Transparency welcome, but method for managing info yet to be agreed

As with any new requirement, some are better able to comply than others. Unfortunately for those trustees invested with the non-compliant investment managers, their duty of compliance is compromised too.

Trustees are accountable to their members, and members therefore require reassurance that the trustees have transparent oversight of all costs being incurred

The chair’s annual statements required for defined contribution schemes demand a value for money assessment, taking into account all costs and including an illustration of how the total costs will affect members’ benefits. It is not unreasonable, therefore, to expect all investment managers to meet their obligations in due course.

So, is this enough? Will this level of transparency ensure the best outcomes for members?

The Pensions Regulator is very clear that trustees should understand the investments for which they are responsible.

Undeniably, this must include the cost of those investments as well as the inherent risks, expected returns, investment beliefs and diversity of staff. How, then, have trustees complied with the watchdog’s requirements to date if they have been kept in the dark regarding transaction costs?

Make comparisons 

Have members been disadvantaged by not knowing the breakdown of charges being applied to the pension scheme’s investments on a scheme level for defined benefit schemes or on a member level for DC schemes?

The short answer is no. The level of fees is indeed crucial, since investment returns must be net of fees when monitoring returns. But should the amount of those fees be known in detail? The industry believes so.

It is akin to looking under the car bonnet when you buy a car. The various components must come together to deliver a return, but are there any elements that do not stand up to scrutiny and, therefore, pose a disproportionate risk should another part fail? The pressure on investment managers to provide this information must not abate.

However, what should trustees do with this information when it is provided? Given that different levels of transaction costs are anticipated across the range of asset classes, what monitoring should be done and how often? Some possible metrics include:

• Correlations between risk or return and transaction costs;

• Comparisons with the peer group; and

• Comparisons across asset classes.

None of these metrics would be expected to change considerably over time and the onus should be on investment managers to provide the detail to populate these comparisons.

Communicate with your managers

A further metric could be where there is a significant deviation from the past position and its significance. For example, has there been a change in the investment manager’s processes or house view? A conversation with the investment manager would be necessary to reveal the cause for the change.

With the exception of very large schemes, this level of analysis would be difficult at scheme level, imposing an unwieldy burden on the trustees.

This suggests that independent, industry-wide monitoring is appropriate. Trustees would consider the detailed costs when selecting managers, but the ongoing monitoring would be outsourced. Given the length of trustees’ agendas, outsourcing could ensure their time is prioritised effectively.

Once the trustees have access to full transparency, what should be shared with members? Pensions communication is regularly accused of being too complex.

That said, trustees are accountable to their members, and members therefore require reassurance that the trustees have transparent oversight of all costs being incurred. However, providing the detail together with the necessary explanations and caveats would be a step backwards for the industry.

The annual report and accounts should contain the detail, and the chair’s statement in DC schemes will comment on the impact on members’ benefits, providing simple illustrations. No additional disclosure should be required.

Full transparency is welcome, but a method for dealing with the information in a proportionate and effective manner is yet to be agreed.

Melanie Cusack is client director at independent trustee company PTL