Published by Paul Leandro on
Estimated reading time: 4 minutes
We’re also seeing consolidation in the number of established providers, including for example: Scottish Widows / Zurich; Aegon / Blackrock; Friends Life / Aviva.
The regulator’s new authorisation regime is leading to the smaller less viable Master Trusts exiting the market as rapidly as they sprang up; either by winding up completely or being absorbed by the larger Master Trusts. 18 months ago there were 100 or so Master Trusts in the market – this could reduce to around 40 in the next six months.
The general consensus of a consolidated DC market is that it is a good idea. After all it should bring economies of scale and reduced risk:
However, are there disadvantages too? Are there any unintended consequences?
To study this, we travelled to Australia and to an industry more mature than the UK’s and a place where “scale” is the watchword – it holds in total around $3 trillion of assets under management, and growing! However, it is also where the decrease in the number of standalone schemes (or “Corporate Funds” as they call them) has been stark.
The number of Corporate Funds fell by 96% in the 11 years to 2014. And this trend has continued, with the number of these schemes reducing from 44 in March 2014 to 24 by December 2017.
At the end of both trips, we came away thinking big is not necessarily always best. The largest schemes still continue to grow, but not necessarily because of proactivity in the market; more perhaps because the mandatory contribution system and the positive investment returns post credit crunch means they can’t help but not.
Also, with the natural growth of these schemes has come some behavioural traits that we couldn’t help but notice.
Consolidation is the “game in town” in the UK, particularly as the regulator’s latest proposals are for smaller schemes in future having to document and justify why they shouldn’t wind up.
As an independent consultancy, we are becoming more and more involved in scheme wind ups and transitions to, mainly, Master Trusts. This is often despite the fact that some of these schemes are very well run and are focussed on providing the best benefits possible for the members. However, the governance burden and operation costs have often got too much, meaning the only feasible option is to move members’ assets elsewhere.
Arguably there is no better time to move to a Master Trust. Even though we still await the results of the authorisation process, we know which providers are likely to be approved, as we know those where growing their DC book is core to their business model. Currently, the market is extremely competitive with the younger Master Trusts wanting to create scale as quickly as possible, and the more mature Master Trusts wanting to create a stronger foothold. Providers are effectively “buying” assets by offering very low charges and, in some cases, offering to foot the bill for asset transition costs (reaching into the hundreds of thousands of pounds of cost in some cases).
These competitive terms will not be around forever.
Biggest is not always necessarily best. We could be heading to a future where we have only a few providers / schemes, which offer increasingly similar propositions and are purely focussed on asset gathering, rather than improving outcomes for members. Gone could be the days when there are a good number of schemes designed specifically for the membership and who endeavour to provide the best benefits possible for members. For one, I sincerely hope this will not be the case!