Submission
Regulation of defined contributions master trusts
Foreword
APTI welcomes the opportunity to provide input to the future regulation of Master Trusts.
APTI is a representative body of larger and smaller trustees who are regulated under various regimes, by the Central Bank, Pensions Authority and Revenue (PTs). We administer Occupational Pension Schemes in accordance with the pension legislation and Pension Authority requirements.
We believe that single member schemes should be exempt from the change in legislation or would be accommodated under a contract or some other vehicle that would not rule out the ability of our members to administer and act as trustee to one member schemes.
That being said, in APTI, we recognise the necessity of a reform of the manner by which occupational pensions is provided. We think that the option of establishing occupational pension coverage by way of a master trust may provide employers with more straightforward and consumers with safe and more cost-effective options than the system which is currently prevalent; we see little reason for a requirement that every employer sets up individual schemes for his/her employees. We think that economies of scale can be achieved by encouraging several employers to establish pensions under the umbrella of the one pension scheme.
On the other hand, we are concerned if the discussion about master trusts and their regulation is a discussion about paperwork. In itself, whether a trust is established under one single deed or a number of deeds is of secondary importance; the main areas of cost-saving and consumer protection can be facilitated under either system. That we in Ireland tend to establish pension trusts by individual deeds and have built our methodology, to include regulatory practices, accordingly is mainly rooted in tradition, not in any particular concern for the consumer. Whether simplicity, cost-savings and consumer safety can be achieved depend on the ability of the provider, the trustees, and the administrator to discharge their functions in a cost-effective manner, not on how many deeds the benefits are held under.
In the following, we have provided our comments on the items set out in the Pensions Authority’s consultation (referred to as the Consultation Document), using the headings of the Authority’s paper of 26th July.
In the following, we will refer to the “consumer” because he or she, in our view ought to be at the center of regulatory attention. He or she might not always be a consumer as this term is usually defined; the purchaser of pension services may be an employer. In the following, “consumer” therefore is shorthand for “purchaser of pension/trustee services”.
2. Risks particular to master trusts
In terms of emphasis of the present consultation, it may first of all be appropriate to highlight that master trust methodology as a means of providing occupational pension provision, if properly applied, represents one of the main opportunities for promoting Government (and Pensions Authority) aims to simplify private pension provision in this country and (thereby) increase general pensions coverage.
It is also one of the eminently attractive means of pursuing these aims because of the fact that there is no immediate need for additional legislation in order to encourage the furtherance of master trust methodology in the pensions market. We know for a fact that there is no need for additional legislation since there is already a number of Revenue-approved and PA-supervised master trusts in the market. All which is needed is some general encouragement, also by the Pensions Authority, and then a set of rules which address the specific issues which master trust methodology gives rise to.
In relation to the particular risks of master trust provision, the Consultation Document highlights that problems in a master trust are likely to affect more people, because master trusts are bigger. We think that the final determination of that question depends on many circumstances, not necessarily specific to master trusts. To build a set of rules around a perceived risk which ultimately proves to be unfounded, makes the rules unnecessary. Unnecessary rules are costly for consumers.
By way of examples, issues of mal-administration within a trustee who has multiple trusteeships has the potential of affecting all members of the trusts for which they act as trustee, and it does not matter whether those schemes are written under separate trust deeds, single member deeds, or the one (master) trust deed. Furthermore, it depends on the quality of the trust paperwork and the governance structures of the trustee whether every DC account is affected by a problem or whether the problem can be contained; a DC account of an occupational pension scheme can potentially be as segregated from other DC accounts as a standalone pension trust. That issue all comes down to the drafting of the paperwork.
In APTI, we are of the view that good (corporate) governance, safe systems and procedures are essential parts of running efficient trustee organisations. The paperwork, and more specifically if every employer or every employee has to attend to the drafting, approval and execution of it, is a secondary issue, albeit a nuisance (and additional cost) if it can be avoided. Master Trusts are useful because they may provide the employer with a pre-fabricated solution for its employees.
This brings us to the second observation. Most of the governance issues raised in the Consultation Document have already been solved by regulation or the Pensions Authority’s Codes of Conduct. We think it an ill-conceived idea to devise new solutions. No additional requirements are necessary for master trust trustees.
Trustee – corporate structure
In APTI’s view, the consumer protection issues that arise in the administration of pension benefits are, in the main, similar to the consumer protection consideration of other investment funds.
At a European level, the UCITS fund is the benchmark retail fund in terms of consumer protection. UCITS is one of the backbones of the European common market of financial services. The European Commission has over a 30-year period worked through 5 reiterations and amendments of the common standard, to achieve the optimum in terms of governance and consumer protection. In our view, it makes little sense to devise solutions contrary to these standards.
In the Irish funds industry, the issue of the corporate organisation of a trustee of a UCITS fund was debated following the introduction of the Companies Act, 2014 (it was the 2014 Companies Act which brought the DAC onto the Irish Statute book). The Central Bank issued the following statement (UCITS Q&A, ID1065):
“the Central Bank will not require the entities mentioned above to convert to DACs as it is of the view that corporate structuring is a matter for each entity. Notwithstanding the corporate structure chosen, regulated financial service providers must comply with all regulatory requirements applicable to them. “
In essence therefore, the Central Bank chose to focus on compliance with the rules, not how the trustee had organised itself corporately.
In a similar vein, in APTI, we are of the view that there is little rationale to the suggested requirement for trustees to organise themselves as DACs. We fear that the Pensions Authority’s recommendation is based on a unfounded assessment of the benefits of a DAC in a governance structure. Perhaps over less well-founded concerns about the cost of scheme wind-up. That issue however is properly a concern about capital adequacy of the trustee – so we have addressed it below.
At best, the proposal of a stand-alone DAC trustee is an unnecessary requirement which as an unnecessary rule is costly for the consumer. At worst, such a requirement may act as a hindrance for complying with regulation.
We do however appreciate that consumers of regulated funds benefit from a rule set in relation to governance, which – apart from the Pensions Authority’s Codes of Conduct – are absent from the rule book for pensions. In order to avoid an unnecessary proliferation of different rule sets (and the inherent risk of incompatibility between them) we suggest the adoption of a requirement for trustees to adhere to the Pensions Authority’s Codes of Conduct and/or Central Bank regulation.
4. Business Plans
The introduction and adherence of a business plan is possibly a general corporate governance requirement which pertains to all companies, no matter whether they seek to operate trusts or not. It is one which is recommended by the Office of the Director of Corporate Enforcement. Business plans should, as suggested by the Authority, be subject to regular updates. In any event, it’s good business practice.
Investment Firms and Life Companies are obliged to maintain business plans. For regulated entities, this requirement is supervised by the Central Bank.
We suggest that the Office of the Director of Corporate Enforcement has the expertise in this area and proper adherence to existing regulatory frameworks will bring trust providers in line with this requirement.
5. Capitalisation
Supervision of adherence to capitalisation requirements for investment firms is a complex exercise. The main reporting mechanisms operated by the Central Bank is derived under EU-legislation. Capital adequacy is reported upon through the so-called COREP and FINREP frameworks.
COREP is the framework for the Capital Requirements Directive reporting of risk under the components of Capital Adequacy, Group Solvency, Credit Risk, Operational Risk and Market Risk.
While COREP is a capital reporting regime, FINREP is its financial counterpart. It is a framework given for reporting financial information to the Central Bank.
The capital adequacy framework provides for capitalisation to take account of the business plan under the Internal Capital Adequacy Assessment Process (ICAAP).
The reporting is subject to considerable scrutiny.
We do not see any added value in devising additional capital adequacy solutions for master trust business.
The capital adequacy framework takes into account the cost of wind-up of the business.
We do not perceive the necessity for additional capital adequacy requirements for trustees, whether of group schemes or one member arrangements.
6. Risk Assessment
Again, we see no need for duplication of an extensive framework which is already in place by the Central Bank or under the Pensions Authority’s Codes of Conduct. Under existing frameworks, regulated firms are required to maintain a risk register, outlining in detail the probability and impact of all material risks, the mitigants and capital set aside to deal with them.
7. Conflicts of Interest
Again, we see no need for duplication of an extensive framework which is already in place by the Central Bank or under the Pensions Authority’s Codes of Conduct. Under these frameworks, regulated firms are already required to operate a conflict of interest policy to address how the firm identifies, monitors and manages conflicts of interest.
These conflicts of interest are particularly relevant in the pensions world where, due to a lack of regulation, life companies in particular have had free rein to promote an offering where the independently important functions of advising, choosing, holding and accounting for investment funds are bundled together in an unholy cooperative – where charges are non-transparent, in many cases, excessive and, always, kept well within the life company’s sphere of interest. This is a position which would be unacceptable within funds regulation, where the separation of functions, in particular between trustee and administrator, is a cornerstone of consumer protection.
The need for the master trust to be “unambiguously run in the best interest of its member” is no different from the current position and obligations of trustees of individual arrangements, be they professional or lay.
8. Member / employer communication
The challenge set out in the Consultation Document is one which providers of small self-administered pensions are familiar with.
The potential for lessening of employer engagement is one of few disadvantages to master trust methodology. We agree with the Pensions Authority’s views on employer engagement.
We think that the Authority’s thinking could be developed further, however. Member communication and engagement is one of the key challenges of pension provision. To that end, the OPS Reporting Regulations are somewhat outdated. Parts of them are not fit for purpose.
To begin with, in general terms, an MBS/SRP which is posted to the client on an annual basis covering items which even for pension professionals are difficult to comprehend, is unlikely to encourage members to engage with their pension. This fact is extremely detrimental to a system which relies on contributions being voluntary. In our view, it is one of the stumbling blocks to pensions coverage. One which it is within the Authority’s remit to rectify.
At a minimum, every trustee ought to have a communication policy and plan in place which covers items such as (online) reporting, web access, member services, etc. We believe that only by applying modern technologies will it be possible to encourage members to engage with their pension, in the manner which we for example observe with the Australian “Super”.
The increase in transparency which is a direct result of ease of member communication provides the consumer with additional confidence in the delivery of services and investment performance. Therefore, an effective communication plan is also a consumer protection device.
This is an area where APTI members have particular expertise and possibly one of the main reasons for the success experienced by us over the past decade or so. In the period 2010-2017 APTI members more than doubled their share of the DC market, as a result, now standing at approximately 16% - and growing!
9. Charges transparency
The current framework for occupational pension schemes is focused on the trustee. We are of the view that it must change and focus directed on the consumer – the member.
Today, where the workforce is highly mobile it is important that members and employers can switch trustees. This however will only happen if there is a transparent framework in place; competition must be created. Competition has the benefit of driving down costs.
Amongst APTI-members there is healthy competition, facilitated by a transparency, in particular with regards to charges. This has provided for a very competitive market place. As examples, the cost of ARF provision among APTI members is generally between 35-50 % of insured ARF provision. The cost of uninsured Buy Out Bonds is around 50% of those offered by life companies. All according to research done by the Pensions Council.
All APTI-members operate a charging policy along the lines of the proposal made in the Consultation Document.
In our view however, the proposals are not sufficiently far-reaching. Currently, transparent charging is hindered by the fact that it is in the interest of few providers to be competitive; trustees go about their tasks for supposedly altruistic reasons and the onus is on them, not the service providers, to make sure that the scheme gets value for money. In many ways trustees, in particular lay-trustees, are just consumers of pension services; pensions administration, investment management, advice are what they are shopping for - from an increasingly limited number of providers. Trustees also need regulatory protection.
As a result – and due to the fact that there is no regulation in the area – charging mechanisms are, it seems, developed to keep prices opaque. Accordingly, in the absence of competition we witness scheme valuations which vary according to purpose; the “market value” of pension investments is always different from the “encashment value” which invariable is dissimilar to the “book value”.
Transparent pricing is further obscured by varying mechanisms which make it impossible for the consumer to compare the price of services between providers. The selling of €105 for €100, unconcernedly referred to as “105% allocation”, is a mirage which should not be allowed to continue.
In our view, pricing should be based on percentage or cash terms (flat fee), always providing for 100% allocation. Which is how schemes run by APTI members have always operated.
We accept that, in the above assessment, there may be a difference of emphasis between retail pension buyers and the challenges facing trustees of big schemes. However, at the end of the day, trustees of group schemes are purchasers of pension services as well. There is little reason why the current lack of transparency should be allowed to continue. It doesn’t provide for a competitive market place.
10. Marketing
In our view, it is not sufficient, as proposed by the Pensions Authority, that the trustees “consent” to marketing material. The marketing of pension services should adhere to the same regulatory constraints as other financial services under Central Bank rules.
Mis-selling of services, also of pension services, is an issue which can be dealt with by the Central Bank, the ombudsman or, ultimately, the courts.
11. New members
The consent to the adherence of new members can be provided by a deed of adherence to the Master Trust. In line with new Revenue guidelines on approval of members of occupational pension schemes the onus is on the trustee anyway to ensure that new members qualify in terms of salary and service.
This is a requirement which providers of small self-administered schemes have particular experience in dealing with.
12. Wind-up
The nature of the master trust changes the relationship between trustees and members. Like executive pension plans provided by life companies, master trusts are not wound up. They continue until such times as there are no further members - or the remaining member can be transferred elsewhere.
In this scenario trusteeship is not transferred. Rather, the assets of the Master Trust are transferred to another provider – not unlike the manner by which trustees of a group scheme on wind-up transfer assets to a Buy Out Bond. Nobody is stuck or left behind, not in an executive plan, not in a master trust.
13. Reporting to the Pensions Authority
As outlined above, reporting to the Pensions Authority needs to be reconsidered. To begin with, the focus of reporting ought to be on reporting to the member. If it is required that the trustee is regulated under the PA Codes of Governance or Central Bank rules, there would be little need for another governance framework.
We think that the Authority’s view that master trusts is in the high risk category, may be based on a lack of familiarity. Master Trust can be structured in various ways; every DC account may have the integrity and segregation of a stand-alone retirement benefits scheme. It all comes down to the nature of the paperwork.
If the focus shifts to the member, the primary area of supervision relates to custody of scheme assets and safe procedures as to how they are accounted for (administration). The trustees continue to carry the responsibility for investments under S.59 of the Pensions Act and OPS Investment Regulations.
APTI members use standard individual trust deeds which are pre-approved by Revenue. Employers sign up to a “pre-packaged” standardised administration and governance framework, developed by the Pensioneer Trustee who ultimately is responsible for adherence to the Pensions Act. For all intents and purposes, these are the hallmarks of a master trust, save for the fact that the provision is made under a separate deed.
Accordingly, there is no impediment for running one member arrangements under the auspices of a master trust – as long as the definition of one member arrangement is adhered to. That question all depends on the structural segregation of the assets of every DC Account; whether it “is established for one person only and that one person will always be the only member and that member has discretion as to how the resources of the scheme are invested”.
Such an approach would have the benefit of reducing the number of pension schemes in the Irish market – a long-standing aspiration of the Pensions Authority.