Investment costs in DC have been the focus of transparency initiatives so far, but PASA's Margaret Snowdon says we should look to other areas of opacity.
The Cambridge dictionary describes transparency as “the quality of being done in an open way without secrets”.
Despite this, some of the debate around transparency and value for money is framed by a general assumption that low costs are better than higher ones. This correlation is not certain.
Despite asset managers being in the spotlight today, transparency is needed across other parts the pensions industry too
People need confidence to save, and the noise around the lack of transparency in pensions damages that confidence. Nonetheless, it is necessary to force change for the future.
Cheating and scams thrive where information is opaque, so transparency is a vital quality for pensions as there is already so much mistrust in the system. It is impossible to judge value for money if costs and charges cannot be explained, measured or compared.
Focus should extend past DC
Much of the focus on transparency centres around costs and charges taken from DC pension pots, but we need transparency in many other areas of pensions too.
There are caps on exit and management charges that apply to particular products and circumstances, but there is still confusion over what is included in the cap and what falls outside of it.
There are more than 100 different costs and charges faced by pension schemes, excluding the cost of poor practice. Some of them are worth paying, while some are of no value to the customer.
The Financial Conduct Authority consulted on transaction costs in investment management, and has introduced new mandatory rules for providing information about transaction costs and administration charges on request.
The Department for Work and Pensions is looking at the same thing for non-FCA regulated arrangements. A united front across the industry is vital.
Getting it right on investment
Standardising how costs and charges are disclosed is a huge step in the right direction, but will probably fail to deliver complete transparency because so much will still be open to variation, including how the information is set out for trustees and independent governance committees.
Investment transactions are very complex, including explicit and implicit costs, covering many different asset classes. There is also a risk that the calculation method could be manipulated or used inconsistently.
IGCs have been deeply engaged with the topic of value for money over the last two years and many have found it impossible to gather the required information.
The FCA has made it clear what it expects of IGCs, and the new rules will help IGCs collect most of the information they need to help gauge value for money for scheme members.
What everyone wants is fair pricing and disclosure of charges will help keep a competitive tension that will ultimately reduce costs without compromising the quality and value.
Many sectors need more transparency
Despite asset managers being in the spotlight today, transparency is needed across other parts the pensions industry too.
Asymmetry of information is a serious concern. Jargon and lack of consistency and clarity in language are a barrier to understanding and comparison.
Management fees for DB schemes are not always transparent and you are not always able to measure them. Sometimes fees are charged at a certain level because they always have been, not because that is a fair cost for the work done.
Value billing does not always represent value for the scheme, and service standards can sometimes be manipulated because fees may be at risk. Mistakes cost money, but can be hidden or poorly defined, and some contracts can be so vague as to be next to useless.
Back to fundamentals
People are not interested in pension saving and will not spend lots of time on it – they just want to know five things.
How much will be deducted from their savings and why, whether they can do anything about it, and what they will get at retirement are key concerns. Savers also need to know how to get more information and what will happen if things go wrong.
Managers and advisers cannot possibly act in the best interest of customers without transparency.
We have come a long way since transparency started raising its head and we should be glad of it, while being wary of thinking that the job is done.
Margaret Snowdon is chairman of the Pensions Administration Standards Association
