For a few years now a cold war has been raging between independent financial advisers and insurance companies over group and personal pensions business. It all started with the advent of auto-enrolment (AE). With ordinary businesses thrashing around wildly, trying to work out how to automatically enrol new staff into a low-cost pension scheme, providers were busy building AE-friendly group personal pensions and master trusts designed to offer an alternative to the state-sponsored Nest.
Up until that point, advisers and providers had lived alongside each other in relative harmony. The advisers focused on keeping a close working relationship with business clients, supporting them to set up, review and manage their staff pension schemes and associated services. But while Nest was keen to maintain this friendly arrangement with advisers, it was also targeting employers directly with the promise that setting up a Nest arrangement was simple enough to do yourself. Faced with a state-backed competitor going direct to market, the insurers started to do the same and began writing directly to underlying clients encouraging them to alter or set up new AE pension plans without the need to maintain their advisers.
Given that advisers were no longer able to charge trail fees or fees based ostensibly on contributions made by members, suddenly the prospect of going direct rather than fronting up advisory fees looked palatable. And so war began.
At first, mainstream advisers were unaffected. The largest companies initially tackling AE were working with the larger employee benefit consultants designing sophisticated and large scale solutions. But as medium-sized and smaller companies began to go onstream as part of the Pension Regulator’s staggered staging process, IFAs started waking up to the fact that their clients were being poached by the very firms they had recommended in the first place.
Three years on
Now, more than three years into the AE process, the cold war is in danger of bubbling up into a rather warmer one. Only the smallest firms, and new firms set up after 1 April 2012, are still due to stage.
The fallout of the war so far is clear to see. In a bid to resist the advances of the insurance companies, advisers had no choice but to build their own products. Negotiations and truces had little long-term impact. The only way advisers could protect revenue streams from corporate clients was to offer them bespoke or locally managed pension schemes, and so bypass the enemy altogether. What would be the point of recommending a provider to a client, only for that provider to take over the relationship once the initial set-up was complete, leaving the adviser without any ongoing or future role?
The outcome has been an arms race for building an arsenal of new pension products. And the structure that was settled on was the master trust. The beauty of a master trust is that almost anyone can make one, and by creating their own arrangements – albeit with service providers doing much of the day-to-day work – the IFA becomes the linchpin of the whole arrangement and keeps in control.
That is not to say it is easy, but it is achievable without needing the scale and resources that a large insurer enjoys. You need a trustee, a pensions administrator and an investment platform. With plenty of willing third-parties happy to provide outsourced services, master trusts have sprung up around the country. At last count at least 70 master trusts had been identified, although only a handful had achieved the Pension Quality Mark standard run by the Pensions & Lifetime Savings Association (the organisation formally known as the NAPF) and fewer still were listed by the Pensions Regulator as having been ‘independently reviewed’.
Added to Nest and the other commercial schemes run by specialist providers and insurance companies, that amounts to 100 or more pension schemes. Compare this with a more mature market such as Australia – which now has just a handful of providers. So what will be the fate of all these master trusts?
The obvious answer is consolidation. It was never the intention of the auto-enrolment project to spawn hundreds of new pension schemes. Overseas, consolidation has been driven by profitability – with fees low and competition high, only the biggest survive. But that may not be how it works over here, at least not for a while.
Here the motivation of advisers is to hold on to clients, not generate new profit centres in their own right. By retaining clients, other more profitable services can be provided. Running a master trust for a relatively small pool of clients is unlikely to be profitable for many years. By their very nature, pool sizes and fees start small. If, over the coming years, mergers of IFA groups and specialist providers lead to incidental master trust consolidation, this may not be bad news for the IFAs if it means they have succeeded in keeping their clients away from the life insurers.
Ironically, it may well in future years encourage the acquisition of advisory firms by insurance companies – a move that would put an end to hostilities once and for all. The fact is that with the Pensions Regulator’s staging programme now drawing to a close, only the very fastest growing small companies who have joined master trusts set up by their local adviser will be able generate enough new members and rising salaries to inject the asset growth needed to make a master trust profitable. But it may take many years for IFAs to lose patience with the master trusts they have created.
In the meantime, it may fall to the Pensions Regulator to conduct a review into the market that it, and the DWP, has unwittingly created. That could lead to tougher all-round service standards or fee caps for default funds, or even tougher requirements governing independent trustees.
Many professional trustee firms have taken on multiple master trust appointments, and while there is no inherent conflict in this, concerns have been raised before surrounding the independence of a corporate trustee hired by the provider that effectively runs the master trust.
Equally, a market-wide review into asset management and consulting firms by the FCA may turn its gaze to the increasingly overlapping business interests of advisers (becoming asset managers) and asset managers and life insurers (becoming advisers, or going direct to market). A glance down the list of master trusts reveals a variety of asset managers, insurers and advisers behind the products almost in equal measure.
Is this a brave new world of holistic wealth management, or a basket of conflicts that may attract regulatory attention?
Bob Campion is head of institutional business at Charles Stanley Pan Asset Capital Management
