More than 100 types of costs and charges in pensions and investments have been identified by research carried out by the Transparency Task Force (TTF).
The revelation follows last week’s speech by West Midlands Pension Fund (WMPF) head of finance David Kane at the PLSA local government conference where he explained that the implementation of a new cost-reporting framework, which captures management fees, performance fees, transaction costs and other charges, saw annual charges increase from £11.5m to £82.1m. Kane said this extra £70.6m in costs equated to around 70 bps on the fund’s portfolio.
Dr. Chris Sier, Professor of Practice at Newcastle University Business School and a leader of the TTF’s costs and charges team, says as well as the many charges formally gathered by the WMPF, the list includes implicit costs such as stock lending and interest.
TTF founding chair Andy Agathangelou says: “You can’t manage what you can’t measure so until now those responsible for pension schemes may have been failing to fully protect their members’ interests by not managing out costs. Well, from here on they can, because we can provide them with a detailed analysis of where they should look for costs, including hidden costs.”
Sier says: “The basic problem is that in general terms there are so many costs outside of those the consumer or trustee is told about, particularly those deemed to be a change in the market value of assets; that’s where the implicit costs tend to be hidden. To get a feel for the significance of these implicit costs you’ve only got to take a look at what happened to the West Midlands Pension scheme’s numbers when they made such costs explicit – interesting is one word that springs to mind, but there are alternatives.
But it’s actually even worse than this – there are some costs or revenues that don’t show up anywhere. Stock lending and interest income for example. The revenues derived by these rarely hit the pension fund assets and are very often paid as fees direct to providers. As part of our research the TTF is going to produce a transparency heat map of costs – impact on total costs vs opacity. What it will show is that there are tranches of cost that are implicit and invisible yet significant to the overall cost of owning the investments.
“But there are some great examples around on how schemes can be run in a cost-conscious way – a particularly good example is The Railways Pension Scheme – Paul Trickett’s team there have done a superb job. I’m wondering if, had the BHS scheme been run for the last ten years the way the Railways Pension Scheme is being run now, whether any BHS jobs would be at risk today. I say this because one reason that BHS cannot find a buyer is because any potential buyer has to shoulder the burden of the funding shortfall in the pension – a shortfall that is at least partly the result of high costs. That’s how serious this is and that’s how significant hidden costs can be. It’s a huge problem, so that’s why we’re doing this work.”
Con Keating, head of research at The Brighton Rock Group and also a leader of the TTF’s costs and charges team says: “Given all the complexity and opacity around costs we knew from the start it would be a substantial undertaking to get to the bottom of it all and after many months of challenging work by our dedicated team of volunteers the truly shocking news is that we have uncovered more than 100 types of costs and charges being routinely applied to pensions and investments. To put it bluntly many of these are hidden from the consumer and that’s just plain wrong, isn’t it?
“There’s obviously a great deal wrong with the status quo and it’s probably too late to stop more BHSs happening, but at least we know we’ve done all we can for the consumer and to help fix the reputation of the sector. We didn’t just stand by, we stood up.”