UK workplace pensions set for more consolidation


After a quiet few months, I foresee the rate of consolidation of DC master trusts picking up over the next few months with announcements over the summer.

This article asks what is driving consolidation and what it means for a pension system rocking from its failure to consolidate data onto a pension dashboard.

What is driving consolidation?
I had breakfast recently with the Chair of a small master trust who has been involved in workplace pensions to and through the introduction of auto-enrolment. He reminded me that chairing a master trust is a full-time job and that many of the decisions he has to take are as tough as those for scheme 50 times his scheme’s size.

His problem is a microcosm of a wider problem, his trust is too small to compete for consolidation and can only grow by keeping existing clients happy. “Clients” in this case means participating employers – who are increasingly looking to the secondary market to get members better deals (typically on price). In short, the small master trust, as a commercial entity is toast, its better off selling itself now – rather than in three or five years where its clients have left.

The technical wrinkles that differentiate schemes are often of more consequence to lawyers than members

Medium sized schemes with powerful private equity backing are looking to compete with the bigger schemes, especially the larger consolidators, and need the assets to cut the deals to make them credible at the top of the market. Now is a good time to offload your smaller scheme – there are buyers.

Finally, the direction of regulation is towards delivery through scale of value. Value comes from a high quality of service along the way (important to employers in the short term) and from high quality investments over the long term (what drives better outcomes). The access to capital that is available from well-funded master trusts allows regulators to feel comfortable when consolidation is put to them.

So ready sellers, ready buyers and a benign regulatory climate mean that any master trust with less than £1bn of assets and some with more, are actively considering selling up.

Is consolidation in the consumer’s interests?
The Pensions Regulator has to consider these interests in the short and medium term, no one can look much further than the end of the decade, it is likely that consolidation will continue beyond then, if we are to move towards an Australian system of Dc superfunds.

Australia is touted as an example of consolidation working for the consumer, the pensions dashboard is an example of a lack of consolidation meaning that savers can’t see their pots and pensions in one place.

A consolidated pension market makes sense for the consumer in the longer term though in the short term, many will lose options that they cherished.

And for employers – who carry the responsibility of administering workplace pension contributions compliantly, a simpler system where there are fewer and easier choices, makes sense. The small pots problem becomes manageable when the feeds needed to operate systems such as “pot follows member” are reduced in number to the fingers of one hand.

Ultimately, members will benefit from a simplification of the system, as a result of employers finding ways to understand their pension choices. The VFM Framework operates properly where there are tens rather than thousands of schemes under assessment.

What’s stopping us consolidating?
The complex system of checks and balances that ensures schemes consolidate without “member detriment” can be a curse rather than a blessing.

The technical wrinkles that differentiate schemes are often of more consequence to lawyers than members. Think minimum normal retirement dates.

But more importantly, the proliferation of charging structures, platforms, funds as well as “scheme rules” mean that it is never as easy for schemes to transfer ownership as it seems.

And then there are the vested interests that get lost; – jobs – not just in operations but in governance; – lucrative advisory deals and of course the consolidation of professional service contracts for lawyers and auditors. Everyone has notice periods, no-one is happy to lose work.

And many small schemes can legitimately argue that they have pioneered innovation. Master trusts such as Malcolm Delahey’s SuperTrust for instance. Many small schemes which are now part of Cushon and Smart had features about them that they could be proud of and which may not survive as the consolidators combine investment and service propositions.

Many of the smaller master trusts which we will lose in the months and years to come have built up special relationships with their participating employers which will be lost – or at least changed.

With so many stakeholders tied up with each master trust, there are many more things to consider, many more interests to serve.

Towards a better market
We sometimes forget that we have a highly sophisticated professional services market in the UK – one that is the envy of the world. We may feel that we are making heavy work of consolidation – but we are making a good job of it. Members interests are being looked after, the master trust assurance framework is working and consolidation is happening in an orderly way.

At a time when there is a lot to be worried about, the state of our workplace pension market is improving at a pace. For that we should be thankful.


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Henry straddles the world of traditional finance and FinTech and is an active entrepreneur who helps people make good pension decisions. He founded AgeWage and the Pension PlayPen to map the pensions genome and ensure everyone gets data driven information on value for money

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