better way to police this, so that if the employee got better outcomes as a result of a consultancy charging solution, that would be acceptable, but if members were worse off, then it would not permitted?
“That makes sense to me. I am not someone for over-regulation but it is about getting to the right solution for the consumer at the end of the day. I hate regulation that does the complete opposite in a vain and noble attempt to achieve its aim,” says Smart.
Buck is readying itself for a move into the at-retirement market, having taken on Peter Quinton, former head of the Annuity Bureau. Its proposition is to be called Annuity Insight, which will be soft-launched in mid-February, followed by a bigger launch in April.
“The plan is to develop our own proprietary technology in time, but in the short term we will take advantage of technology that is out there. We have got the advantage, being part of the Xerox business, that we have access to a vast amount of expertise and technology within a short period of time. We will leverage that to get our solution up and running quickly,” he says.
“The post-RDR world will lead to a substantial number of people having modest pension funds and nobody to give advice on doing that. We will put ourselves in the position of being able to give them a home for helping to select an annuity – not on an advised basis for small pots. It will be execution-only for small pots, which can take commission.
Commission on execution-only annuity business is permitted at present and there are no plans to change this. But in the investment world, execution-only brokers can only carry on as they are for another year. So does Smart anticipate the execution-only annuity market will also have to go to factory gate pricing any tine soon?
“It may have to go that way, yes, and we are planning our business around that being the case” he says.
And why does he think the annuity market has remained immune from the RDR principles to date?
“I suspect it is partly because commissions on standard annuities are that much smaller. It is only the enhanced market where they are greater. And you can’t really sell the product a second time. And maybe an element of people keeping their heads down, hoping the problem will go away, because it is a market that functions quite well in the way it is currently operating. But we would be remiss if we planned our business on the basis of that change not happening.”
Smart wants to see more flexibility in the way retirement income can be taken, to better match needs through old age. “I am always fascinated by the concept of healthy life expectancy. You are going to end up spending more years of being unhealthy at the end of your life because we have more ways of keeping you alive. Yes, healthy life expectancy is going to increase, but it is not going to increase as quickly as life expectancy itself. So that burden at the end of life is going to increase. The care costs are going to be very expensive to cover over time.
“So for advisers it is going to be about how you help people slice and dice that income to focus on the bit where they are healthy. Your need for cash when you are in your 90s staying at home gardening and watching TV is not the same as when you are younger and doing more travel. So a flat annuity is not the way to deal with that,” he says.