A voluntary code is the fastest route to real progress on pension fund charge transparency says Stonefish Consulting managing director Chris Sier
There is a general belief that the cost structure of pension funds, not just in the UK but globally, is transparent and that pension fund costs are obtainable. Neither of these assertions is true.
This belief has been challenged in several jurisdictions, most notably The Netherlands, as is shown in my recent report for the Financial Services Consumer Panel.
As to how we collect and manage these costs, I find myself torn. On the one hand it is obvious to me that without some enforcement asset managers and other service providers will not comply if just asked politely. It is also obvious that pension funds seem to lack the skills and the teeth to require submission.
Ideally, a wise and knowledgeable fund will know what to ask for, when to stop asking as the effort is too extreme and expensive, and when to dismiss an asset manager or other service provider for non-compliance. However we are still some way from that ideal.
So should a regulator set a data standard for cost collection? This would ensure compliance and hopefully do away with dubious obfuscation and omission. But who will police data submission and accuracy? This sounds like a burden for a regulator, which will drive up costs for the industry; who will safeguard and assure the privacy of the data?
And once the standard is set it will be immediately subject to regulatory arbitrage. Once the standard is set it will require huge efforts to change it. Just think how long it has taken to get to where we are now.
A voluntary standard meanwhile is not set in stone and can be changed without complex regulatory and statutory changes. It can be more readily expanded to mitigate the arbitrage suggested in the point above.
Once a regulatory data standard is set, the asset management industry and other providers will manage to this transparency standard and getting additional cost information will be met with the following rejection “we submit data according to the regulatory standard”.
Given these restrictions, my belief is that a voluntary code of practice, set in conjunction with industry and guided by the regulator – with the implicit threat of sanctions – and other interested parties is the way forward.
This standard should be flexible and progressive and, in the first instance, aimed at collecting data that is already theoretically easily collectible.
This will allow for cost savings to be obtained as soon as possible, maximising the impact of compounding of these savings. The data collection should be managed by an independent body, possible a private company, via consensus mandate and funded either from revenues derived producing reports, a levy on pension funds or the industry, or voluntary contributions by those companies in industry that desire transparency…or a combination of all of these. Such a body would be responsible for producing useful and actionable information to provide effective market performance and comparative metrics useful to both consumer and those responsible for pension fund governance.
To remove the ability of asset managers and other service providers to obfuscate around such a voluntary code of practice these providers need to be incentivised to comply. I suggest that this happens by making cost transparency a source of competitive advantage. Pension funds need to pick service providers based upon their willingness to adhere to the code of practice. Pensions funds will therefore need to understand the benefits of knowing and managing costs. This requires evidence, analysis and education.
My suggestion is to work with key pension funds, asset managers and other service providers to develop the standard and produce insight and analysis. Fortunately, the current drive to baseline the costs of the Local Government Pension Schemes might provide such an opportunity. This drive comes from the need to pool assets and derive the benefits of scale within the massive pension pool that is the LGPS. To understand these savings, a costs baseline is needed and obtaining such a baseline is of interest to the LGPS, the Treasury and the DCLG. This then could be the kernel from which the data standard is derived. With the willing participation of key asset managers and other service providers, data and analysis could be available in months.
The main roles the FCA, TPR and FSCP could play currently are to clearly indicate that collaboration by the industry is key; to offer reasonable suggestions as to what a standard might look like; and to encourage trustees and governance committees to look for providers who comply with the standard so that the industry is incentivised to provide the information so badly needed by consumers and their representatives. The alternative is to impose something that might be extremely expensive and complicated to deliver whilst bringing us no nearer to the prize of full transparency and accountable asset managers and other service providers.