The ongoing consolidation of pension schemes goes hand in hand with consolidation of the trustee world. Fewer people are in charge at ever larger funds, sometimes overseeing several competing ones. At the same time, master trusts, unlike single trusts, are often commercial entities. What conflicts could arise, and how can these be managed? 

 

Master trust Cushon recently made its third acquisition, leaving 36 master trusts in the market as consolidation is continuing. Some in the industry believe there will be no more than 10 to 15 master trusts left in a few years’ time. It is envisaged by the government that master trusts should be large to create economies of scale, and well governed thanks to strict authorisation criteria.  

 

However, conflicts of interest can still arise for their trustees, just as they can for those on single trusts – and perhaps more so; they can feel constrained by the need for the scheme funder to be profitable, or they could – as some trustees do – sit on more than one master trust board. 

 

 

The demands of a master trust trustee tend to be higher, notes Gerald Wellesley of Punter Southall Governance Services, but while there are additional requirements, there is also much ‘on the job’ learning. This is where he sees multiple appointments as an advantage 

 

"Issues arise at different times in different master trusts. It’s not a conflict in my view to say, ‘I can see the dangers of that approach’... because you have a different perspective on it,” he says. 

 

While actual conflicts need to be managed, they are rare, he believes, and should be weighed against the benefits of the broader and deeper experience of the trustee duties that is required on master trusts. 

 

Occasionally however, conflicts can happen. "The issue that can arise, though it doesn’t often, [is] that master trusts compete against each other,” bidding for the same scheme or section. “You have to manage that conflict carefully. It’s not a trustee’s job to be on the commercial side of things, but increasingly the employers want to know more [about] who the trustees are [and] what the governance is, as one of the key criteria for joining a master trust,” he says. 

 

For Wellesley, the commerciality of master trusts is an overall benefit, saying competition leads to better offerings. "There are few places to hide if the benefit consultants are trawling through the offering,” he notes. “Where it’s found lacking, you’re not shortlisted.” 

 

However, commercial pressures mean the dynamic is different for master trust boards. “If you’re on a single employer trust, you have a budget, but to some degree you can have what you want. In a commercial environment, the trustees have a lot of power, but one has to balance the commercial offering; it’s in everyone’s interest that the master trust is profitable. If it’s unprofitable it could become insolvent in future,” observes Wellesley.  

 

However, such potential conflicts – which resemble those of defined benefit trustees – can be managed, he says, and should be seen in the context of master trust governance rules. “I don't think it means the governance is less good, I think it’s better, because of authorisation and other regulation,” he adds. 

The potential for conflicts between the interests of members and the funder exists but, says Mark Futcher, head of DC and workplace wealth at consultancy Barnett Waddingham, "in reality the relationship with the funder can be advantageous for some master trusts". Where a funder has a range of workplace DC products including group personal pensions and others, this delivers economies of scale across investment and administration, he says.

 

Where a trustee sits on two or more master trust boards, "there could be a conflict from a ‘beliefs’ basis if one board had a very different investment philosophy to the other", he notes. 

On the commercial side, the fact that schemes and employers tend to run competitive tendering exercises should give the trustees "some comfort that the ‘value’ is competitive", says Futcher, although "if new business starts to decline then that could be cause for concern to the trustees".

Barry Mack, a director of governance specialists Muse Advisory, says trustee appointments carry scope for conflicts of interest, and mismatched expectations vis-à-vis the trustee role if they are sourced from within the funder. 

But, "on the other side of that coin, in an otherwise independent trustee board, having a trustee director with more knowledge of the sponsor/funder can be helpful," he adds.

But independence does not always look the same from the outside. Appointing trustees who are well known in the pensions industry or non-executive world, as was typical when master trust boards were first established, "could appear to perpetuate a cosy club that isn't sufficiently independent or diverse in its demographic or thinking", he says. 

Master trusts are "increasingly looked to by TPR" for evidence of a committed approach to diversity and inclusion given the sector’s scale and the overall impact trustee decision-making can have on member outcomes, he notes.

Where a trustee serves on multiple boards, it can help give wider experience, but conflicts can arise if there is competition for business, he agrees, "especially as we see some trustees being more involved in supporting the pitch process".

Other conflicts arise where there are competing time demands and a trustee is not available in a crisis situation, and in consolidation or approaches between trusts "if in a small board, one or more people have to be recused", says Mack.

 

 

Trustees sitting on multiple master trusts can refer to the Pensions Regulator's guidance on managing conflicts, but where there is a potential conflict, TPR can meet and interview both scheme funder and trustees and request documents before deciding whether to take any enforcement action, which could include a fine or improvement notices – and might even jeopardise the master trust’s authorisation. 

 

Trustees need to ensure they have a path of escalation with the scheme funder if there are disagreements about objectives, recording all decisions and ideally mapping out conflicts to ensure they are being managed, according to TPR. In more extreme circumstances, they could even step away from conversations to pass the decision to non-conflicted trustees. 

  

“Conflicts of interest can arise in any type of pension scheme and all schemes should have adequate internal controls in place to monitor and deal with real or potential conflicts,” says David Fairs, executive director of regulatory policy, analysis and advice.  

  

“The trustees of authorised master trusts have been assessed as fit and proper and the majority of trustees on the board must be independent of advisers and service providers,” he notes, adding that trustees should make sure they have a conflicts of interest policy – which should be reviewed from time to time – mapping out the approach to managing conflicts. 

  

“Where we identify a cause for concern, master trusts may be asked – as part of our ongoing supervision process – to demonstrate their process for handling conflicts of interest remains fit for purpose,” Fairs adds.