Is contract-based versus trust-based really the question?
Automatic Enrolment (“AE”) has resulted in an increase in Defined Contribution (“DC”) pension saving through Master Trusts (“MTs”). This trust-based approach has overtaken contract-based arrangements, such as Group Personal Pensions, as the most popular form of DC saving. A key attraction of trust-based saving (to employers and savers) is that Trustees have, in theory, a fiduciary duty to act in the interests of the beneficiaries of the trust. The Occupational Pension Schemes (Charges and Governance) Regulations 2015 prohibit a trust’s Trust Deed & Rules containing provisions that require the appointment of specific service providers. However, many MTs active in the AE market utilise services provided by associated service providers and/or shareholders in associated service providers.
These service provider-related MTs are effectively acting in a manner similar to contract-based arrangements. This blurring of the lines between trust-based provision and contract-based provision is set to increase, albeit in a different dimension, with the mooted capital-adequacy requirements for MTs. The overlap between trust-based and contract-based provision has parallels in the roles and responsibilities of their respective regulators, The Pensions Regulator and the Financial Conduct Authority.
Would employers, savers and trustees not be better served by a simplification of the regulatory regime, grouping providers by function rather than form? MTs with links to service providers are effectively closer to contract-based arrangements than trust-based arrangements. Why not regulate these service provider-related arrangements in the same way as a contract-based arrangement? The Trustees would be freed from the discomfort of trying to comply with their legal obligations while commercial realities hover over their decision-making processes. Employers and savers would be spared the confusion of thinking they have the protection of a fiduciary acting solely in the beneficiaries’ interests. The contract-based regulatory regime would likely give beneficiaries of service provider-related MTs greater clarity as to the protections they currently actually have.
The theoretical protections of a trust-based approach might well exist in reality for some service provider-related MTs. However, the benefits of a regime that is simple to understand and implement potentially outweighs well-intentioned but often-circumvented provisions. How about dividing arrangements between for-profit (including both contract-based arrangements and service provider-related MTs) and non-profit (MTs independent of suppliers)? The flow of profits and (corresponding) source of financial support in the former case is clear. The use of surplus and source of financial support in the latter instance would need to be defined too. The two cases are analogous to proprietary and mutual companies. Does this proposed distinction not give a clearer picture than the current debate between trust-based and contract-based arrangements?
FinTech Co-Founder | International Financial Services | Strategy | Growth and Revenue | Pension and Retirement
8yAn obvious one to throw into the ring is; we need to understand where any conflict of interest lies, whether in the board and/or in the operation of any scheme etc. A good debate to be had...
Institutional Director, LGT Wealth Management
8yAn interesting piece, Ralph, and definitely to keep pushing the governance debate. Echoing some of Ash's comments, I do think placing service-provider MTs together with GPPs does presume that the fiduciary duty is more or less a fig leaf: that they are little more than GPPs with a raincoat. Not a view the independent trustees appointed would necessarily endorse! Beyond this, there is the regulatory arbitrage issue that particularly impacts on legacy members marooned in old neglected GPP default funds (due to their own inaction or that of the provider). President Truman used to have a sign on his desk saying "The buck stops here". I wonder whether we would get a unanimous verdict as to whose desk this should sit on for a GPP?
Chief Actuary (All views expressed are my own)
8yGreat suggestion Ralph Frank. Has the drive for profit in the banking sector and the consequences of excesses in that sector created a general wariness of profit-driven financial services providers? Perhaps the high barriers to entry that are likely to emerge (have already emerged) in the MT sejctor requires more emphasis on regulating this industry? Under the 'mutual model' issues relating to inter-generational equity will no doubt have to be resolved?