The report says there are issues with the transparency of costs and charges in contract-based and master trust schemes, particularly where there is a commercial link between asset manager and provider. It says charges are often paid directly to the investment manager, who then provides a rebate to the provider to cover administration, governance and communications costs. The report says that where there is a commercial link between the provider and the underlying service providers to the scheme it is ‘harder to provide a clear break- down of how costs and charges’, and in most cases this breakdown is not readily available to employers or members.
The report argues that some employer-run trust-based schemes also struggle with transparency as a result of using “bundled services” from a single agency who manages all the scheme’s administration and investment services. In these cases it is often difficult to obtain a clear breakdown of how the costs and charges are used.
The report says: “A further potential barrier to transparency in relation to employer-run schemes, is that trustees are often responsible for setting the objectives, but also making the key investment strategy decisions and reviewing them in order to assess value for money. This puts trustees in the difficult position of reviewing their own decisions, rather than having their decisions reviewed by an independent external body”.
This low level of transparency makes a granular verification of value for money by members and employers difficult, says the Pensions Policy Institute. The FCA is working towards a requirement for asset managers to provide a full cost breakdown, or estimate, to providers.
The wide-ranging report, which also examines the challenges schemes face in benchmarking the performance of their default investment strategy, also found providers, market commentators and regulators use confusing and contradictory language and ignore member outcomes when talking about default investment strategies,
Some providers report objectives for their default investment strategy as a statement of how contributions will be invested rather than the underlying objectives. The report says that if a scheme’s “objectives” merely describe the investment strategy, this implies there are no over-arching member outcome objectives which the investment strategy is intended to satisfy.
Legislation requires employers to be consulted when setting the investment objectives for the default strategy for trust-based arrangements, although there are a range of easements for multi-employer schemes.
The report says records of how well schemes meet target returns are not usually readily available, making it hard for employers or members to assess how well scheme investments have succeeded in doing so. Where records do exist, they often do not reflect the stated targets suggesting they may not be actual targets, but rather long-term expectations.
The report says: “A lack of clear metrics against which the past and future performance of the default strategy should be assessed, and how these align with the overall objectives of the default strategy make value for money assessments either by trustees and IGCs as well as employers and their members very difficult.
“For cost breakdowns to be transparent, a split would need to be provided, not just of what costs cover, but of how much money is paid by members tothe provider, organisations which the provider has an underlying commercial relationship and independent third-party organisations.”