Small schemes lagging larger peers on cost transparency

Here they are, specifically around the non-compulsory use, or voluntary use, of the Cost Transparency Initiative’s templates for asset owners to collect cost and performance data from asset managers.

I chaired the Financial Conduct Authority working group that created what are now called the CTI templates and the voluntary ruleset for their use, and there is one thing I will always stand by: the templates were created as a best-practice guide for what data asset managers should give and for what asset owners should ask in relation to the costs of asset management. This is their fundamental purpose, to give people a simple framework for communicating cost data that is standardised, replicable and comparable across almost every fund type and asset class.

If asset owners use the templates voluntarily it is because they truly understand the utility of the process and the data, and are more likely to use the data to assess the value for money that managers provide

This standardisation also allows for proper like-for-like comparisons and benchmarking, which is something everyone wants and needs but has until now been missing, given the plethora of non-standard formats and expensive approaches previously available.

Do I think voluntary submission by asset managers and voluntary use by asset owners is the way to go? Bluntly, yes — but with one caveat.

Voluntary use by asset owners is important because if you do something voluntarily it is because you want to rather than because you are told to. If asset owners use the templates voluntarily it is because they truly understand the utility of the process and the data, and are more likely to use the data to assess the value for money that managers provide. Cost data is, after all, the ‘money’ in value for money.

They are also more likely to compare their manager choices to the market that standardised data offers and to test the relative efficacy of those choices, thereby assuring their stakeholders that they have made good decisions.

Everyone wants to prove they have done the right thing. Collecting and comparing the data using the templates allows that, as does using the templates in the first place.

Showing managers’ true nature

Voluntary submission of data by asset managers has a different purpose. It can show asset owners the true natures of their managers and the strength of the relationships they have with them.

The CTI standard was set under the direct scrutiny of the FCA and agreed by industry trade bodies and key stakeholders alike, including some of the largest asset managers in the world. The templates therefore carry considerable gravitas, and asset owners have the right to the data that is contained within.

To decline or fail to give data upon request should be seen as a major issue, specifically in relation to the respect and operational capability of asset managers.

I have lots of data on this and since finishing the work with the FCA I have built and run ClearGlass, a technology ‘utility’ that works for asset owners to obtain and analyse data from asset managers using the CTI templates.

Last year, ClearGlass collected cost and performance data for more than 500 pension schemes with total assets of almost £700bn, including more than 65 schemes with more than £1bn in assets.

This meant collecting data on more than 9,000 portfolios from in excess of 400 managers. I know which managers can and will disclose, and which managers cannot and will not. Fortunately, most can and will — although some needed to be reminded of their obligations — but this has got much easier over the past two years.

Data based on a sample of ~2,500 mandates of data collected in 2019 from ~200 ClearGlass DB pension clients. Additional fund expenses include administration and other costs relating to pooled fund management, and additional costs relating to Infrastructure and private equity fund management. Performance fees include carried interest charges for private equity. Property expenses are the additional property costs incurred by funds that hold real estate products.

There are currently only 29 managers that consistently struggle with either the principle or execution of submitting data. From a universe of more than 400, that is not bad — and even these 29 have still given data, it is just that they are not very good at it.

Small schemes lagging

I broadly agree with the voluntary nature of the recommendation in the report, with this one caveat: all of my 500 clients are big. By big I mean they almost all have more than £100m in assets, with a good portion above £1bn. Big schemes get it, but where are the small schemes?

The UK’s defined benefit market has 5,500 schemes with total assets of £1.5tn. Hence, 5,000 small schemes have not jumped on board with cost transparency, and I strongly suspect that they are probably the ones that need it most.

Whether compulsion to use the CTI to collect data is the right way forward, or education on the needs and benefits is best, needs to be decided — but please decide on one or the other.

For a small scheme, every day without the data is a day of potentially unnecessary cost incurred. I make the same assertion for the defined contribution market, which also has been slow to adopt the templates (ClearGlass has only 35 or so DC clients) and is equally in need.

Using the data

The data is collectible, managers generally give data, and large schemes and their advisers are on board with using it. This leaves one other question to cover: is the data useful once you have it?

Aside from all the times I have heard clients or advisers say “hang on, what on earth is that cost? I’ve never seen that before”, or “I thought there was a fee cap?”, there is a single compelling demonstration of how useful the data is.

If one broadly categorises costs into ‘known’ (previously seen, collected and explicit) and ‘unknown’ (previously not seen or collected and mostly implicit), the ratio of known to unknown for almost every pension fund for which I have collected data is 50:50. In other words, the costs collected using the CTI templates generally double the reported asset management costs of a pension fund.

As you cannot manage what you do not measure, the process of collection using the CTI really gives you something to get your teeth into — and that alone makes them worth using.

Dr Chris Sier is chair of ClearGlass Analytics and led the FCA’s Institutional Disclosure Working Group