PensionsSep 21 2017

Competition watchdog to probe master trusts

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Competition watchdog to probe master trusts

A lack of competition in the investment consultancy space could be directly harming individual pensioners, the Competition and Markets Authority has said.

The Competition and Markets Authority has published the scope of its investigation into the investment consultancy sector after it was requested to look into this sector by the Financial Conduct Authority.

The investigation will cover investment consultancy services which provide advice to institutional investors – mainly pension funds – and employers on their pension schemes as well as fiduciary management services.

The Competition and Markets Authority will be investigating including whether difficulties in assessing, comparing and switching consultants mean they have little incentive to compete for customers, whether conflicts of interest reduce the quality of the service and whether barriers to entry and expansion mean there are fewer challengers.

On the issue of conflicts of interest, the Competition and Markets Authority said there are concerns that investment consultants are incentivised to steer clients into their own in-house products, particularly their own fiduciary management or master trust offering.

The Competition and Markets Authority stated: “This potential conflict may raise greater concerns given that employers are likely to have weaker incentives to monitor and challenge their advice.

“In addition, since, for these types of pension, there is no guaranteed retirement outcome for pensioners, any competition problems that we find are likely to have a more direct harmful impact on individual pensioners.”

The authority has said it will look into the controls for fiduciary management and master trusts and the extent to which trustees or employers scrutinise and tender for these services.

It added: “We also note that there is an existing price cap in place for master trusts which was put in place to protect auto-enrolled savers from high charges.

“We may give further consideration to the pricing of master trusts, if there are concerns in relation to this potential conflict.”

Among the remedies the Competition and Markets Authority has said it will consider are mandatory tendering for master trust services, prohibiting investment consultants from offering these services and measures to control prices.

The Competition and Markets Authority also said there were concerns that tendering and switching rates for investment consultants appeared to be low, and that customers – particularly pension trustees – find it difficult to monitor, challenge and assess the quality of consultants’ advice.

It has also said there are concerns that the monitoring of advice given to employers about defined contribution schemes is less frequent than for defined benefit schemes.

damian.fantato@ft.com