We’ve been helping pension funds with their cost reporting since 2015. In the course of their research, our cost transparency experts have found that investment costs are up to three times higher than most in-house estimates, across both the UK and Dutch markets. This strongly suggests that pension schemes should take cost transparency and value for money assessment seriously.
14 Jun 2019
The three times higher figure is largely driven by transactions costs, which have previously been unreported. But there are other miscellaneous items, especially in pooled funds, that have also driven this three times estimate up. Having a cost transparency process provides pension schemes with the ability to uncover these costs across their funds and holdings.
“Our cost transparency experts have found that investment costs are up to three times higher than most in-house estimates.”
We have broken these costs down as follows:
- Management fees represent around 50% of the total investment costs
- Transaction costs account for 25% of the total investment cost
- Performance fees are around 10%
- General investment costs, including custody, performance measurement and consultancy fees, represent about 10% of the cost
- And Other costs, such as miscellaneous costs associated with investing in a pooled fund, total around 5%
So how do you collect cost data?
A new set of templates has been developed by the Cost Transparency Initiative and these bring together the work of the FCA’s Institutional Disclosure Working Group (IDWG) , the Local Government Pension Scheme (LGPS), the Investment Association and the Pensions and Lifetime Savings Association PSLA. It’s an all-inclusive template that covers most asset classes, including alternatives. The template doesn’t capture the total cost of ownership, but it does cover investment costs in granular detail.
The CTI templates are a great step forward, enabling schemes to have a consistent, standardised methodology when collecting cost data. We employ a seven step process to collect, analyse and report information back to our pension schemes. The first few steps capture data collection from our pension cost specialists and then we blend hands-on analysis with technology to analyse the cost data to make sure it’s accurate and the integrity of the data is secure.
“The CTI templates are a great step forward, enabling schemes to have a consistent, standardised methodology when collecting cost data.”
Bringing the data to life
We’ve also developed a simple check list that our trustees find very helpful. We encourage them to start by analysing their costs using information they already have. Then we get them to ask their managers to complete the CTI template, before moving on to evaluate their costs in the context of the services they are provided with. Once they have this, they can report back on their findings to their peers and members. We also encourage them to talk to as many advisers and pensions specialists as they can in the wider market.
“Visualisation tools really bring this cost data to life.”
For our part, once we’ve collected all the cost data, we report back to the pension scheme using visualisation tools such as dashboards. This helps trustees and their investment committees interpret what the cost data is telling them. Visualisation tools really bring this cost data to life.
In short, the more data trustees have on their costs, the more it helps them make better informed decisions. This in turn improves the governance of their pension schemes. But this isn’t just about cost savings. It’s about helping trustees to make a value for money assessment. And this is done in the context of the strategy, the fund performance and the service the trustees are receiving. Ultimately, we believe that it can improve members’ outcomes.