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Self-reporting on cost transparency for the pension funds' industry

By Pat Sharman, Managing Director UK, KAS BANK.

I came across an article in Forbes about the value of cost transparency. “Researchers say that when a firm does share cost breakdowns, consumers consider it a form of "intimate disclosure"--and people are often more attracted to brands that disclose intimate information.”
Drawing the parallel with the pensions fund industry, disclosure of costs will be viewed as a willingness to be open and share information that is currently being labelled as hidden, subsequently distilling trust and long-term loyalty to a specific pension fund/offering and the wider market.

19 Apr 2018

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I came across an article in Forbes about the value of cost transparency. “Researchers say that when a firm does share cost breakdowns, consumers consider it a form of "intimate disclosure"--and people are often more attracted to brands that disclose intimate information.”

Drawing the parallel with the pensions fund industry, disclosure of costs will be viewed as a willingness to be open and share information that is currently being labelled as hidden, subsequently distilling trust and long-term loyalty to a specific pension fund/offering and the wider market. Self-reporting is also a sign of long-term commitment to the market and tends to be viewed favorably by the regulators. Just like in the Energy trading market according to Federal Energy Regulatory Commission which encourages self reports.

At the same time, many executives in financial market institutions are consistently being asked to find new ways to improve performance and customer satisfaction. Many are venturing into exploring new technologies like AI, Blockchain and Robotics to support their operations, and look at their cost structures with a view to improve cost management, derive actionable insight, and justify the value for money for their shareholders.

Back in 2015 the FT wrote that “fund managers have been criticised for a continued lack of transparency around costs. Critics believe this opacity is hurting pension fund returns and damaging the reputation of the industry.”

Now in 2018 we see that the level of transparency in UK pensions has certainly been improved with efforts from the FCA, DWP and LGPS. These organisations are actively advocating cost transparency as a good governance practice, however we still have a long way to go in order to give members the comfort that we are delivering value for money as an industry.

For us trustees, there are multiple costs to be collected, monitored, accounted for and soon-to-be reported on to the regulators. For example, some of the more difficult costs to consolidate in pension schemes are investment costs, specifically transaction costs across alternative investments asset classes.

The challenge of monitoring costs

The UK occupational pension fund market is the second largest in the world (behind the US) and the largest in Europe with over GBP 2.22 trillion AUM, however it is largely unknown how much money is spent over the pension value chain.

One of the reasons for some costs being unreported, is that pension funds have complex infrastructural and operational challenges which often prevents them from having a complete visibility on costs across multiple data and operational silos. For example, a typical mid-size pension fund will need to aggregate cost data from at least 25 different sources and in multiple formats.

In addition, it’s the UK marketecture itself which makes it more challenging to institute and execute on cost transparency.

With the demand for transparency growing, and initiatives such as the LGPS Code of Transparency and the FCAs’ IDWG we are getting close to having a standardised cost collection template. Although, largely, the market is using excel spreadsheets for this purpose, which makes the process inefficient and reconciliation of cost data time consuming and therefore expensive.

I believe that the UK can certainly learn from other markets such as the Netherlands.

Best practice exchange

The Dutch pension fund industry has undergone a steady reformation over the last ten years and is widely considered to be the frontrunner in governance and transparency. One reason for their success is a well-structured cost reporting system as a part of their governance framework. Their journey towards achieving cost transparency (the identification and assessment of the total cost of ownership of a pension scheme, which includes pension management costs and asset management costs in conjunction with invest­ment risks and returns), began in 2007 with the introduction of the ‘The Financial Assessment Framework (FTK)’ to the Dutch Pensions Act, in order to assess the financial health of pension schemes.

Over time this framework evolved, and in 2011 The Pensioenfederatie (Dutch pensions’ industry body (PLSA equivalent)) recommended to its 220 pension fund members to report their pension management costs, asset management costs and transaction costs in a uniform manner via a cost collection template. To address costs that were unreported or unknown, The Pensioenfederatie produced a matrix of transaction cost (over)estimates for different asset classes.

In 2015, the implementation of article 45a in the Pensions Act, made it mandatory for pension funds to include a statement of administrative costs in their annual report. These guidelines are aligned to the recommenda­tions made by the Pensioenfederatie in 2011.

And it’s important to consider the results of embracing this change. An article published in 2018 by the Dutch fund and asset management association revealed a downward trend in average investment costs and transaction costs in NL pension funds (2012-2016). The data highlighted a 17% investment cost reduction for pension funds less than € 1 billion, and between € 1 billion – € 5 billion in size.

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I think a lesson for the UK is that the Dutch collaborated across the industry (pension funds, custodians, asset managers and regulators) building a robust framework which was developed over time and is updated regularly. The regulator supported and provided guidance, however it is the industry that drove the initiative. As noted above, it only became a regulatory requirement to report costs in 2015, 8 years after the introduction of the FTK.


Next steps
1. Stay tuned for my next blog where I will look into costs benchmarking, the need to redefine cost transparency and its value for the UK pensions market.
2. Get in touch with KAS BANK UK today to learn more.

 

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Pat Sharman

Pat Sharman

Managing Director - UK Branch
+44 207 153 3660