Advisers who use master trusts in vertically integrated firms are at risk of conflicts of interest, with one expert stating this creates bias towards that particular master trust.
Henry Tapper, director at pensions consultancy First Actuarial, has expressed concerns about ‘vertically integrated’ adviser firms, where an adviser is responsible for both the asset management and administration of a scheme.
Regardless of the size of company, the same conflicts of interests arise where vertical integration is used by companies which set up their own master trusts, Mr Tapper said.
Speaking to FTAdviser Mr Tapper said: “We think that whether you are big or small you’ve got the same fundamental conflict of interests which is that you are making a product which you are going to make money out of and what that does is it creates a bias towards that product, against products which you aren’t going to make any money out of.”
He added that this creates a false market, and that he believes advisers should advise, and product providers should provide.
“We don’t like the bias that is created - it is not the same as commission but it is similar.”
Last year, the Treasury warned in a better workplace pensions paper that “where master trusts use a vertically integrated provider there may also be greater potential for conflicts of interest”.
As a consequence the paper contained proposals to strengthen the independent governance of master trusts, including that master trusts have a minimum of seven trustees, an open and transparent recruitment process of independent trustees and arrangements to ensure that members’ views are directly represented.
Mr Tapper said: “If you are in a situation where you are calling yourself an independent financial adviser I think you have got a duty of care to try and do your best to research what the market has to offer.”
Lighthouse Pensions Trusts is one adviser firm which has an integrated proposition, however Roger Sanders, managing director at Lighthouse Group said that the firm is “horizontally integrated” as opposed to vertically integrated, which is “preferable”.
He said: “Lighthouse Pensions Trust is an unbundled master trust with all of the components interchangeable if the trustees so desire; in fact even the trustees can be changed in certain circumstances.
“Lighthouse Group is simply the sponsor and distributor of the Lighthouse Pensions Master Trust. We firmly believe that a horizontally integrated unbundled master trust framework is superior to any other model and leads the way in transparency and delivering favourable member outcomes.
“A vertically integrated model ties in an employer, arguably to an unacceptable degree, as it is impossible to fire the trustees, remove fund managers or sack poor performing administrators, if all of these services are supplied by the master trust provider.
“And the situation is even worse if the employer has used the provider’s auto-enrolment middleware, as all employee records are with the same supplier.”
Carl Lamb, managing director at Almary Green, agreed with Mr Tapper in that the inherent problem with using vertically integrated master trusts is the conflict of interest.
“The issue of master trusts is that they are not regulated at the moment.
“With a master trust the death benefits are all encompassing - you are relying on the trustees to follow your wishes. They provide a global overview as opposed to an individual basis.
“We don’t use them because of the conflict of interests.”
ruth.gillbe@ft.com
