The costs and charges associated with running a pension scheme are an integral part of its governance and can have a significant impact over the long term.
01 Jan 2017
However, the simple truth is that only by better understanding costs can trustees be confident that they are making optimal decisions.
Cost transparency is still relatively new in the UK, especially when compared to the Netherlands – regarded as world leaders on the matter. We can learn much from the Dutch experience. Crucially, change occurred over the course of four years before the first cost reporting guidance; the drive for this was predominantly led by a high level of self-regulation.
As a custodian with Dutch heritage, we’ve seen the positive effects on the industry that cost transparency brings, including greater confidence in long-term decision making and better accountability. While it’s important to note that costs are not inherently bad, and the focus should be on achieving the optimal situation for your scheme, we saw the proportion of members paying over 1.5% in total costs reduce by 92%.
The UK is, however, a different market which presents unique challenges. Indeed, one key factor to note is that in the Netherlands the cost transparency revolution was industry-led before it became officially mandated. The Investment Association’s consultation exercise, the Local Government Pension Scheme’s proposed cost transparency code and the FCA Investment Costs Disclosure Working Group will help engage the industry on the subject of costs, but the industry would benefit further from an organisation to take responsibility for ensuring the accuracy and validity of all the data captured. Any solution should start with a simple and fit-for-purpose approach, which can then be evolved over time, tailoring it to meet the needs of the market.
Technology has undeniable potential to enhance the industry, while modernising and making pensions more accessible. In a bid to better understand and demystify costs and charges, there is a temptation to become heavily data-driven, but making sense of all this information can present a challenge in itself. Now, with the launch of our cost transparency dashboard for DB pension schemes, the industry has a comprehensive and collaborative solution which will allow data collection and visualisation at both a top-line and granular level, with potential for bespoke configuration.
Although some may see cost transparency as a challenge to the industry, what’s clear is that greater awareness and understanding of costs will lead to better operational decision-making, and the ability to identify areas for greater cost efficiency which ultimately should result in better outcomes for scheme members.
Whether the industry will choose to adapt and embrace cost transparency is yet to be decided, but pressure from the regulator is only going to increase. Herein lies an opportunity to get ahead, leading the industry in the drive for transparency, which can only benefit both the industry and scheme members. So what’s stopping us?