Cost scrutiny intensifies as TTF calls for select committee inquiry

The Transparency Task Force’s petition, which was presented to MPs on the committee last week, attracted more than 100 signatories, including industry figures and academics.

Investment costs have already attracted interest from the Financial Conduct Authority in its asset management market review, but the campaign calls for scrutiny of cost efficiency across all pensions-related charges.

One of the reasons costs are high in the pensions environment is because of the regulatory burden

Hugh Nolan, Spence and Partners

Administration, compliance and custodian services should all fall under the scope of the inquiry, according to the taskforce.

“It doesn’t matter to the consumer whether a pound wasted is a pound wasted by the asset investment industry,” said Andy Agathangelou, founding chair of the campaign group, who compared the pension system to a leaky bucket with multiple sources of hidden costs.

Select committee remains non-committal

The call for an inquiry received positive, if non-committal, comments from the Work and Pensions Select Committee, who, according to Agathangelou, had previously asked for a show of industry support for the issues before considering launching an inquiry.

Speaking to the Financial Times last week, Frank Field, chair of the committee, said: “I’ll be looking at the petition, and the issues it raises, very carefully. It will then be for the committee to decide how it wants to respond.”

If recommendations are made by the committee and approved by government, Agathangelou expects a further review to be carried out by both the Pensions Regulator and the Financial Conduct Authority.

He said he hopes that a July inquiry outcome would coincide with the end of the FCA’s review of the asset management industry, thus freeing up both regulators to conduct their own investigation.

A regulator spokesperson said the regulator was already working closely with the Department for Work and Pensions on improving cost disclosure, and welcomed the FCA’s participation.

Do we need an inquiry?

Few industry figures argue that transparency over investment costs is not a problem for the pensions industry.

Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association, which noted the length of the value chain in its own defined benefit report, voiced his support for tackling transaction costs.

“It is clear that inadequate reporting or visibility of the ‘true’ costs of transaction costs can have a real impact on scheme performance and member outcomes,” he said.

However, support for a review of the hundreds of individual costs which could potentially affect pension savings, each identified by the taskforce in its request, was more patchy.

“Lower costs are a good thing, but one of the reasons costs are high in the pensions environment is because of the regulatory burden, and another inquiry [...] isn’t going to help with that,” said Hugh Nolan, director at consultancy Spence and Partners and president of the Society of Pension Professionals.

He also argued that cost should be evaluated within the context of value added, and voiced support for a disclosure regime that would aid that assessment.

“Sometimes a higher charge [...] gives you access to a better return,” he said.

Inefficiencies do exist

Given that opaque charging structures are by their very nature hard to detect, some have argued that a comprehensive review might unearth previously unidentified inefficiencies.

“When individual schemes start to look at cost, the picture tends to be that there is more information that’s of interest than they thought,” said David Weeks, co-chair of the Association of Member Nominated Trustees.

He cited the example of RPMI Railpen using a forensic accountant to expose hidden costs, adding: “The lesson is to look everywhere.”

But even where pricing inefficiencies are discovered, it is not totally clear that inquiries and regulation would help.

Daniel Taylor, director at administration specialist Trafalgar House, said the admin services are “not a price-efficient market at all” due to contracts which are sometimes continued for 15 years, and a trustee reluctance to question existing arrangements.

But for many trust-based schemes, particularly in DB, costs are borne by employers, and the difficulty in establishing a charging framework means launching an inquiry might not be effective.

“It has to come down to trustees,” said Taylor. “Where a change occurs within the scheme that should automatically trigger a benchmarking exercise.”