Campaign for greater transparency is critical to proper governance

The Financial Conduct Authority has published new rules requiring those managing funds in respect of defined contribution arrangements to comply with the Packaged Retail and Insurance-based Investment Products legislation. This requires asset managers to provide the following upon request:

• Information about transaction costs calculated according to the ‘slippage cost’ methodology;

• Information about administration charges;

• Appropriate contextual information.

What are the benefits?

Responsible parties often have an extremely difficult choice in selecting the appropriate manager to meet the agreed mandate. 

The increased clarity will allow schemes to check the homework of investment consultants who provide investment shortlists and to make better selection decisions

The universe of funds is wide ranging, and consultants supporting selection exercises often provide a number of options that must be compared and contrasted.

The availability of clear information allows the responsible parties to properly understand the total cost of each of the funds as well as individual cost components, making it easier to compare funds. 

It can be easy to focus on the headline charge rates, but if you do not understand the natural fund expenses it would be easy to select an inefficient manager, which impacts returns.

Responsible parties may also want to select funds that have less opaque charging structures to maximise transparency. This should build member confidence.

understanding the range of additional expenses can also give clarity on how total fund costs could develop as strategies are refined. 

Multi-asset funds in particular will have varying annual costs depending on the level of underlying movements and trading structure. Having all the increased information makes its possible to better understand the future potential costs not just those in the last headline year.

Active versus passive

The merits of active versus passive management is one of the most debated issues in the investment advisory market.

The argument is heavily clouded by historic difficulties in understanding the true cost of active funds, and therefore not being able to properly measure the benefit against cheaper passive alternatives.

For the reasons set out above, the disclosure of transaction costs will enable trustees and IGCs to better understand and to weed out wasteful and inefficient active management.

They must ensure active managers are consistently beating the passive index, net of the relevant fees. They would expect this to be more than marginal outperformance, as active management brings the risk of underperformance that is not prevalent in the passive alternatives.

Monitoring and benchmarking

Trustees are not only responsible for selecting appropriate funds, they are also required to monitor their ongoing performance.

While the return achieved is the key driver of performance, understanding wasteful management practices is also an important consideration.

In any form of investment, every basis point counts and wasteful management must be challenged. The availability of wider details will allow trustees and IGCs to monitor charges against the investment management agreement.

The campaign for greater investment transparency is critical to the proper governance of all pension arrangements. 

The increased clarity will allow schemes to check the homework of investment consultants who provide investment shortlists, to better understand the charging underpinning investment management agreements and to make better selection decisions. 

This process can then be followed by more open reporting to better monitor these decisions. While the increase in charging clarity is helpful, there is still work to be done in ensuring the visibility of all investment charging.

Chris Roberts is trustee representative at Dalriada Trustees