Steve Webb: The increasing concentration of power in the hands of a small number of trustees is extraordinary
The push for consolidation towards defined contribution (DC) ‘megafunds’ could lead to a “massive concentration of power” in the market, a report from LCP finds.
The consultancy's report – The Pensions Powerbrokers 2: The DC Generation – published today (28 April) is based on analysis of data on scheme assets and 15 interviews with industry figures, including trustees and master trust providers. It found while defined benefit (DB) schemes are increasingly focused on endgame options, the DC sector is experiencing rapid growth and "permanent evolution".
The report noted there are 11 million more workplace pension savers today than in 2012, when auto-enrolment began, with the majority in DC schemes. It said while the number of trust-based workplace DC schemes has declined year-on-year over the last two decades, multi-employer master trusts have grown rapidly since 2017 with combined assets under management (AUM) of more than £200bn.
LCP noted since regulatory focus aims to ensure DC schemes deliver for members and the wider society, with the drive for consolidation to create £25bn+ DC megafunds among key initiatives, it said its report aimed to understand where the power in DC schemes lies in setting strategy, shaping key features of scheme design, and determining how assets are invested.
‘Extraordinary' consolidation
The report found the shift towards megafunds in the DC sector is leading to an "extraordinary" consolidation of power. It estimated that within the occupational DC market, fewer than 50 people, specifically the trustees of the seven largest DC master trusts, oversee more than half of all DC assets, which amounts to over £160bn in AUM. LCP said this consolidation raised questions the government will need to answer as part of the Department for Work and Pensions' consultation on trusteeship.
By comparison, the consultancy's report on the concentration of power in the DB sector found that fewer than 500 trustees controlled more than half of all DB scheme assets, showing the concentration of power in the DC sector is ten times greater than in the DB sector.
LCP added this raises questions as to whether the industry can ensure diversity of thought, what the source of independent thought and innovation will be in a landscape dominated by a select few trustees, what the right balance of power is between this small group of trustees on each scheme and the provider, and how these "mega trustees" will be overseen and regulated.
The interviews conducted showed while independent governance committees provide scrutiny and feedback to group personal pension providers, providers made the important decisions in contract-based pensions. It also found trustees in a DC megafund will have to work to prevent the risk of tweaking decisions already taken by the provider, as providers continue to hold power across the DC landscape as they are often the source of new ideas and make the majority of the day-to-day decisions.
LCP's report also showed the job of DC trustees is evolving and becoming increasingly more challenging due to a combination of regulatory changes and increased scale, while also needing to remain on top of issues such as the value for money framework, meeting new duties on decumulation and engaging with the government's push for more investments in productive finance. It added the contribution of independent insights to meet these challenges will be vital.
‘Muffled' employer and member voices
The report also showed that while the provider's voice continued to hold importance, the employer's voice is becoming "muffled". It said while employers hold power when master trusts compete for their business, once they have paired with their chosen provider, the power balance shifts, with only the largest employers having influence to offer a tailored approach.
Lastly, LCP said the push for consolidation is making the member voice more muted. It said since master trust memberships go into the millions, a member trustee or a member panel will not be able to be "meaningfully" representative of such a substantial membership, with many schemes reliant on large scale data on member behaviour and "ad hoc" research into member attitudes to ascertain what members want.
LCP partner Steve Webb said: "The increasing concentration of power in the hands of a small number of trustees is extraordinary.
"Whilst these individuals will be carefully chosen and typically highly expert, the model of having a handful of people overseeing huge ‘mega funds' raises serious questions which the government has not so far addressed. In particular, much more needs to be done to make sure that there is proper accountability of trustees by employers and scheme members, and that there is scope for innovation and challenge in these enormous financial institutions."
Partner Nathalie Sims added: "There is no doubt that the way pension schemes are run will benefit from the current drive to greater professionalisation of trusteeship. In particular, overseeing multi-billion-pound pension schemes requires a highly skilled group of people, with access to ongoing training and support.
"But it is also important that we have structures in place to make sure that there is plenty of independent challenge and advice for these ‘mega fund' trustees, as well as diversity of thought amongst those who secure these crucial roles in the future of workplace pensions in Britain."
Not a negative
Commenting on the report, Standard Life Master Trust board chair Helen Dean said the UK continued to play catch-up while the benefits of the larger consolidated pension scheme were "proven and well observed" in Australia, Canada and the US.
She said: "The concentration of decision-making power should not be perceived as a negative. On the contrary, such configurations are easier to observe and open to higher levels of scrutiny than the hundreds of single employer trusts currently operating.
"The decisions taken by the megafunds will be some of the most publicly scrutinised, underpinned by the strongest governance, extensive support structures, and undertaken by highly qualified individuals with deep experience built-up over many years."
Dean added: "Though we're at the start of this consolidation megafund journey in the UK, we must stay focused on the opportunity to raise the bar to deliver better outcomes for members across the board, and this includes welcoming heightened levels of professional governance and oversight."
