The growing move to outsource group personal pension assets to master trusts in the U.K. has set off a race between money managers and consultants offering bundled services.
A wave of mergers and acquisitions in the U.K. over the past year has saddled some defined contribution plan sponsors with a jumble of group personal pension plans, industry sources said. Sponsors now are feeling pressure to outsource those retirement assets — estimated to be £160 billion ($215 billion) in 2016 by consultancy firm Spence Johnson — to master trusts because of the high cost of governance and plan design complexities.
"Every firm that offers a master trust is in competition with one another," said David Baird, head of proposition development at Willis Towers Watson PLC, the sponsor of the £2 billion LifeSight Master Trust, as the governance of DC plans is increasing and the plans would rather outsource plan assets to master trusts.
In particular, the three largest consultants — Mercer LLP, Aon PLC and Willis Towers Watson — have repositioned their retirement businesses to emphasize the master trust business, which includes investment consulting, over advisory services they offer to defined benefit plans.
Consultant-led master trust assets are expected to double by 2026 to about £60 billion and could hold one-fifth of all assets in the total master trust market, with gains coming at the expense of master trusts offered by money managers, according to Spence Johnson.
The largest consultants have been extending their access to DC plans since 2012, with the advent of auto enrollment in the U.K., by offering bundled arrangements that incorporate investment consulting, record keeping, investment management and, more recently, participant communication and debt management tools.
As part of the master trusts they offer, consultants now also determine the asset allocation and glidepath for consolidated DC plans. By taking on a larger role in DC, consultants are coming into direct competition with money managers offering similar bundled solutions. However, these managers often provide investment management services to the same consultants' master trusts, so the relationship with consultants has become tricky for money managers to navigate, sources said.
And consultants have one edge over money managers: existing relationships from their advisory businesses, which they can leverage to get better access to DC assets. Sources said having two streams of revenue is more lucrative for consultants so they focus on the master trust business over pure investment consulting.
Focus on 2 businesses
Sophia Singleton, partner and head of DC consulting at Aon in Epsom, England, said: "We are focusing on both businesses — investment consulting and our master trust — based on client-by-client demand. Clients want investment consulting, investment management, governance and record keeping together as they struggle to keep up with legislation."
Aon declined to provide the size of assets in the Aon MasterTrust citing the ongoing investigation by the U.K. Financial Conduct Authority into the influence of consultants in the DC market due to conflict of interest concerns raised in an asset management review last year.
However, Ms. Singleton added: "We would never run selection exercises where our solutions are being included, as this would cause a conflict. (But) we do advise a large number clients that use other money managers that offer a master trust."
However, since U.K. auto-enrollment regulation took effect, the competition between money managers and consultants has had asset owners concerned about money managers having to compete with consultants. By law, certain U.K. plans, including both corporate plans and master trusts, are required to use investment consultants.
Lee Sullivan, group pensions manager at BNP Paribas in London who is in charge of the bank's £1.1 billion defined contribution plan, said it is difficult for employers to challenge that advice because they don't have adequate in-house resources.
"So a number of them took the master trust offered by the consultant," Mr. Sullivan said. "And money managers that might be competing with consultant-led master trusts are afraid of leaving the fund manager shortlist made by the consultant earlier through that advisory business."
"To me there is an obvious conflict of interest, in instances where consultants make sure that their own products are part of the search," Mr. Sullivan added. "Some five years ago, one consultant tried to do that — i.e., advise us to go into their master trust." However, BNP Paribas chose to go with Fidelity's master trust instead.
As a result of the FCA's intervention, consultants might need to ensure their advisory and fiduciary businesses are separate, sources said.
However, Mr. Sullivan said he didn't have high expectations that market relationships would be altered.
"I don't have huge hopes the review will change the market," Mr. Sullivan said. "The FCA might have technical power, but (it) doesn't have the power to break that (consultants') market."
Good for participants
Despite potential business getting away from money managers, executives say competition with consultants benefits plan participants. Sponsors can get better access to diverse investment strategies and competitive product pricing for workers.
Emma Douglas, head of DC solutions at Legal and General Investment Management in London, said: "We do see consultant master trusts being set up as competitors … it is fair to say there is a conflict of interest that needs to be managed, (but) this conflict is being managed."
LGIM's Worksave Pension Mastertrust has £4.8 billion in assets under management.
Jamie Jenkins, head of pensions strategy at Standard Life in Edinburgh, said: "We are seeing elements of competition with advisers for corporate business as they extend their reach in the value chain. But we have worked with consultants that offer a master trust and we have been introduced to clients through them."
Standard Life Master Trust Co. has £6 billion in assets under management.
Although executives at money managers offering bundled arrangements recognize competition from consultants in the master trust market, they are not giving up on the bundled space.
"We are happy for Willis Towers Watson to offer our funds via their LifeSight master trust … that way we get revenue via the investment platform we offer to LifeSight," Ms. Douglas said. "We would also compete for this (master trust) business ourselves, in which case, if we won we would get both investment and administration revenues."
Sources said there is also a visible move in the market, where independent consultants that do not offer a master trust — including Lane Clark & Peacock, Barnett Waddingham and KMPG and PricewaterhouseCoopers — now run many money manager searches, so a conflict of interest is avoided.
"We are not seeing any consultants not behaving appropriately in the market," Ms. Douglas said. "And the buyers in the market will be aware of any conflicts that exist and how they are managed."
Mr. Baird of Willis Towers Watson defended the consultant-led model: "Most of our (master trust) business came independently from companies that have not been using bundled solutions, far more so than the number that moved from being advisory clients."