By Shani McKenzie, Head of Sole Trustee Services, Hymans Robertson
Many schemes are turning to professional trustees to explore and execute endgame options, both traditional and emerging, which can be complex decisions. Professional trustees recognise that this has driven a rise in appointments in recent years, and demand could stay strong as schemes look to get the expertise they need for this kind of strategic work.
A scheme that chooses to run on may continue with a trustee board, but sole trusteeship and consolidators are viable alternatives. Trustees need to consider member representation, longevity of appointments, flexibility in trustee eligibility and conflicts of interest. With small numbers of schemes expected to run-on, the near term effect on which governance model dominates may be muted.
Another driver of demand for professional trustees is demographic. Data from the Department for Work & Pensions suggests a surge of retirements from traditional trustee boards in the next three years. Professional trustee firms can fill these gaps, especially where they have ‘career trustees’. A few of the firms we spoke to saw these retirements as an opportunity; others thought them to be outweighed by a competitive market, passive endgame discussions and a slow flow of opportunities.
…consolidation takes away
In the long term, demand could be dampened by a shrinking market. At the moment, only 2% of DB schemes are winding up every year, but we expect faster wind-ups to accelerate the decline in DB schemes. The risk transfer market remains busy, and schemes approaching insurers may have more time to prepare for a buy-out before transacting a buy-in. Alternatives like superfunds could also reduce the number of schemes looking for professional trustees as they join consolidated arrangements.
Some firms are confident that demand for their services will remain strong; others worry about the shrinking number of schemes. This year may be telling: a public consolidator is being talked about, and the Clara superfund has proved so successful that TPT is launching its own.
From the short term to the long term
On balance, we expect demand for professional trustees to grow strongly in the short term. The long-term outlook suggests fewer opportunities but more potential revenue from each.
Professional trustee firms have the resource to govern many schemes, so we expect their market share to grow. Ignoring the regulatory change on the horizon, we expect sole trusteeship to continue to grow, especially if member-nominated trustee numbers continue to fall. Consolidation and competition means professional trustee firms need to diversify to grow in this environment longer term, and market share may become stable as we approach 2035.
Preparing for the future
The firms are diversifying in various ways. Some are looking at their role in a consolidating market. DB superfunds, master trusts and multi-trust consolidators operate with fully professional boards or sole trustees; DC master trusts and collective DC schemes also have fully professional boards. But consolidators are typically commercial entities, so potential conflicts of interest can prevent a firm being appointed to more than one board.
Other firms are exploring their governance services. In-house governance expertise can be applied to independent governance committees for DC schemes and outsourced pensions management. Some firms are considering how to apply these skills beyond pensions.
As pension scheme outlooks become more complex and the opportunities for professional trustees broaden, so will the skills needed to capture them. In our next blog, we’ll share our insights on firms’ recruitment considerations.
|
