New research reveals massive ‘concentration of power’ in DC pension market

A major new research report published today by consultants LCP finds that the move to ‘mega funds’ in Defined Contribution (DC) workplace pensions will lead to a massive concentration of power in the hands of a small number of people.

The research finds that more than half of all the money in occupational DC pensions – over £160bn - is controlled by fewer than 50 trustees. Yet a recent DWP consultation on trusteeship seems to assume that, once most savers are in this type of scheme, issues around scheme governance will largely have been solved.

The finding comes in LCP’s new report: “The Pensions Powerbrokers 2: The DC Generation”, which follows on from last year’s ‘Pensions Powerbrokers’ report on DB pensions. That report found that fewer than 500 DB trustees control more than half of all DB assets, but this year’s report finds that the concentration of power in DC is 10 times greater.

The new report is based on an analysis of data on scheme assets, alongside 15 in-depth interviews with key industry figures, including trustees and providers of Master Trusts. It warns that the drive to ‘mega funds’, where schemes typically serve thousands of employers and millions of workers, risks a loss of employer and member ‘voice’ in the running of schemes compared with the world where many companies had their own pension scheme for their own employees.

Five key themes identified in the report are:

1. We are witnessing an extraordinary consolidation of power in the hands of a remarkably small number of people. This raises issues such as:
   • Can we ensure diversity of thought and behaviour, when some ‘mega funds’ are overseen by just four or five people?
   • What is the right balance of power between this small group of trustees on each scheme and the pension scheme provider?
   • What will the source of independent thought and innovation be in a pension landscape dominated by a handful of giant players with no realistic threat of market entry?
   • Do ‘mega trustees’ need to be overseen, especially in a situation where individual members or individual employers may have relatively little voice in a massive scheme?
2. Provider power remains important. The insurance companies, consultancies and other organisations that provide workplace pensions remain key players in determining how money is invested and how pensions are structured. Whilst trustees (and Independent Governance Committees for Group Personal Pensions) have a key oversight role, providers are often the source of new ideas and take most day-to-day decisions.
3. The job of DC trustees is evolving and becoming more challenging. A combination of increased scale and constant regulatory change means that DC trustees have an increasingly challenging job. Trustees need to be on top of the new Value For Money framework and holding their scheme to account, meeting new requirements on scale, responding to new statutory duties on post-retirement provision, engaging with the Government’s ‘productive finance’ agenda, and much else besides.
4. The employer voice is becoming ‘muffled’, especially compared with the balance of power in a traditional Single Employer Trust. Whilst we heard that employers can exert power at the point when Master Trusts are competing for their business, once they have paired up with one provider, the balance of power shifts. In many cases, it is only the very largest employers who have real power. Large employers can demand (and secure) a bespoke offering more suitable to their particular workforce, but most other employers are largely left to take the standard offering.
5. The member voice is quieter. Members risk becoming even more remote in the drive to scale. When Master Trust memberships routinely run into millions, a single member trustee or even a member panel cannot hope to be meaningfully representative of a vast membership. We heard that schemes rely heavily on large scale data on member behaviour (including complaints and calls to helplines), supplemented by ad hoc research into member attitudes, to understand what members want and need.

DWP has recently undertaken a consultation on the future of trusteeship (see notes to editors), which focused mainly on a range of governance concerns, including in smaller schemes. But on the specific issue of governance in ‘mega funds’, the consultation asked only one question (about potential conflicts where trustees are appointed by the scheme they supervise), but otherwise seemed to assume that there were no specific issues on which it needed to consult. Indeed, the DWP consultation explicitly said:

“Our vision for the pension market is that a smaller number of bigger and better pension schemes are overseen by highly skilled trustees operating independently, applying good governance, and focused on delivering the best outcomes for savers without risk of conflicts of interest”.

Source: Introduction, DWP consultation, 'Trust-based pension schemes: Trustees and governance, building a stronger future'

Commenting on the LCP research, Steve Webb, partner at LCP, said:

“The increasing concentration of power in the hands of a small number of trustees is extraordinary. Whilst these individuals will be carefully chosen and typically highly expert, the model of having a handful of people overseeing huge ‘mega funds’ raises serious questions which the government has not so far addressed. In particular, much more needs to be done to make sure that there is proper accountability of trustees by employers and scheme members, and that there is scope for innovation and challenge in these enormous financial institutions.”

Nathalie Sims, partner at LCP, said:

“There is no doubt that the way pension schemes are run will benefit from the current drive to greater professionalisation of trusteeship. In particular, overseeing multi-billion pound pension schemes requires a highly skilled group of people, with access to ongoing training and support. But it is also important that we have structures in place to make sure that there is plenty of independent challenge and advice for these ‘mega fund’ trustees, as well as diversity of thought amongst those who secure these crucial roles in the future of workplace pensions in Britain.”