Competing agendas: Does the pensions industry need a rethink?

One topic that keeps cropping up in conversation, including on the weekly V-FM Podcast that I co-host – often at my prompting, admittedly – is the thorny issue of conflicts of interest in the pensions industry.

Conflicts exist everywhere in life. As realists, we must recognise that they will always be present. We often talk about the importance of disclosure and effective management of conflicts.

However, at what point do we need to take a step back and rethink how the industry operates to make sure there is alignment and balance necessary to deliver good outcomes?

I was struck by the response I got when I raised this point at a recent conference hosted by law firm Baker McKenzie. Several people came up to me after the event and thanked me for raising the issue. Why did I raise it? I have two major concerns that I’ll take in turn.

The master trust model

Master trusts are manifestly a good thing – particularly in a world of defaults and disengaged members.

I worked for two of them and I am a firm believer that having a board with a fiduciary duty is a great way of ensuring member interests are front and centre of decision-making.

What we haven’t really thought through is the inevitable potential for misalignment between the trustee and what often is a commercial sponsor. This even applies to not-for-profits, which compete for business. There are inevitable compromises that must be made.

This conflict between trustee duties and commercial interests can surface in various ways, but two that stand out are:

• The tension between developing a proposition that meets commercial objectives versus what trustees might ideally want for their members.

• The power to hire and fire service providers through trustees’ ability to exercise discretion – a very powerful tool.

These two points raise questions. Would a trustee of an investment-backed master trust ever sack its sponsor as investment manager and choose another provider?

Would a trustee of an adviser-run master trust ever change so that they were no longer advised by the provider’s personnel? Could the advisers or service providers even be changed without the trustee having to exit the master trust?

We must then ask whether our regulatory framework adequately addresses these questions and conflicts to make sure we have a system that genuinely puts the member first. Do we have trustees that are fettered in their decision-making? Are trustee boards as independent as we’d like to think? These are critical questions that demand scrutiny.

The rise of professional trusteeship

To set the context, I’m a big fan of the professionalisation of trusteeship. My caveat to that is that I would argue that we should look at the make-up of the whole board to ensure diversity of experience and thinking. Not every trustee needs to part of a professional company or have a professional qualification.

Professionalisation of trusteeship has gone hand-in-hand with the commercialisation of the sector. That’s fine – we all need to make money.

Where I start to have concerns is when professional trustee companies go beyond providing trustee services. For example, where trustees from those companies are procuring non-trustee services from the very companies that they are also a part of.

On a recent podcast, LCP partner David Fairs – a former executive at the Pensions Regulator – argued that this might make sense for smaller schemes as they can benefit from bundled services at a lower cost. After all, a smaller scheme only has so much money to spend on governance and administration.

Putting that to one side, there is still an inevitable conflict of interest. For example, if something goes wrong, trustees would usually take legal action against the adviser or service provider – but if it is the same company, they will be under commercial pressure essentially to not sue themselves.

Likewise, I’ve been told there are concerns over budgetary scrutiny and pressure to procure additional services from the trustee firm.

This brings us back to the issue of hiring and firing and the importance of trustees being able to exercise discretion.

The ability to switch service providers is one of a trustee’s most significant powers. What happens when they are procuring services from their own firm, or another entity within it? Can we truly expect these conflicts to be managed effectively within the existing regulatory framework? I’m not seeing evidence that they are – and that worries me.

A regulatory wake-up call

The regulator is developing its relationship with professional trustee firms, and this is a positive development.

However, in a world where we are putting more onus on trustees to deliver great outcomes, we need a regulatory system in which conflicts are properly disclosed and managed – or even avoided where there is potential for harm.

A few years ago, the industry was having a similar debate with employee benefits consultants when they were potentially both advising on and providing a product.

A simple solution would be that you could do one or the other, but not both.

I’d argue that it is important that we get this right, and now is the time to do it.

A timely legal precedent

To this end, I was struck by a recent Court of Protection judgement in March 2024 in the case of Irwin Mitchell Trust Corporation versus PW & Anor. This concerned a fiduciary duty that, while not directly related to pensions, may well cause people to pause and think.

In a nutshell, the Court of Protection said that a law firm, Irwin Mitchell, was conflicted when it acted as a professional deputy (a type of trustee) while also offering asset management services through an affiliated company.

Irwin Mitchell argued that appointing its own asset management company only after running a “beauty parade” where its own company scored highest was sufficient to resolve any conflict issues.

However, crucially, the Court ruled that even this was not adequate to resolve the conflict given the obvious financial interest in appointing its own company, and the conflict could only be overcome if the asset management company provided its services free of charge.

See the connection?

Conflicts of interest are not going away. We must be honest about where they exist and ensure they are tackled before they undermine trust in the system.

Darren Philp is co-host of the V-FM Podcast and director at Untamed Consulting.