Between 2003 and 2013 the number of workplace DC members hovered around the 8 million mark, according to Spence Johnson. On their forecasts, DC membership is to swell to just shy of 18 million by 2023. This legislatively-driven demand is driving two structural changes in the DC market.
Firstly, and most obviously is the requirement for increased capacity in the provider market. While any insurer working on legacy systems will complain about ‘capacity crunch’, the emergence of a vibrant master trust sector, which has the benefit of working with the latest technology for administration systems and processes, shows there has been a powerful supply side response to this market expansion.
Secondly, the exponential growth in the DC market is, rightly, requiring a material increase in the legislation and regulatory guidance around how DC schemes are managed and governed to ensure savers’ interests come first. For trust-based schemes, trustees must now follow the six principles for good workplace pensions and the 31 quality features contained in the Code of Practice and Regulatory Guidance. Parallel provisions are to be put in place by the FCA for contract-based schemes. And it won’t stop there. Charge cap review, pensions freedom and choice, pot follows member, and the taxation green paper shows (lest there be any doubt), that for workplace pensions, the one constant is continuous change.
So in face of this exponential growth in the market, and this near-certainty of constant change, how best should Corporate Advisers adapt their business models to align to this brave new world?
We think there are four elements to consider.
First, as commissions on contract-based schemes get wound down, revenue models have to be service-led, not transaction driven. The requirement for ongoing governance around a workplace scheme lends itself well to a service-driven proposition. The inherent flexibility of master trusts means that Corporate Advisers can have a meaningful role to play in the governance of a scheme, that could not easily be replicated in a more rigid contract-based environment.
Second, is the question of provider relationships and their impact on Corporate Advisers’ position in the value chain. Where a Corporate Adviser has acted as an intermediary to a contract-based arrangement, their involvement is tangential to the provider/employee relationship. The risk of disintermediation is high. By contrast, master trusts’ inherent flexibility enables Corporate Advisers to create and customise their own proposition.
Third, is the question of fiduciary responsibility and its impact on professional indemnity. In GPP arrangements, corporate advisers have a direct or indirect advisory role to thousands of individual contract-based arrangements. In master trust arrangements, all fiduciary responsibility rests squarely with the trustee. This helps mitigate adviser liability in respect of individual outcomes.
Fourth where corporate advisers support smaller trust-based arrangements the growing and ongoing governance requirements means that the cost of running a trust-based scheme is rapidly becoming unaffordable to the sponsoring employer. Outsourcing the day-to-day running of the scheme to a master trust provider should provide a more efficient way on delivering the member-level governance that best practice would expect.
While master trusts can help redefine the delivery of DC component of their proposition, Corporate Advisers have a key role to play in designing and articulating the broader benefits proposition they offer to their clients in a way that puts employers’ and their employees’ interests first.
Griselda Williams is Head of Business Development at TRUSTPensions® a multi-employer occupational pension scheme (‘master trust’) www.trustpensions.org.uk