UK pension schemes now have a new tool to use in their assessment of the value delivered by their asset managers. At the end of last month, the Cost Transparency Initiative (CTI) unveiled a long awaited cost transparency template. For the first time, fund managers will be asked to report all of their charges in a standardised way.
The CTI came into being in November 2018. Evolved from the Financial Conduct Authority’s Institutional Disclosure Working Group, the CTI is a partnership between the Pension & Lifetime Savings Association, the Local Government Pension Scheme and the Investment Association.
Over the past year, it has been running trials of this new cost transparency template with major institutional pension schemes and asset managers. Earlier this year it published the approved version to “encourage fully transparent and standardised cost and charge information for institutional investors”.
But the template’s arrival has stirred concerns. The prospect of more clearly identified, and standardised costs has, of course been welcomed, but there are consequences too, of which trustees, and corporate advisers will need to be aware.
Pension schemes have long wanted a clearer breakdown of the charges levied on them by asset managers. While this new template may provide everything in a standardised fashion, some believe that smaller schemes will be unable to interpret and manage the data.
If a scheme is without this expertise, it may well end up paying an external party to scrutinise submissions, potentially wiping out any savings by moving to a better-value fund manager.
“They will understand the costs of that investment for their own scheme, but the raw data will not provide comparative analysis or benchmarking. That will require additional advice,” says Kirsty Bartlett, a partner at Squire Patton Boggs.
“Trustees will rely on their advisers to interpret the information they receive from asset managers and tell them if the costs are in line with expectations and competitive for schemes of their size and chosen investment strategy.”
Bartlett’s predictions are echoed by many. Kas Bank’s UK managing director Pat Sharman, agrees, saying that larger schemes, with internal support will likely be better equipped to deal with the new flood of incoming data.
“We believe smaller schemes may require the support of their consultants and service providers to manage the collection of data,” she says.
“With a review of transaction costs being a relatively new area, defined benefit and defined contribution schemes will benefit from a specialist view on the new data they are receiving.”
Fund manager co-operation
Assuming that schemes do have the necessary skills and resources to collect and interpret the data, there may be other challenges in the newly transparent world.
Ultimately, asset managers know that their profits, to some extent, are linked to the charges levied on clients. With that being the case, fund groups may be reluctant to offer additional information on how they calculate their charges, which could lead to “many interpretations” experts say. David Whitehair, head of UK defined contribution at Franklin Templeton, says we have seen this previously when the DC Pensions Template — agreed by members of the Association of British Insurers — was introduced.
“Transaction cost data presents a number of data points that can be used to help identify ‘good value’ in the context of paying for asset management services.
“One of the difficulties in analysing the data is that, despitethere being an industry template, there are various ways in which data can be calculated. This means unfortunately that the data cannot be presented on a consistent basis.” The involvement of the nvestment Association (the trade body which represents asset managers) in the Cost Transparency nitiative, should ensure that its members respond to data requests in a willing manner. However, some consultants believe that there will be instances where fund firms simply won’t want to co-operate.“
Some managers will refuse to provide the data,” says Neil Smith, principal consultant at Aon. “Trustees may well want to know why; is it because they are operationally too complex? Is it because they have something to hide? For whatever reason, it will lead trustees to question whether they wish to remain invested with the manager.”
Cost versus value
Even with all fund management groups agreeing to supply data in the newly prescribed formats, trustees still face the biggest challenge of all – assessing value. While they will now have a breakdown of what they’ve been charged, they will then have to decide whether the charges equate to good value.
For example, a fund manager may have confessed to charging very high transaction costs from its trading venue choices, but in doing so, gained access to assets which generated huge returns for the scheme. In these instances, trustees would need to weigh up whether paying more in trading costs was justified, given the stellar return for the scheme.
“What is value for money?” asks Andrew Pennie, head of pathways at Intelligent Pensions. “Costs are clearly one element, but value will mean different things to different members.”
However, Alistair Byrne, head of EMEA pensions and retirement strategy at State Street Global Advisors, says he believes that “assessing value” will, in itself, become a more standardised approach as trustees become more comfortable with the new data.
“It should bring a more systematic approach to assessing value for money,” he says. “This should help trustees check they are paying a competitive price for the services they get.
Keeping members happy
Trustees will certainly have their work cut out, should members begin paying closer attention to what they are being charged. In its CP 19/10 consultation, the FCA hoped that the increased availability of information on costs and charges would also lead to increased accountability of scheme governance bodies to members.
However, given that transaction costs have historically sat outside of the charge cap calculation – the maximum annual amount that a pension scheme can charge members – it remains to be seen how schemes cope with member complaints, should they believe transaction costs to be too high. “What would it take for scheme governance bodies to act?” asks Intelligent Pensions’ Andrew Pennie.
“One person complaining, ten people, 5 per cent of members or possibly 20 per cent? Who knows? For members to be better informed they will need league tables, on various aspects of value, to see how their scheme compares with others. That is likely to give members greater context and appetite as well as confidence to challenge where their scheme is falling short.”
Overall, the general consensus in the industry is that member interests are likely to be better- served thanks to the introduction of the new template.
In the Netherlands, where compulsory cost transparency reporting was introduced in 2015, costs-per-member fell by 19 per cent between 2015 and 2017, according to data from Kas Bank. The biggest decline came from investment costs, specifically from lower transaction and performance costs, the bank’s research shows. “The regulatory pressure and facilitation of cost transparency through standardised templates will enable schemes to gain better access to their cost data for the first time,” says the bank’s UK
managing director Pat Sharman. “This facilitation will better ensure that schemes bring the cost transparency agenda to top of mind. Over time I believe that discussions and reviews on costs will naturally be included in a schemes trustee and committee meetings.”