Lewis Brown is a committee member of the Association of Member-Nominated Trustees
The latest of the Association of Member-Nominated Trustees’ (AMNT’s) regular columns for PP considers the continuing growth of consolidation among pensions schemes and cautions that the industry should not fall into the trap of assuming that economies of scale will always be a path to better quality.
Consolidation! It's been a bit of a clarion call within the industry, hasn't it? An inevitable slide towards us having fewer but larger schemes, governance burdens centralised and ever-more complicated investment strategies overseen by a tiny cadre at the top of the evolving pensions pyramid.
Unfortunately, the current state of the industry has been shaped by a long tail of underperforming arrangements; schemes with weak governance, limited resources and perhaps little ability to access more sophisticated investment strategies. For the sponsors of these schemes, consolidation must appear as a panacea, a pill that cures all of these ills with one sharp swallow.
But this scenario doesn't cover all small schemes – in the context of pensions large won't always equal good, just as small doesn't always equal burdensome.
Many smaller schemes continue to be well governed and effective in their decision-making processes, managed by trustees with direct links to both scheme sponsor and member. And this is a really critical point to make – these smaller schemes can more easily retain a strong and direct connection to their members (and indeed their sponsoring employers) than many of the larger and more commercialised arrangements.
Experience over the last few years very clearly shows that as schemes fall into consolidation, the connection between a scheme member and the decision-making structure becomes increasingly abstract. The role of member representation and the representation of their views at the decision-making table continues to creak under pressure, with evidence showing that the number of member-nominated trustees is falling as we see consolidation accelerate.
In addition to this, there are clear concerns that the larger and more centralised governance models not only risk diluting that member voice but do very conspicuously remove that voice.
This leaves members feeling that decision-making is concentrated within a relatively small London-centred professional network. The industry increasingly appears willing to treat the measurable benefits of consolidation as self-evidently outweighing the less tangible qualities that schemes may lose alongside it. Value for Money, governance consistency and access to scale may be comparatively easy to demonstrate, but diversity of perspective, local accountability and genuine member connection are far harder to quantify. This does not make them unimportant.
Yet the direction of travel increasingly feels set. Even The Pensions Regulator's current consultation on its future corporate strategy appears to assume ongoing consolidation and commercialisation as the natural evolution of the market. But should we allow that assumption to pass without prodding a little at it?
Let's take a look at another emerging industry trend – a greater appreciation of systemic risks.
Trustees and governance boards should be well versed by now in ensuring that consideration of climate and sustainability issues are baked into all of their processes, but in addition to this many boards are pivoting to horizon scanning and assessments of risk co-occurrence, preparing their schemes for the storms ahead.
Geopolitical instability, equity concentration and AI disruption are causing headaches up and down the country – who could have guessed in January that so much time would have been spent pondering the Strait of Hormuz?
It's difficult to see the same few firms of advisors working with small numbers of consolidated professionals reaching anything but a broad uniformity of thought when planning for these potential eventualities. If we take that a step further, we could imagine a scenario where that concentration of opinions in investment strategy, governance practices and strategic approaches may itself become a systemic risk.
To counter this real threat to members interests the AMNT has recently launched a manifesto calling for a change in the law to make it mandatory for a minimum of 33% of all scheme boards to be made up of MNTs. The association is also calling for member representation within the governance structures of defined contribution master trusts and emerging collective defined contribution schemes to be compulsory.
None of the above should be taken as an argument against consolidation where it genuinely improves member outcomes.
Poorly governed schemes with limited capability should not be preserved for sentimental reasons, but nor should the industry fall into the trap of assuming that economies of scale will always be a path to better quality. A healthy pensions ecosystem should contain a degree of diversity: different governance structures and different investment perspectives certainly, but all overseen through direct forms of member representation.
As Margrethe Vestager, once European Commissioner for Competition, said: "I think a lot can be said for consolidation, but I think it should be done for the right reasons".
And that is the key. The objective in the consideration of consolidation should not be to deliver an assumption of a future of fewer schemes – it should be that whichever path is chosen leads to a better pensions' outcome for the members of those schemes. For, after all, it is for the benefit of the members, not fund managers or professional advisors, that pensions exist.
Lewis Brown is a committee member of the Association of Member-Nominated Trustees
