The pensions industry must address conflicts of interest ingrained across its systems, delegates heard at the transparency symposium last week, as the Financial Conduct Authority clamps down on the asset management industry.
Trust in financial services hit an all-time low in the wake of the global financial crisis and large companies evading tax through complicated vehicles. The latest wrangle over US multinational Google’s offshore structures and paltry £130m payout for back taxes – 3 per cent of profits – has curried no favour with the man on the street.
In the pensions industry, an era of change has brought uncertainty for savers, many of whom are reluctant to embrace their new pension freedoms.
Transparency is an absolute requirement to build the trust that is essential if consumers are going to come into the market and… start building the sort of asset bases they need for their futures
Daniel Godfrey, Big Issue Invest Fund Management
Transparency has become even more crucial in the new environment – where savers must make active choices to achieve an adequate income in retirement.
Research from the Pensions and Lifetime Savings Association showed two-thirds of those eligible to access pension freedoms have not yet done so, and many reported low financial confidence.
However, mistrust is rife all the way along the value chain – from savers to regulators – evidenced by the Financial Conduct Authority’s market review of the asset management industry currently in train.
At the end of 2015 the UK watchdog launched a review of cost control, competition and conflicts of interest across asset management and investment consulting industries.
Transparency task force
Experts shared their views on how to drive more transparent practices for the benefit of pension savers at a symposium run by campaign group the transparency task force last week.
Speaking before delegates, Mary Starks, director of competition at the FCA, said value for money and the role of investment consultants will be key focus points for the market-wide review.
When comparing the offerings of two asset managers, Starks said trustees and investors should be able to clearly gauge which party offers better value for money by assessing performance and cost.
Top performing in transparency
Catherine Howarth, chief executive at responsible investment charity ShareAction, provided delegates with examples of positive steps that have already been taken by industry participants:
• Provider Aviva will hold an annual general meeting this year for all members of its pension products
• Scottish Widows is undertaking a climate audit of its default funds
Howarth said reporting in pension funds needs to move further towards corporate reporting for shareholders, in order to give savers full access and oversight of the way their savings are invested.
“We have to open up the industry to the voices and experience of pension savers,” she said.
“We need to do a lot more to help trustees and investors to answer both questions,” she said.
On the subject of fiduciary management, Starks said the practice may well bring “economic efficiencies”, but the industry needs to better understand the impact of potential conflicts on investors.
However, Con Keating, head of research at scheme insurer BrightonRock Group, said it is common practice for managers to deny trustees and members of independent governance committees access to fund data on the grounds of data ownership.
Keating called for the FCA to address data ownership in its review. Managers “can’t have their cake and eat it” he said.
Preventing fiduciaries from having full oversight of performance figures is ultimately to the detriment of end users, he added.
Ingrained conflicts
Daniel Godfrey, non-executive director at Big Issue Fund Management and former chief executive of the Investment Association, said conflicts of interest are ingrained in practices across the pensions industry.
“Transparency is an absolute requirement to build the trust that is essential if consumers are going to come into the market and… start building the sort of asset bases they need for their futures,” he said.
In the current environment, savers will not move their money from “under the mattress in a bank earning zero interest” into asset classes and funds with the prospect of generating better long-term returns, he added.
This played out in the PLSA’s report on the first six months of pension freedoms. Among the 204,000 savers who accessed some or all of their pension as cash during the first six months of pension freedoms, more than four in 10 (41 per cent) have directed their funds into either a current or savings account.
Godfrey said the introduction of a single charge for investment management services – excluding dealing commissions and execution costs – could simplify complex distinctions between explicit and implicit costs.
“Agents and investment managers should make a single charge for clients for everything they do that’s different to what you would do yourself if you were managing your own portfolio,” he said.
