The chair of the Financial Conduct Authority’s working group on cost disclosure has spoken out about a dangerous fixation with net performance in the pensions industry, insisting that granular data is needed for the recent transparency drive to have any effect.
The FCA's asset management market review from 2016-17 had uncovered issues with competition and transparency in the sector.
Trustees must not tolerate the asymmetry of information present in some asset managers' client relationships, warned Chris Sier, and should insist on detailed data even if they do not understand it themselves.
He pointed to the importance of selecting competent investment consultants to interpret this data.
Sier was chosen by the markets watchdog to develop a template for cost disclosure in August, after its asset management market survey revealed weak price competition and a buy side that struggles to get the data it needs.
It’s not necessary for you to know all of this detail, but all this detail adds up into some number that you should know
Chris Sier, institutional disclosure working group
Speaking at the Pensions and Lifetime Savings Association’s annual trustee conference in London, the academic and former policeman said he was frustrated that many managers, trustees and even consultants continue to believe that performance after fees is the only number of importance to pension funds.
“You don’t make a purchasing decision on the basis of net performance, you make it on the basis of cost,” said Sier.
“It’s fine in a rising market when net performance is giving you a positive return,” he added. “But if those costs are fixed, and largely they are, in a falling market a high fixed cost will give you a negative return. A low fixed cost may still maintain you in a falling market with a positive return.”
Do not be afraid of detail
Sier’s working group, comprising asset owners, managers, consultants and independents, expects to release its template early next year.
It will go further than the template devised by Sier for Local Government Pension Scheme participants, adding more asset classes and further levels of detail.
Member-nominated trustees may not feel they are capable of analysing such detailed disclosure on their own, especially with regard to complex assets like derivatives, but Sier said they should still insist on disclosure.
“It’s not necessary for you to know all of this detail, but all this detail adds up into some number that you should know, and you can’t trust those numbers unless you’ve got someone who’s going to interpret this for you,” said Sier. “I would point the finger at your consultant.”
Scrutinising costs is worth it
Anecdotally, the benefits of greater transparency on investment costs are beginning to manifest themselves in the industry.
Sier said local authority pension funds had begun to receive voluntary offers for fee reductions from their asset managers in the wake of their adoption of a cost disclosure template.
“The threat of transparency, the threat of cost data collection, has resulted in a voluntary contribution of £125m to the performance of those funds,” he said.
Large pension funds outside the local authority sector have previously made significant savings by carefully scrutinising their costs. In 2014, a forensic accountant hired by RPMI Railpen found its investment management costs were four to five times what it was being billed for, enabling it to cut costs for the members of the Railways Pension Scheme.
Help small schemes take action
Big schemes have larger governance budgets to investigate fees, and are also better able to negotiate new fees.
David Weeks, co-chair of the Association of Member Nominated Trustees, said while this might be the case, smaller schemes are still likely to see a net benefit from carrying out this kind of investigation.
“You shouldn’t be too formulaic about [cost scrutiny],” he said. “You never know which stones you turn up are going to be the ones… where the savings will come from.”
Trustees are responsible for looking after the best interests of their members, but they may need to be helped to do so, according to Alex Cunningham, MP for Stockton North and shadow pensions minister.
He called for Sier’s new template to be mandatory for all schemes and managers when it is published, in order to place the duty for cost disclosure back on fund managers.
“The custodians of this information need to know that they are responsible [for disclosure],” he said, adding that his party “want to work with” asset managers to ensure a pensions industry that works for members.
