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Topic: Consolidation

Consolidator proposal the right way forward to help tackle small pots problem – People’s Partnership

People’s Partnership1, which provides The People’s Pension to more than six million people across the UK, has today given its backing to the Government’s proposal to create consolidators2 to deal with the growing small pots problem.

In a Government consultation, the Department of Work and Pensions (DWP)-proposed a framework would enable a small number of authorised schemes to act as regulated consolidators for deferred pots under £1,000. In its response, The People’s Partnership agreed that this is the best solution to tackling a problem which has seen millions of small, dormant pension pots created since the introduction of automatic enrolment in 2012.

The provider of the UK’s largest master trust, believes that the consolidator option will help build the scale required to enable pension schemes to invest in less liquid assets, as outlined in the Chancellor of the Exchequer’s Mansion House speech in July. It also supports the proposal to use the value for money metrics, which the Government wants to introduce to the defined contributions pension market.

However, People’s Partnership has warned that there is a vast amount of work to do over the next six months to operationalise the framework.

Commenting, Phil Brown, director of policy at People’s Partnership, said:

“The growing number of small, deferred pension pots has become an increasing concern for the industry, and we are pleased that the DWP has offered a solution which works in the interests of savers.

“Our main reason for support of this proposed solution is that it will hold consolidator schemes to a higher regulatory standard, which will only improve outcomes for savers.

“From an operational perspective, the core processes needed to make consolidators work are very similar to the processes needed to make pot follows member work. There is also an opportunity to learn from the dashboards project. While there’s a lot of detail to work through, the consolidators proposal looks achievable and no harder than anything else that was on the table. With the policy direction now set, it’s now up to the industry to make this work.”

ENDS

Transfer delays are frustrating but observing the law is vital

Recently, B&CE, provider of The People’s Pension, has been the subject of false claims that we have been “abusing the transfer regulations”.

The reality is that recent changes in the law governing how pension transfers work have caused legal and administrative problems and we are putting in place workarounds to resolve those problems.

The aim of these regulations, which were introduced last year, was to provide pension providers with the power to protect savers by halting transfers to scam schemes. We continue to strongly support this objective.

The regulations work by requiring providers to “flag” transfers where the signs of a scam are present. The problem is that the drafting of the law doesn’t match the policy intent and we are legally required to flag transfers to providers that are obviously legitimate.

For example, a red flag, which causes the right to a statutory transfer to be extinguished, must be raised where an incentive is present in the transfer. Incentives are a common market practice for non-workplace pension providers and also a common tactic of scammers. The regulations do not adequately distinguish between the two, which means that any transfer where an incentive is present must be red flagged.

We cannot take a pick and mix approach to legislation

There has been a lot written about this problem in the national and specialist press over the last week. We have yet to see anyone credibly argue that we have misread the law. While it’s easy to see how this is frustrating for consolidators who legitimately use incentives, we cannot take a “pick and mix” approach to financial services legislation. We cannot choose which parts of the law to observe and which to disregard. We must follow the law, even when it is inconvenient.

We are putting in place workarounds to deal with this problem. We are working with affected providers, offering three suggestions to speed transfers along:

  1. First, where providers are generally using incentives, they may be able to certify that there is no incentive in place for a particular transfer. In that instance, the transfer can proceed as normal.
  2. Second, where there is an incentive, they can encourage transferring savers to engage with the scheme’s due diligence processes.
  3. Third, our legal advice and the regulator’s guidance is clear that where no statutory transfer is possible, we can consider a non-statutory transfer at the discretion of the trustee. This requires a slightly different transfer process, but we remain committed to making this work with affected providers.

An industry-wide issue

In the longer term though, these actions are merely a sticking plaster over an industry-wide problem. The regulations either need to be changed or providers should stop using marketing incentives that are caught by the regulations. We would like to see a discussion over which option to pursue ahead of the planned review of the regulations set for 18 months’ time.

For now, it’s vital that the pensions sector works together within the law instead of criticising those scheme trustees who are simply observing their legal obligations.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

Mind the charging gap

For industry professionals, this raises the question of whether these consolidation services represent value for money or whether customers would instead be making a hefty contribution to the marketing spend of a provider based solely on the influence of the featured companies’ branding and advertising.

The Pension Policy Institute has provided us with a comprehensive analysis of the charging landscape. In a recent report, the institute looked at the different charging structures implemented across the industry and their effects on member outcomes. It found that there was a charging gap between capped and non-capped funds. The typical cost in a workplace scheme of 0.5% AUM would absorb the equivalent of 14% of the member’s final pot. At the level of the cap — currently 0.75% AUM — pots would be eroded by 20%. Independent Governance Committees currently use 1% AUM as a benchmark of value for retail schemes, and some SIPPs have total charges that are even higher.

The websites of 2 companies currently advertising for consolidation indicate that their charges would, on this basis, be expensive for many savers compared to the rates they would get from the big workplace master trusts. One consolidator charges a flat 0.75% to all participants. The other starts at 0.5%, but for products that are comparable to the funds offered by capped workplace pension providers, it charges 0.7%. These rates would seem particularly costly if the customer had the choice of consolidating into an alternative master trust that was charging below the average or had a rebate scheme rewarding higher rates of saving.

Higher fees could be justifiable if a more complex investment strategy is used. For example, a fund with more illiquid investments is more costly to manage, but it may offer the possibility of higher returns. However, the retail consolidators’ websites don’t indicate anything else is being offered other than standard index investing. The Pension Regulator (TPR) and the Financial Conduct Authority (FCA) are currently working on a new framework to assess value for money in pensions. This is likely to include metrics that focus on risk-adjusted returns and scheme governance as well as costs and charges. For those considering the consolidation of historic pots, this is potentially going to make it much easier to make an informed decision as to where it is best to bring their pots together. In many cases, this is likely to be a default fund that an employer, with the help of a financial adviser, has selected on their behalf, specifically because it meets the value for money criteria that the regulators are now focusing on.

The work of TPR and the FCA will only deliver for consumers if it helps them to make these comparisons across all the potential schemes for consolidation. To this end, it’s vital to make it a requirement that all workplace and retail pension schemes publish their value for money scores. Value for money should not just be a description but an order: if you do not show the value, you should not be able to accept a member’s money.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

Sharing our knowledge and experience of consolidation

The drive for consolidation

Over recent years, we have seen many changes that are driving further consolidation of master trusts and employer-sponsored trust schemes. Top reasons being:

  • Pension freedoms
  • Tightening governance demands
  • Higher charges

Consider too the government’s recently proposed changes from 5 October 2021. These changes aim to encourage DC occupational pension schemes (operating for more than 3 years with less than £100m in assets) to regularly consider value and consolidation. If these proposals do come into play, no doubt some schemes may struggle with the extra governance standards and consolidations will rise. 

Currently, there are around 1,800 single-employer trusts with over 12 members in the UK*, and this is expected to halve in the next 10 years.

We’ve been busy this financial year, welcoming 6 bulk transfers from trust-based schemes which have chosen to wind up and find a secure new home for their members’ pension savings.

Stripping out the complications

It’s a complex and evolving marketplace with many legal and administrative hurdles to overcome and the consolidation process can take 12–18 months. As regulations tighten, it can be daunting to get started. After years of experience in the transfer market, we have some key learnings to share on successful consolidation.

1. Planning is key

Here are some tips that we’ve found have helped to overcome the challenges:

  • Have a clear project plan for a seamless transition of assets.
  • Make sure the scheme is right for you – due diligence should be carried out by both sides.
  • Set dates to meet with key stakeholders to identify actions, requirements and decision makers.

2. Gear up for the legal minefield

Thorough preparation helps to avoid legal delays and obstacles. Ensure lawyers are involved early on to go through documentation with a fine-tooth comb. The following questions should be asked and answered:

  • Do scheme rules permit the bulk transfer of the assets?
  • Do the trustees have rights to make transfers on behalf of members, or is member consent required?
  • Is consultation with active members required?
  • Are guarantees or promises built into the existing benefit structure?
  • Will any valuable member tax benefits be lost upon transfer?

Be realistic about timescales. Consider all the various stakeholders – sponsor, trustees, their respective advisers, legal advisers, members and the receiving scheme. These exercises don’t happen overnight, and often formal trustee meetings are, at best, quarterly.

3. Review your scheme

Trustees must strategically review their scheme and be satisfied that the transfer is in their members’ best interests. Conduct a market review, comparing your current offer with alternatives to decide whether it’s still fit for purpose. This involves checking:

  • charging structures
  • whether members might benefit from greater investment choice and retirement options.

4. Consider a suitable scheme

Next steps would be to weigh up alternative arrangements, for example:

  • Contract-based GPPs
  • Trustee buyout plans
  • Master trusts 

More and more, we’re seeing master trusts being favoured as a vehicle to deliver better member outcomes due to the overall trustee framework and oversight embracing all active, deferred and retired members. We’ve seen scenarios where sections of deferred members are transferred to another provider to focus on current employees and reduce administration complexity and cost.

Professional advisers would add value here, to explain and provide reassurance on the effects of charges, investment and retirement options.

5. Clean up data ahead of transition

It’s important to receive cleaned-up and accurate member data. This enables effective member communications and confidence that data is in the right shape to go to the new provider. Despite crackdowns by The Pensions Regulator on schemes’ poor record keeping, poor quality personal or scheme-specific information is still supplied, especially for deferred members.

6. Get communicating

As members aren’t usually making an active choice to transfer, clear and up-front communication is vital so that they know what’s happening, when and why. We firmly believe that a set process and plan should be mapped out for member engagement and communication.

We’re with you every step of the way

Understanding the processes and requirements are crucial – so we’ve generated a roadmap with a questionnaire to highlight the information we think trustees and sponsors need, including well-tested standard deeds and communication templates.

Find out more

Visit our webpage on ‘Consolidation of trust-based occupational pensions’ for more information.  

To contact us, email RRM@bandce.co.uk or phone 0333 230 1310.

*Source: DC Trust: Presentation of scheme return data 2019-2020

Steven is a former National Business Development Manager for B&CE, provider of The People’s Pension. He has been replaced by Duncan Reeves.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

Why size really does matter in the world of pensions

Research into the effects of economies of scale in our industry show that big is really very beautiful when it comes to pensions.

This is why it’s vital that the Government consultation into improving member outcomes must include lessons from other countries, such as Australia, Canada and the Netherlands.

Lessons from Australia

Australia’s independent Productivity Commission, which advises the government there on policies to improve living standards, reported in 2018 that merging the smallest 50 schemes with the 10 largest would make the average member A$22,000 better off in retirement with the gains much larger for those coming from those smallest schemes.

The findings from ‘Down Under’ backed up findings in earlier reports from Canada and the Netherlands which found the greatest savings were to be made at the administrative layer. This is because the total costs at the administration layer don’t rise much as extra members are added. The size and cost of operating the board of trustees and advisers to the board, for example, are fairly similar regardless of the size of the scheme. Consequently, the cost per member drops as each additional person becomes a member. The independent international pension analysts CEM estimate that every tenfold increase in membership decreases administration costs by 63% per head on average.

All these studies also found that there were cost savings to be made at the investment layer too. They were smaller in magnitude than those at the administration layer but were still significant. The Dutch prudential regulator has found that a Dutch scheme that had 10 times the assets would, on average, lower investment costs by 7.67 basis points. Both Dutch and Canadian research has concluded that the gains are likely to be greatest where pension schemes are able to take some of the investment functions in-house.

A report in October 2012 by the Pension Investment Adviser to the Canadian Deputy Prime Minister and Minister of Finance argued that this lay at the heart of the recognised success of that country’s public sector pension funds; providers that we now regularly come across as owners of UK infrastructure. The Canadian report found that pension schemes needed to have assets under management of $50 billion to maximise their economies of scale at the investment layer.

Proposed changes in the UK market

Here in the UK, the Department of Work and Pensions (DWP) is now proposing to follow in Australian footsteps and require the trustees of sub-scale pension schemes to assess whether they offer value for money and whether they ought to consolidate into a larger scheme. This statutory requirement would apply to schemes that have been in operation for more than 3 years with less than £100 million in assets. The assessment of value for money would relate to net returns and to the other aspects of good governance which The Pensions Regulator (TPR) holds as being key parts of the customer experience.

There’s nothing to suggest that the economics of pensions in the UK are different from other parts of the world. The evidence from self-reporting surveys of trustees conducted by TPR is that the trustees of small schemes are unable to cope with meeting many of their required duties. We also know from surveys conducted by the DWP that charges vary by size of scheme, with higher charges generally applying to smaller schemes.

While a very welcome step forward, it’s unclear why the UK government is proposing to restrict the application of the new duty to schemes with less than £100million in assets. It would seem self-evident that every scheme should have to demonstrate that it offers value for money and if it does not, it should consider exiting the market. The inference from the Australian Productivity Commission’s findings is that schemes with less than A$1 billion (£546m) are unlikely to offer value for money.

The DWP’s consultation response doesn’t contain any economic modelling specific to the UK. It’s to be hoped that the DWP will produce its research on the economies of scale as a necessary part of the cost-benefit analysis needed before a bill becomes law.

The global evidence about the benefits of bigger, well-run schemes is there for all to see. It would be helpful to see similar research published on UK schemes.

Read more

Find out how employers can consolidate with The People’s Pension on our website.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

The quiet inevitability of consolidation

In an industry full of buzz words, there’s one which crops up more often than most – consolidation.

In reality, pensions have been consolidating over the last decade, an evolution largely driven by The Pensions Regulator (TPR), Department for Work and Pensions (DWP) and the Financial Conduct Authority (FCA).

Originally their focus centred on the legal duties of defined contribution (DC) pension schemes and boosting retirement savings. Although this remains paramount, there’s also been a notable shift towards driving up the quality of workplace pensions for better outcomes for members. This, of course, should be the reason for being for all master trusts.

Master trust authorisation process complete

Last year we saw the end of the first phase of this culture shift towards better governance in pensions – master trust authorisation. When the authorisation process came to an end in the early autumn, 38 master trusts successfully gained authorisation, reduced from 93. That said, many master trusts decided not to apply in the first place.

Since that highly rigorous process ended last autumn, the question ‘what next’ has loomed large over the sector. In reality, the next steps we take aren’t a great secret as we all expect tighter regulations as the drive towards further market consolidation, led by TPR and the DWP, continues to unfold.

Why do regulators encourage consolidation?

The focus of the regulator will most likely be directed at challenging smaller single-employer DC trusts that lack resource and access to specialist support and are unable to meet the required standards of governance or proposition development.

Much of this change in the pensions landscape has been brought about by the advent of auto-enrolment, with larger DC pension schemes growing substantially in membership and assets under management, making them significantly bigger than many smaller DC pension schemes.

As a result, in the last decade there has been a clear drop in the number of small DC schemes registered. Statistics from TPR revealed that the number of pension schemes with 12 or more members has more than halved between 2009 and 2017, falling from 4,570 to 2,180.

Smaller schemes face significant challenges

How much further this figure continues to reduce remains to be seen. We know that the requirements of time, resource and cost can present major issues for some smaller DC pension schemes looking to meet the increasingly burdensome regulatory requirements. According to a TPR report last year, larger DC pension schemes were able to meet 84% of the regulator’s key governance requirements in contrast to both micro and small DC pension schemes, who only met 15% of them.

There are numerous conversations already taking place between trustees, sponsors and advisers of these smaller schemes and their counterparts at master trusts about if and how consolidation can be achieved in the best interests of members.

We must also remember that it isn’t just the smaller outfits that will consolidate. In the 1990s, there were 25 active group pension providers but now this is a much more streamlined 7.

Quietly evolving towards consolidation

In terms of pensions governance, we are certainly in a better place than we were 10 years ago, but there’s still a long way to go before we can honestly say there’s complete fairness in the market. There will be no Big Bang but a quiet, methodical evolution over the next decade.

After all, nobody expected consolidation to happen overnight.

Read more

Find out more about what to consider on our webpage about consolidation of trust-based occupational pensions.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

What to consider when transferring schemes

The UK occupational defined contribution (DC) market is one of the least consolidated in the developed world, but things are changing. Single-employer DC trusts are in the spotlight.

At the time of writing, there are 2,180 pension schemes in the UK. That’s considerably more than Australia, for example, with just 233, and Mexico, which has only 11 workplace pension schemes.

A growing trend for consolidation

The Pensions Regulator (TPR) and the Department for Work and Pensions (DWP) are encouraging consolidation in the UK DC landscape, promoting fewer, higher quality, better regulated schemes.

Single-employer DC trusts are being pushed along by a unique range of factors, including greater costs. Short service refunds were abolished just over 4 years ago. This prompted a rise in membership and a proliferation of small pots for many active DC pension schemes. However, for the larger number of smaller pensions schemes who offered this option, it can be costly and complicated to administer.

In the same year we saw the new 0.75% charge cap for default funds. Larger schemes, like The People’s Pension, have used their scale to make sure high-quality investment options remain available below this rate. Smaller schemes may have difficulty achieving this and, if they want active investment options, the charge cap poses significant challenges.

Regulators expect high standards of governance

Other pressures come from The Pensions Regulator. Its 2016 paper on 21st century trusteeship offered clarity on what they expected of pension scheme trustees. This includes:

  • their roles
  • board composition
  • risk management
  • and a host of other issues.

This renewed focus makes it abundantly clear that the expected standard of governance is high.

The regulator has also pointed out to trustees its high expectations of both transparency, not least in the chair’s annual statement, and good investment choices for members. DWP regulations also mean trustees must strengthen their approach to environmental, social and governance (ESG) issues in their investment options.

Trustee boards are now required to consider ESG. And this means time and money spent on adopting new policies and working with investment managers to offer new options. These are all material changes – requiring substantial amendments to working practices, policies, processes and the amount of time individual trustees spend on governing their schemes.

Trustees are feeling the pressure

Trustees that signed up to the role expecting a specific time commitment will be interested that the regulator is now asking whether quarterly meetings are enough – and whether the board should meet every month instead?

This increased burden on trustee boards is laid bare by data from the regulator. They have 5 key governance requirements – which range from independence to providing good value for members.

According to a May 2019 TPR report, just 23% of all pension schemes met 2 or more of these requirements. This is perhaps unsurprising, given that in the pensions market, the benefits of scale can be felt in governance, good value and the quality of investment options.

Master trusts: an option for consolidation

If the occupational DC pension market continues to consolidate it seems reasonable that trustee boards of single-employer DC schemes will look at master trusts as a possible consolidation option.

Master trusts operate under the same regulations and laws as single-employer DC trusts, unlike contract-based schemes, commonly referred to as group personal pensions. This means that the trustees have the same direct responsibility toward members’ best interests. Master trusts are just one of several available options, which is why we’ve created a ‘key considerations guide’, setting out what the journey could look like.

Read more

Find out more about what to consider on our webpage about consolidation of trust-based occupational pensions.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

Playing pensions catch-up with ‘Down Under’

Forget year-round sunshine and shrimps on the barbie. It’s the Australian pensions system that many in our industry have looked to with envy.

For the last 25 years, under the compulsory superannuation model, employers ‘Down Under’ have been forced to pay a significant contribution into a “super”, or retirement fund, for their workers. It now holds huge assets and is the largest defined contribution system in the world per capita.

In the UK, pensions savings have extended to millions more people in the last few years thanks to auto-enrolment, but as a nation we’re still a way behind Australia. As we move towards potential consolidation of master trusts as a result of The Pension Regulator’s (TPR) authorisation process and many single employer trusts are looking to move to a select group of larger master trusts, it’s worth asking what we can learn from Australia’s extra years of experience.

Watershed moment – big is beautiful

Master trust authorisation is at a critical point. Applications have been submitted to The Pensions Regulator and industry predictions suggest the result will be a small number of big players managing workplace pension schemes in the future.

The ultimate aim is for auto-enrolment to evolve into a more stable and effective system of retirement saving. So although we’re taking a different approach we’re heading in a similar “big is beautiful” direction to the multi-trillion dollar Australian pensions system where AUS $2 trillion of assets are managed by around 225 funds.

Play catch-up but don’t play with fire

We’re still a few steps behind so it’s a good opportunity to take stock. One thing is clear to me – we must learn useful lessons from Australia and avoid pitfalls. My colleague Gregg McClymont has previously analysed the issues and lessons around various scandals which hit the industry. Read his thoughts here.

I agree that the shocking headlines about greed and misconduct by banks and other commercial providers should serve as both a warning and an opportunity. At the heart of this is the question over proprietary/for-profit compared with not-for-profit – something I discussed with colleagues and financial advisers at a recent event we, The People’s Pension, organised.

To profit or not-for-profit?

In Australia, the numbers stack up in favour of not-for-profit funds which make up the top 10 performing pension funds across short and long time periods. Even before official enquiries were launched into banking and superannuation, people could see the long-term financial benefits of not-for-profit – or profit-for-member as they are often referred to in Australia.

The “profit-for-member” terminology resonates well for me, coming from an organisation which has a firm commitment to putting people ahead of profit. The People’s Pension has no shareholders to answer to so we can genuinely ensure that any profits are ploughed back into improving value and service for our customers. Our Charitable Trust also gives back to society and individuals as part of our mission. I’m proud of all this from a moral standpoint but I also believe it’s a good approach for the industry – and retirement planning – in the UK as a whole.

Where does this leave us?

At The People’s Pension we’re fortunate (as are our 4m members) as one of the largest master trust workplace pensions in the UK that we can provide stability and experience in the pensions landscape. We should build on the consolidation process of master trust authorisation and champion the value we can offer people through a long-term, “profit-for-member” approach to pensions.

Anyone focusing on chasing short-term returns or making bad decisions in the interests of sponsors rather than members should take heed of the Australian lessons. If we can all do that, then hopefully big really will be beautiful for British pensioners.

Glenn Dobson is a former National Development Team Manager at B&CE, provider of The People’s Pension. He has been replaced by Phil Taylor.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.