Intermediary-driven master trusts are becoming increasingly common, yet some question whether they come with inherent conflicts of interest while others suggest they could become a burden. John Lappin weighs the arguments.
The concept of the master trust has always provoked murmurings of the potential for conflicts of interest. The Law Commission’s consultation into fiduciary duties of trustees has already raised concerns about the potential conflicts of interests in master trusts where the provider is the asset manager and is able to influence the trustee board directly or indirectly.
Whether the arrival of corporate advisers and EBCs into this market will see these questions grow will depend on the extent to which they can demonstrate adding real value to the proposition.
But so far, with capacity an issue, regulators appear to be taking a pragmatic approach, taking no steps to stop firms, whether traditional providers or intermediaries, from setting up arrangements where they oversee a trust they have potential to derive benefit from.
Advisers in the market are reasonably relaxed about the issue. Hargreaves Lansdown head of pensions research Tom McPhail says: “The bottom line is – do we have an effective review process for all the components of the scheme, good fund choices, good member communications? Whether it is a contract based GPP scheme or a master trust run by the intermediary or run by a more traditional manufacturer, I am pretty agnostic about that.”
JLT employee benefits director Mark Pemberthy says: “For any pension scheme if it is done right and with good integral elements, there is no reason it should be a bad thing. Yet fundamentally, RDR has put a very clear differentiator in terms of how services are paid for. Any services delivered in a product can be captured in a product charge and paid for by the member, but anything that is not is paid for by the employer or the member by a fee, so if an adviser feels he or she can deliver relevant services but wants to have those paid through a product fee, the only way to be involved in that is through the manufacturing value chain. However, if the consultancy is confident it can add value to running the scheme, investment, communication and administration then absolutely why not. If it enhances member outcomes, then I would have no concerns.”
Lighthouse has set up a trust that it will offer to its employer clients and across its adviser membership. The firm has an ambition to service Middle Britain’s employers and employees for their AE needs.
Yet Lighthouse Group employee benefits managing director Roger Sanders says the real driver is capacity. Sanders says: “This is a defensive measure because of the capacity crunch. The major insurance companies are all saying ‘once we get to this point next year we won’t want to take this on’. They have got this huge legacy book of business, which is costing them an arm and leg to look after. They have privately said, we may not be in this space. At Lighthouse we realised we could have been left with a market that was just Nest and maybe some of the other Master Trusts.
“We are seeing signs of capacity evaporating. The final straw for us, was when we had a company lined up for staging on 1st February. We had lined them up a provider, they’d been selected, the costing all done. On the first week of January the provider says we have changed our criteria for 2014, and we can no longer take that business. We managed to place it with Nest and had three weeks to do all the work. That is a symptom of provider attitudes. With L&G perhaps the exception, they don’t want business of less than £300 a month.
He says advisers, given nine or six months, can still rebroke schemes. But that is changing too.
“We are finding that isn’t going to work. It takes a long time to find out what a provider might charge, they string you along. So the typical EB broking cycle is going to go. Smaller employers will say we have left it to last minute and say help. We can work out whether it is a good fit for our Master Trust or for Nest. It is a complementary scheme to Nest,” says Sanders.
The other issue is scale. Jelf head of benefits strategy Steve Herbert says: “If we are actually talking about proper master trusts from an adviser as opposed to a solution, the first problem would be the scale. The OFT were concerned about the number of master trusts coming to market where there isn’t sufficient scale. If it is an adviser without a good number of corporate clients, they could have a real scale problem further down the line.
“The client will know what they are getting whether it is whole of market or a solution that has been devised by the broker, so I don’t see that as a huge gamble, but scale could be a major problem. With some of the smaller players it could get a little bit dangerous.”
Finance and Technology Research Centre director Ian McKenna agrees. He says: “A lot depends on the scale of the organisation and have they got the wider infrastructure to support all the things you need to run a scheme? There is a lot of specialist technology which doesn’t come cheap which you need to have.”
“It is not for nothing that Nest has had a £700m loan from government. You may not need that much, but you need serious money to do this sort of thing.”
He thinks tech suppliers might have a chance to come up with master trust in a box and supply it to advisers.
“That might be an interesting prospect but it would probably need to come from the technology supplier. Building the second version is really cheap, it’s just you need the few million quid to build the first version.
“If you are an established player with existing business in place for a number of years, looking after hundreds of thousands of members and you put something clean in, and then we get pot follows member, it could be an interesting game.”
Aviva head of policy, corporate benefits, John Lawson has been an outspoken critic of provider-run master trusts.
He says: “Some of the master trusts are conflicted because they have been set up by the underlying fund manager or administrator, which is what the OFT found difficulty with. It will be interesting to see if the DWP listen to the OFT on those conflict issues. I would like to see something similar to the GPP governance requirements in the master trust world.
“Where a consultancy does the investment consulting, if they are taking a profit margin on investment advice, and managing the solution, you have to question is that conflicted? Are trustees independently buying that service and if so will they have the right to stop buying that service in future if performance or administration is poor”.
Those offering master trusts are convinced such matters can be addressed, particularly through full communications with clients. But the main driver is client demand.
Mercer principal Roger Breeden says: “For me a lot of defined contribution is about getting stuff done. It is a matter of being able to react to situations, market conditions, legislation. It is a new world.
“With a much stronger focus on retirement income for people, on whether a scheme is being governed in the best way, that is putting more pressure on employers and trustees. Combine that with the requirement to get things done and it is changing the market. That would be the main driver behind our move.”
Breeden says for Mercer the move is not entirely AE driven. “Auto-enrolment is a factor but not the primary factor. A lot of big organisations are looking at master trusts or have gone for these arrangements. There is evidence of client demand, and in fact we would have liked to be a bit earlier. But to do these things properly, they do take a lot of time. We had to make sure we had the right resources. We are talking to a number of clients and have been surprised to see some of the companies who are interested.”
“Auto-enrolment has pushed it further up the agenda, but so have the increasing obligations of trustees. A lot of employers are saying let’s look for outsourced solutions without moving everyone into personal pensions.”
The Mercer approach is, says Breeden, consulting led. “We have got GPPs, we’ve got buyout, investment only solutions. We have the full range. That is the discussion with the consultant. We then go through a provider selection process and have three providers we maintain contractual terms from, which in the vast majority outweighs whole of market.”
On the question of potential conflicts, he adds: “There is a balancing act where you are providing consultancy services and also providing the solution. But we think that if we are completely up front with clients about the issues and the options then it stands up. The ultimate test is whether it meets what the client wants.”
Sanders sees the Lighthouse proposition as being a natural alternative to Nest. He says: “We will have a cross over point with Nest for lower income or employers with high staff turnover rates. Essentially we see this trust as a natural default mechanism for employers staging later this year but also 2015 and 2016 so not just fewer than 100 employees but fewer than 50, right into Middle Britain. It fits with our affinity groups with trade union groups where we have contracts to provide full financial advice.”
He says the Lighthouse app, which has a range of tools, will be free for members and employers and there will be a pro version for advisers, which will cost money.
“The most important point is that as far as we can tell there are no conflicts of interest. We have managed out any conflicts with the full support of TPR, the DWP and the FCA. We are not taking any revenue from the trust itself. There is a 75bps total cost with 45 bps for fund management. The AE hub is an additional cost invoiced to the employer.
The trust’s default, which incorporates Elston Consulting’s Birthstar target date funds, managed by AllianceBernstein, will hold up to 80 per cent equities as opposed to Nest’s 60 per cent upper end.
“We are exploiting an opportunity but we have carried TPR, DWP and FCA with us. The advice is not regulated, but the demarcation is that if an individual member wants advice at that point you move to retail advice. The generality is not within the FCA remit making life much easier. We want to be with middle Britain employers.”
Nobody knows where the hundreds of thousands of small schemes coming to market in the next few years will end up, and with traditional providers mostly not interested, it is no surprise that new models are evolving.