The regulators should have nothing to fear from adviser-run master trusts argues F&TRC director Ian McKenna
At last there is almost unanimous recognition from virtually everyone except pensions minister Steve Webb that auto enrolment is anything but easy and that small employers will struggle. In the real world, especially for small employers with low-earning workforces it is increasingly a matter of who will take their auto enrolment scheme, rather than the terms that can be obtained.
A number of life offices have introduced stripped down versions of their services to offer a streamlined approach where all the information can be processed electronically. These are highly selective offerings and only help customers where either the employer or an adviser is effectively prepared to self-service. That’s fine for employers who fit such criteria, but what of the rest?
As the focus of auto enrolment turns to smaller companies this problem is going to be exacerbated. The smaller the business, the less likely they are to have the in-house skills needed to address auto enrolment. Accountants are frequently cited as the potential solution to this problem, but it is also increasingly clear that there is reluctance amongst some to provide such services.
This should present a significant opportunity for adviser firm. But even if they can charge for providing the support services to the employer, there is still the challenge of finding an insurer willing to take the scheme. At one time the newcomer master trusts looked like the answer, but there is also increasing evidence that many of those who had originally claimed they were open to all are struggling to live up to such promises, with a number discreetly introducing acceptance criteria. Whilst Nest may have a legal obligation to act as the supplier of last resort, anything that can add more capacity must be a good thing.
I believe that this is a significant opportunity for networks and other large distribution groups to develop their own capacity, via outsourcing arrangements with pensions administrators, through “own brand” master trusts. A number of conversations I have been involved in recently lead me to believe that this is one area where there is potential untapped capacity. In recent years most substantial distribution businesses have built their own investment propositions, either in-house or in partnership. Adding the scale available through auto enrolment may offer an opportunity to further reduce charging costs.
In establishing and maintaining their own investment propositions adviser firms have an obvious need to ensure the asset managers involved deliver. Advisers can be expected to keep such appointments under active review as it is essential for them to be able to deliver consistent ongoing performance. Similarly if they outsource the pension administration they will inevitably put in place service level agreements and be actively involved on a day-to-day basis in working with the administration so they are well placed to identify if such service levels are being maintained.
These are exactly the sort of controls that historically one would have expected trustees to address. But in the case of master trusts operated by organisations that select their own in house asset management and administration, how likely is it that the trustees would really be in a position to replace an under-performing asset manager or administrator? Conflicts of interest and indeed vested interests might make this less likely where a service is being bought in house.
For reasons I struggle to understand there appears to be a very negative attitude amongst the great and the good towards distributor-created master trusts. By entering into direct relationships with pension administrators a large adviser business could agree the extent of capacity that the administrator can accommodate for them far more effectively than they might achieve with a life office that has to keep all their distribution happy.
If in turn the adviser can implement an effective process to ensure that the terms offered by their in-house solution are at least as good, if not ideally better, suited to each individual employers needs. In situations where the in-house option is not as good as others available, that scheme could still be placed in the open market.
Provided the distribution business can ensure it has put in place a suitable process to identify employer requirements and priorities and compare these against the options available is there really any reason why distributor operated master trusts should not play a valuable role in meeting the challenge of the capacity crunch?