U.K. keeps pressure steady on poorly governed plans

Defined contribution master trusts in the U.K. could see an additional boost in assets as the U.K. Pensions Regulator pressures single-employer plans to step up their governance and investment oversight.

The Pensions Regulator has been on a mission to weed out poorly governed defined contribution plans in the U.K. for quite some time. After asking master trusts, also called multiemployer DC plans, to obtain new operating permissions to stay in the market, the number of DC master trusts was cut by more than half.

Most recent data from the regulator showed 38 master trusts operating the U.K. in May, down from 91 a year ago. Of those 38, about two-thirds are still in the midst of an approval process that requires payment of a £41,000 ($53,000) licensing fee and proof that they have the financial resources to pay up to £150,000 for the cost of complying with fiduciary duty regulations, according to the regulator's data.

In June, the regulator issued another order, directing single-employer DC plans with two to 999 members — an estimated 500 plans in the U.K. — to review their default options to ensure they deliver investment value to plan participants, which could further decrease the number of DC plans, according to sources.

The regulator wants to confirm that plans regularly review their default strategies and performance to ensure that plan trustees are meeting their legal obligations and committing to proper plan governance.

Industry sources said this increased focus on governance could lead to single-employer plan sponsors deciding they are better off moving the assets to a professional plan provider, such as a mater trust.

"Further consolidation of U.K. DC is likely as the regulator increases its focus on governance," said Gregg McClymont, director of policy and external affairs at B&CE, provider of the £7 billion ($8.9 billion) People's Pension, a multiemployer defined contribution plan. "To the same end, employers running single trusts will gradually move, I would imagine, toward the multiemployer trust model as a simpler, high-quality solution."

Obtaining scale to manage total costs, which cannot by law be higher than 0.75% of assets under management and administration, is a key objective of DC plan sponsors. As part of a master trust, employers could improve their governance and ability to diversify their asset allocation.

For example, scale makes it easier for plans to add alternative strategies to their default options to secure additional streams of income for participants from potentially higher-yielding asset classes.

But experts warned the new requirements will only make single-employer plan sponsors exit the DC business and add concentration risk in the retirement system.

"The Pensions Regulator is uncomfortable with the existence of smaller single-employer plans but they can't force them to consolidate with others," said Robin Ellison, head of strategic development for pensions at legal firm, Pinsent Masons LLP in London. "Its policy, however, is to increase the governance costs to such a level that merger or consolidation becomes inevitable eventually."

By joining a master trust, single-employer plans can avoid governance expenses, including participant communications and trustee salaries. On their own, plans could expect to pay up to £750 per participant in yearly charges, according to estimates by LifeSight, Willis Towers Watson PLC's master trust.

A report published in May by Defaqto, a U.K. information provider to financial advisers, showed that a 0.75% maximum allowable annual fee could reduce returns for the fund by 20% over 50 years. Charges levied by master trusts usually run between 0.2% and 0.5% of plan assets, while still allowing employers to access a breadth of asset classes.

Amid recent moves from the regulator, Willis Towers Watson Group's 2018 UK Pension Strategy Survey showed that 25% of employers were planning to review DC plan types in the next two years.

One single employer said joining a master trust was a logical move.

Trustees of the Stena Line U.K. Pension Scheme, a £36 million single-employer plan, chose to transfer assets to Ensign Retirement Plan, a £64 million Gatwick, England, multiemployer provider in October 2018.

"It comes as no surprise then that many organizations are choosing to switch to a master trust that is able to pool advisory and administration costs, lower investment charges and streamline management demands," said Ensign CEO Andrew Waring.

Richard Sweetman, senior director at Willis Towers Watson in London, thinks the required review of the default investments is only one consideration that may influence some plans' decision to outsource to a master trust. "It is more general regulation, legislation that is more likely to be encouraging assets into master trust," he said.

Mr. Sweetman said WTW's survey results suggest some 24% of FTSE 250 companies are planning a review of their DC arrangement vs. 20% of FTSE 100 companies.

Other factors, too, could be contributing to the growth of master trust assets, such as closures of defined benefit plans and the transfer to a defined contribution model.

"This might not be captured in surveys because quite often this will be scheme-specific and owned by the trustees, who may not be the focus of commercial surveys," he noted.

Other sources agreed that the increasingly stringent regulatory landscape in the U.K. is dulling the appetite of plans sponsors for managing workplace plans. The U.K. government in February, for example, announced unlimited fines as well as the possibility of jail sentences for executives who recklessly risk workers' pensions.

Commenting on the most recent attempt to supervise default requirements raised by the regulator, Helen Stokes, partner in the DC team at Lane Clark & Peacock LLP in London, said the review is "another push to master trusts."

"But it is not as simple that all (participants) will be better off in master trusts," she said. Ms. Stokes noted that participants in hybrid arrangements could have access to sophisticated investment strategies or an open defined benefit pension fund.

Still, she said, the regulator is targeting smaller plans. "There are lots of schemes where the governance is lacking and they don't know how to improve it."

People's Pension Mr. McClymont concurred: "Governance is the crucial element in setting good pension funds apart, and while scale is not sufficient to ensure good governance, it is necessary."