The Pension Schemes Bill (the Bill) is expected to be enacted in 2017 and focusses on protecting savers and maintaining confidence in pension savings.
The pensions market has responded to the introduction of auto-enrolment and has developed a new product – the workplace Master Trust “scheme”.
This Bill aims to ensure that those saving into a Master Trust scheme, a form of multi-employer occupational pension scheme which employers are able to select for their workers rather than needing to set up their own pension scheme, are protected.
The Bill also amends existing legislation to support the Government’s intention to cap early exit charges and ban member-borne commission charges in certain occupational pension schemes.
Like Janus, the two headed dog we celebrate in January, the Bill looks forward to the inclusion of hundreds of thousands of new employers into auto-enrolment, and backwards to the legacy of personal pensions and their predecessors , many of which are reaching maturity.
The Bill is important to the pensions industry and will have three impacts
- It will drive consolidation among master trust providers between today and 2020
- It will improve outcomes for most people with insured occupational pension benefits (including AVCs)
- It will continue to polarise regulated advice between those who take it and those who rely on guidance.
In this article, I will expand on these three points. The details of the Bill and subsequent amendments (from the House of Lords) can be found here http://tinyurl.com/gslhurg
Impact one – master trust consolidation
The “pop-up” master trust has been a feature of many consultant’s pension strategies since RDR. In the absence of an obvious way to take advisory fees from products, corporate advisers have decided to manufacture the products themselves. Participants have ranged from the big three actuarial consultancies, employee benefit consultants and corporate IFAs. Some of the master-trusts are ,no-more than white labelled versions of others , but the general estimate is that there are now some 70 AE qualifying master trust structures available to employers.
What pops up, can pop down (as anyone familiar with the popular arcade game of crab-thrapping knows). We know of many master trusts that are getting ready for a pensions equivalent of the insolvency pre-pack, having no intention of jumping the various hoops proposed in the Bill. This activity is covert but discussions with stronger master trusts, intending to meet the new solvency and governance standards is already underway.
Advisers operating in the scheme selection market (and there are very few) are wary of putting forward master trusts with invisible or weak business plans. Picking survivors is a matter of judgement as no master trust provider is waving the white flag, but First Actuarial estimate that there will be no more than ten master trusts operating as “live” QWPS by the end of the decade. Whether the consolidation process will be smooth is a matter of speculation. How clean the data is, how reconciled the investment administration and how “pre-packed” the provider can present the proposition is a matter for speculation.
Impact two -legacy charges
“The Bill amends existing legislation to allow regulations to be made which override terms of certain contracts which conflict with the regulations. This seeks to support the government’s intention to introduce a cap on early exit charges in certain occupational pension schemes”.
The extension of the charge cap legislation already in the pipeline for contract based schemes to cover member-borne commission charges arising under existing arrangements will impact insurance companies more than advisers. Many of the schemes in question are now “orphaned” of their advisers and advisers still managing such arrangements are typically independent of commission.
Conversations I have had with insurers with substantial back-books with commission based charging structures suggest that the impairment to their embedded value will be substantial. However, these legacy providers (aka Zombies) have little overlap with the insurers active as QWPS providers. Our view is that the legacy exit-fee caps are a consumer tax on bad-practice, the insurers are paying for mis-sold distribution , dressed as “ongoing advice”.
Impact three – polarisation of advice
Although the Bill originates from the DWP, it will be enacted in the context of a number of Treasury initiatives designed to bed down the major changes brought by the RDR, auto-enrolment and FAMR.
The Bill assumes a market where workplace pensions are selected and operated by employers without the help of regulated advisers. This is in line with feedback from the Pensions Regulator which has long been telling the DWP it is accountants and their payroll teams who are helping employers select and manage both auto-enrolment and the ongoing contribution management of the workplace pension.
Similarly, the Government’s tenacity in demanding the end of exit penalties from commission based pensions is driven by the absence of advice on these pensions from those who have received commissions.
Once again insurers are “on the hook” for the advice given by others. People who have legacy pensions, will increasingly be looking to consolidate these plans. The Government hopes that the launch in 2017 of the prototype pension dashboard will accelerate this process, but the principal driver is the arrival at retirement of the baby-boomers. Excitement at the possibility of using pension freedoms is tempered at the prospect of losing a good proportion of the pot to pay early exit charges.
While advisers can celebrate higher transfer values from legacy DC pensions, they should be wary of celebrating too hard. While the Government has so far focused on the accumulation of money in workplace pensions, regulation (especially on costs and charges) on the decumulation phase, is already under consideration,
The FCA’s interim Asset Management Study and its CP16/30 paper on transaction charges suggest that the regulatory focus will continue to be on the outcomes of workplace pensions and what is seen within Government circles as “unnecessary layers of intermediation.
The 2017 auto-enrolment review will now incorporate a review of the workplace pension charge cap – specifically to consider including transaction costs within it.
At the same time, the DWP has reopened consideration of the defined ambition legislation as part of its Green Paper consultation on defined benefit schemes. In the words of the new Pensions Minister “nothing has been ruled out”.
The general direction of travel is clearly towards a polarised world where advice is purchased by the wealthy and guidance offered to the mass market. The reorganisation of Pension Wise is underway as is a consultation on the definitions of advice and guidance.
The blurring of the distinctions between adviser and provider evident in wealth management is under threat from the Pensions Bill. The concept of “vertical integration” within accumulation master-trusts is no different (in Government eyes) to the concept of “vertical integration” in the operation of wealth management platforms.
The Pensions Bill’s most important impact may not be immediately apparent, but within Government it is another step towards a disintermediated market where financial services are distributed through the employer, money invested in defaults and charges capped to ensure that the supply chain is kept as short as possible.
