The code submitted by Chris Sier's working group on cost disclosure should make a material and positive difference to the industry, writes the Society of Pension Professionals' president Paul McGlone, but schemes have an obligation to make use of this new information.
Not all of the detail is yet available, with a summary of the report sufficing until the launch of the body that will oversee the code, but what we can see, both in formal documents and from comments made by those close to the IDWG, is encouraging and welcome.
It should make a material and positive difference to the industry.
At the core of the code is transparency of investment costs. This goes back a long way, at least to the Myners report in 2001. Few would object to that simple principle, but it has been difficult to deliver in practice.
If this information is important for schemes to have then it is important to understand
One barrier has been commercial pressure. Many managers did not want to be the first to disclose the full costs involved with managing assets.
Even those that did faced consistency issues – different managers took different approaches, while different asset classes faced different elements of costs. Schemes therefore struggled to obtain, and then make sense of, the necessary information.
The code helps with these. Most managers are now supportive of transparency, but the code removes the commercial risk of disclosing information.
Indeed, there is now more commercial risk in not disclosing information, and the templates due later in the year will help provide consistency.
Demand quick sign-up
However, while this is clearly a step forward, further challenges remain before the code fulfils its potential.
Availability of data remains an issue in some areas, particularly when relying on third parties. Managers are working hard to fill gaps, and consistent templates will give added impetus to this, as they know that the requirements are now relatively stable.
Take-up of the standards is something to keep an eye on. For UK managers dealing with UK schemes we expect to see rapid response.
The willingness of managers to sign-up to the Local Government Pension Schemes’ own transparency code is evidence of this. However, in a global market it is difficult to see all international managers adopting UK standards unless they have a substantial UK pension scheme client base.
It is not clear how schemes and advisers will treat those managers who refuse to provide the information.
Small schemes may be swamped
Perhaps the biggest challenge is what to do with the information. With disclosures from multiple managers, even in the same format, there is a risk that trustees feel swamped with data.
Some boards will have the skills and time to analyse the new data themselves. Those that do not will need advice and support from elsewhere, but that will cost.
If this information is important for schemes to have then it is important to understand. So what can schemes realistically do? In the short term possibly not a lot. Smaller schemes will not be able to influence costs any more than they can influence, for example, an environmental, social or governance policy.
Larger schemes, advisers and consolidators like fiduciary managers should have greater influence, and in the long term smaller schemes will play a role as managers that are outliers start to come under pressure in manager reviews.
Cheap is not always good
As to what represents an ‘outlier’, that does not just mean higher costs. For example, as cyber threats grow, managers who spend the least amount of time protecting their assets from this emerging threat may be more at risk than those that spend more.
The code allows schemes to access and interpret this sort of information for the first time, allowing them to engage with managers to get a better judgement of the value being added.
Looking to the future, it is unlikely that the initial templates will be static, and it is right for the IDWG to put in place a review process from outset.
In the same vein, it is helpful that compliance will not, at least initially, be documented in a specific FCA rule. Mandating at this stage would only stifle evolution and innovation, and that would risk turning helpful information into unhelpful box-ticking.
The IDWG cost code is absolutely up to scratch – it is certainly not finished but it is a great start.
Paul McGlone is president of the Society of Pension Professionals and a partner at Aon
