PASA’s Master Trust Working Group provided a response which supported the move to consolidation while highlighting the flaws in the proposed approach.

 

The key question asked by DWP was ‘How can government, regulators and industry incentivise scheme consolidation?’

The obvious response is simply to regulate to improve governance. Government could impose such a high bar it becomes unworkable and unattractive for single trusts to continue to comply. But is this the outcome the government is really looking for? There are a large proportion of well run medium to larger arrangements which shouldn’t need to consolidate. We’d like to see government focus on:

·      Ensuring the poorly run schemes are consolidated

·      Not leaving smaller schemes behind (which probably need help first)

 

Incentives aren’t needed and wouldn’t be beneficial.

 

The consultation focused particularly on how to incentivise DC schemes with between £100m and £5bn of assets under management (AUM) to consolidate. Schemes with over £100m of AUM are likely to already have robust governance, lower costs and access to lower charges and educational tools.

 

Government shouldn’t confuse ‘large’ with ‘well governed’, or indeed ‘small’ with ‘badly governed’. There’s nothing magic about reaching £5bn of AUM which changes the governance of a scheme. Government should focus on poorly run schemes regardless of size; their focus should be better outcomes for members, not eliminating small schemes purely because of an arbitrary measure of size.

 

There are clearly risks associated with consolidation, so it’s important to consolidate where there’s a benefit to doing so, not just because of size. The key risks are:

·      Consolidation could lead to reduced cost/quality competition and therefore innovation from providers. If government encourages schemes over (say) £1bn or more to consolidate, we anticipate some newer authorised Master trusts will be forced to consolidate again - stifling competition, innovation and new entrants to the market

·      Capacity risk – depending on the timeline for consolidation there may be capacity issues, and hence the volume of transitions would need to be managed carefully over time

·      Systemic risk – resulting in greater concentration of not just providers, but systemic risk in infrastructure/application providers supporting much larger but fewer schemes

·      Loss of direct employer support for third party provision

 

We can’t assume consolidation would be on the same advantageous terms which large schemes have historically been offered. If Master trusts have to choose, they’ll make the most commercial decisions for themselves, not the industry or HMG.

 

For instance, a provider offered both a £1bn and a £50m scheme will more likely give preferential terms to the larger scheme. This could leave smaller schemes unable to access the whole market, as they could be offered either less favourable terms or even potentially find they have no offers at all if there’s no provider capacity at the time.

And of course, the transitional cost of change will be high for smaller schemes. The consulting and legal costs look pretty similar for a scheme of <£100m and £1bn – so they’ll be disproportionately higher for the small schemes potentially in focus.

 

Finally, we question whether the pensions industry has sufficient capacity over the short term to deliver the sort of consolidation DWP is looking for. This is partly about the need for legal and consulting advice, but it’s also about the Master Trusts themselves. Master Trust providers are at risk of having their own capacity squeezed. Capacity isn’t just limited by the number of working hours available, they may also have pre-funding in place which could limit the level of capital available to fund growth.

 

In summary, we absolutely favour incentives to deliver good member outcomes, and this could include a need to consolidate some scheme which are unable or unwilling to provide good governance and outcomes for their members. However, focusing on monetary benchmarks, such as fund size, costs, charges and AUM, detracts from the overall aim of having few, very well governed schemes, instead of an oligopoly of very large schemes with significant asset portfolios.