Master trust consolidation – at what cost?

The Pension Schemes Act has begun the process of boosting mastertrust quality, with draft regulations for a stringent authorisation process awaited.

The recent review of value assessments of small and medium-sized schemes, mandatory capital adequacy and a review of the charge cap will also help.

It is not a question of how many trusts choose to consolidate – the real issue is how the right standards are defined

Number of schemes is unimportant

The desired or expected level of consolidation remains unclear. One hears vastly differing estimates of the target number of mastertrusts.

In the past month I have heard 50, 40, 30 and eight being quoted from sources within the Department for Work and Pensions and the Pensions Regulator. Clearly, there is no consensus view.

This is as it should be: settling on a figure is putting the answer before the question. The focus should be on setting standards for governance, security of assets and costs.

Then mastertrusts can decide whether to meet these or consolidate. If they all wish to meet adequate standards then that is a good outcome.

When I hear that a certain number of approvals are “expected” it seems to presume the extent to which sponsors will choose to invest, put capital aside and carry on, or alternatively seek to consolidate into another mastertrust. This cannot be known at this stage.

What are we trying to achieve?

We need to be clear on the aims of this policy: one is greater security of member assets. If consolidation improves this then so much the better.

However, the authorisation process under the Pension Schemes Act gives the regulator the ability to make the level of security as high as it wishes, and does not necessarily require consolidation to achieve this.

Another aim is greater value for money in pension schemes. This is quite a subjective assessment, and the level of improvement delivered by consolidation may be more modest than many expect.

Careful with the definitions

The regulator’s recent review of the value for money of smaller and medium-sized trusts was accompanied by policy descriptions implying that all members of all schemes should receive the same “value”.

These statements need care if the same strategy is applied to mastertrusts. There is a danger of oversimplistic thinking and two issues are being confused and conflated.

The first is the issue of governance standards. Ideally all scheme members should receive a similar standard or at least a minimum standard.

The regulator can define these standards, and should ensure that members receive a coherent and holistic assessment of value for money, well communicated to them, if they wish to study it.

The second issue is one of value for money in the context of member charges and costs.

Here, almost all pension providers will operate pricing that varies according to the size of the employer and other characteristics.

If the authorities want to aim for similar charges for all members of all schemes, then they need to persuade the whole industry to change their methodology.

Cautious support for consolidation

These issues should not be confused. It should be noted that many types of employee benefits have more availability and cheaper cost for larger employers. Members of smaller employers have other benefits and value from being part of smaller employers, however, larger employers can negotiate lower pension charges.

So, even though considerable consolidation may be beneficial in various ways, the level of desired consolidation is overstated by many consolidation ‘zealots’ and the cost itself of enacting the consolidation underplayed.

The correct approach for regulators is to define the requirements, with no preconceived notion of how many mastertrusts will pass those requirements. It is not a question of how many trusts choose to consolidate – the real issue is how the right standards are defined.

Colin Richardson is a director at professional trustee company PTL