UK financial services is on a journey toward greater transparency, and pensions are central to it. Transparency is increasingly critical in the pensions industry as part of demonstrating effective governance. Several new regulatory initiatives have been kicked-off and implemented recently, with more scheduled this year. Schemes have a golden opportunity to finally understand their true costs and manage their operations more effectively. Will this be the year that costs are finally made to count for UK pension schemes? Stewart Bevan, Head of Product Development, Pensions, Simplitium explores
The cost of running a pension scheme is increasingly an essential governance element for schemes, but up to now, true cost transparency has remained a huge challenge with few schemes having an accurate idea of what they are truly paying and what these costs specifically entail. It’s become increasingly clear, however, that schemes need to know this information.
Why does cost transparency matter so much? Managing costs and charges associated with a scheme is central to its successful operation, as they can have a significant impact over the long term. Monitoring schemes’ expenditure accurately is key to operating a scheme efficiently. Allied to this, governance bodies have a duty to savers to closely monitor costs as part of the overriding strategy of a scheme. They require robust governance frameworks to ensure their investments are operating effectively and that value for money is being achieved.
Demonstrating accountability is increasingly vital as regulatory scrutiny of cost transparency is growing, which requires easy access to up-to-date, accurate data to evidence that schemes have made the best decisions possible. In the past year, we have seen the Investment Association introduce an enhanced Disclosure Code for their members and the Local Government Pension Scheme Advisory Board (LGPS) launch their ‘Code of Transparency’ for asset managers.
During 2018 we can expect to see more asset managers sign up to the LGPS initiative. Over 30 asset managers have now committed to this voluntary code which seeks to deliver transparent and consistent investment cost and fee information between managers and schemes. Managers committing to the code must provide costs in a standardised template, breaking out various types of management fees, indirect fees, and transaction costs.
Most recently, new FCA rules which came into effect on 3 January 2018, require asset managers to provide transaction costs to Defined Contribution (DC) scheme providers and governance committees. Additionally, the DWP will require DC scheme trustees to publish cost data on-demand from April and expects costs to be publicly available online by November. While the obligation for DC schemes to clearly disclose costs and charges, as well as assess the extent to which it delivers value for money has been around for a while, few occupational schemes have been able to meet the requirement, often citing their inability to accurately obtain comprehensive cost data. The imposition of a fine for failure to comply of up to £50, 000, let alone the reputational damage that would be incurred, should mean that schemes take this requirement seriously.
In a further initiative to accelerate the transparency drive, last September saw the FCA set up the Institutional Disclosure Working Group (IDWG) to support consistent and standardised disclosure of costs and charges to institutional investors. The IDWG work is designed to deliver schemes with data which allows them to effectively manage and challenge costs, make better informed decisions on the composition and selection of vehicles and managers and compare charges between providers and against market norms.
The new cost collection standard templates should provide schemes with access to significantly more detail on their costs than existing templates can provide. Due to be published early this year, the templates should be instrumental in helping schemes gain easy access to this critical data.
Cost transparency is new to many – costs can be complex but they need not be confusing. Communicating the costs story can be a challenging and sensitive task so while having access to comprehensive cost data is a major step in the right direction, it will be important for schemes to work with specialists who can educate them on where costs occur and explain them clearly so the information feeds through into the investment decision-making process, along with other governance activities.
Achieving transparency is an evolutionary journey and will take time as understanding matures. 2018 should be a key milestone along the cost transparency journey as regulatory initiatives accelerate and schemes gain access to granular levels of cost data for the first time. Once schemes improve levels of transparency, the challenge will be about applying this insight in a meaningful way and knowing what schemes can do with the information. What is clear though is that without this information, it’s impossible for schemes to genuinely be fully in control of their fund.