The WPC's cost and transparency inquiry reveals it is impossible to know exactly how much consumers and trustees are paying in charges. Victoria Ticha takes a closer look
As parliament resumed last week, first up on the Work and Pension Select Committee's (WPC) agenda was its inquiry into pension costs and transparency - which is focussing on whether the pensions industry provides sufficient transparency around charges, investment strategy and performance to consumers.
The evidence put forward in the session on 5 September highlighted the inherent tension between the profitability of the industry and its job of protecting the consumer from adverse costs.
Complexity is a problem
Asset managers' failure to provide clear transaction costs incurred in pension funds leaves savers "deeply depressed", remarked Frank Field during the inquiry.
Indeed, giving evidence during the session, the Financial Conduct Authority's (FCA) Institutional Disclosure Working Group (IDWG) former chairman Dr Chris Sier said some asset managers will inevitably refuse a request by pension trustees to hand over data on the charges they levy "because they genuinely have something to hide".
But this is not the only problem. Sier blamed the lack of transparency within the industry on its "operationally inefficient" complexity - explaining that a simple equity fund in the retail space can have as many as 15 layers of intermediation between a member and the marketplace, with each layer adding extra costs to the member.
Complexity is also intimidating for people to address, and Sier said institutional investors have either learnt to dispel their disbelief, ignore the fundamental principle of asking ‘how much' something costs, or have simply not been aware of the need nor the benefits of collecting such data. Also, poor consensus on what data should be collected makes the task virtually impossible.
"At its core, the pensions industry is in an extremely complex and messy state, and that needs to be resolved, but it can only be resolved by getting data on it," he said. "The mantra that net performance is all you need has erroneously and sadly prevailed."
Protecting members' interests
The IDWG recentlY proposed five cost disclosure templates to be adopted by asset managers, which will be published by the FCA this autumn. However, the FCA is not forcing asset managers to fill out the template.
Sier said the templates would "address the root causes" of fund management opacity, but warned: "There will always be a pool of asset managers, but an increasingly shrinking pool, who will either refuse or decline to give data."
Sier explained: "Even if you set a cap [on charges], if you don't know what is in the cap and what is outside of the cap - it doesn't matter what the cap is. So the first thing we have to determine is what the entirety of cost is, and then we can think about managing it down."
Giving evidence to the same inquiry, Cambridge Judge Business School visiting fellow David Pitt-Watson, pointed out that fees of 1% could reduce the size of a pension at retirement by 25%, and that charges of 2% could potentially halve a savers pot.
According to Pitt-Watson, Independent Governance Committees "have not been effective" in getting pension savers a good deal as they have "just scratched the surface of their duties".
Also giving evidence, Transparency Task Force founding chairman Andy Agathangelou told the committee that a huge attitudinal and regulatory change needs to happen in order to solve the problem.
"Let's understand the commercial dynamics of the industry and recognise there's a true tension between the profit motives of the industry - as laudable as they are - and the simple desire to protect the interest of the consumer from adverse costs," he said.
While Sier said the industry needs a data collection standard, and suggested a public register of asset managers who do not make their charges transparent, Agathangelou went a step further and suggested such standards must be mandated if the industry is to overcome the "festering sores on the face of financial services".
While Agathangelou acknowledged there has been improvement in the level of consumer protection offered in the UK, the pensions industry is "a long, long way from solving the problem" and it would be "a huge mistake" to underestimate just how big a problem it really is.
If the industry is to truly protect the interest of its members, Agathangelou recommends the regulatory construct must truly reflect the way we want the industry to behave. This means accepting the commercial dynamics of the industry.
Also, he said it means understanding cost, performance and what risks people are being exposed to, where their money is really being invested and fixing data integrity by moving towards a mandatory framework.
"The industry will always adopt a profit maximising agenda if it is allowed to do so, and while it's right that it does, as regulators we must address that," he said. "Surely we ought to have much greater transparency around where the trillions locked up in pension schemes are actually being invested."
"Why should we run the high risk strategy of asking the trade bodies, who ultimately might have some natural conflicts of interest, to take care of disclosure and transparency moving forward? I'd be far more relaxed if the regulators regulated," he concluded.
The FCA's voluntary cost disclosure templates
In July, The FCA's Institutional Disclosure Working Group (IDWG) recommended five institutional cost disclosure templates, although it said these should not be made mandatory.
The five templates are: a main account-level template covering most product types; a user template summarising the data from the account-level template; and three sub-templates covering private equities, physical assets, and ancillary services or custody.
While the IDWG has not recommended making use of the template compulsory, it has said institutional investors, investment consultants and other market participants should apply pressure on providers. Additionally industry representative organisations and trade bodies, such as the Investment Association (IA), should "be prepared" to adopt the templates as their own disclosure codes and support their members who do use it.
Improved institutional investor education on cost disclosure and its benefits should be provided, the working group said, but the FCA should not introduce any rules to mandate the collection or submission of data from providers. It, however, should consider this if there is poor take-up, difficulties in investors obtaining the information, or if misrepresentation of data is found.
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