RPMI Railpen is in the next step in the journey towards achieving cost disclosure. Victoria Bell tells Stephanie Baxter about taking part in the Cost Transparency Initiative's pilot phase
The Cost Transparency Initiative (CTI) was launched last November to take forward the work of the Institutional Disclosure Working Group, which had produced industry-wide cost disclosure templates in a bid to provide institutional investors with a clearer understanding of the costs and charges for a given fund or mandate.
Since then, the CTI has been beta testing them with a number of pension schemes and providers - and the pilot phase for the templates came to a close at the end of February.
The templates are expected to be delivered across the industry in the spring, likely in the back end of April or early May.
The big question was whether asset managers would be willing to give the information when there is no regulatory requirement for them to do so yet. According to Victoria Bell, director for trustee accounting at RPMI Railpen, which manages the circa £30bn Railways Pension Scheme, it has been a more positive experience than she had been expecting.
"I was expecting a fair bit of pushback from the investment managers but they have on the whole been accommodating and if they couldn't give us the information before, they are now committed to give us it in a couple of months' time," she says.
"They asked us an awful lot of questions, which to me shows there's such a need for this in the industry, and that there is a lot of confusion, uncertainty and lack of transparency. They didn't understand what or why we were asking them, how to fill in the form and were asking ‘what's this cost and where should it go?' Some managers put cost data in the wrong areas. We need managers to understand their costs before they report them to us.
"We had a few push back saying ‘no the information's in the year-end accounts, we're not filling it in for you'. When we went back and explained why and that other asset managers were doing it, and how difficult it is to extract the information from the year-end accounts, they all eventually obliged."
Not all asset managers were able to give RPMI Railpen all the information. "Those that couldn't fell into two groups: one said they could but not yet as they were working on their systems and would have it ready by the back end of April. Some others - mostly private equity managers - didn't have results yet, but said they would be able to in time," she says.
Another question was whether the template would work for most alternative investments. RPMI Railpen had a few issues with a royalties fund and a ground rent fund which did not quite fit into the template - but it generally worked for all its alternatives and other asset classes.
The template is "very nearly user-friendly" but "is not quite there yet", which is the whole point of doing the pilot study, says Bell.
"The template will drive consistency and comparability, and will make it really easy for trustees and investors to understand the full costs of their investments and get full transparency without having to hire people to go through reams and reams of financial statements to pull costs out. Once we've got a handle on costs, then we can be better informed and make better decisions for members."
RPMI Railpen's involvement in the pilot study is the next step in its journey towards cost transparency, which started with its investment transformation programme in 2013. This was a full roots to branches review of its investment processes, focusing on the value chain, with the overall aim to improve value for a given level of risk.
It went through the reports, accounts, and financial statements to get all the costs. The scheme thought its costs were around £80m but found they were actually closer to £280m. The scheme has gradually reduced total costs from 1.69% of assets in 2011, to 1.05% in 2016, 0.98% in 2017 and 0.85% in 2018 (draft figure). Some savings were made through direct costs but the bulk was from indirect costs, which has come from getting greater transparency without changing asset allocation too much. It evaluated its use of fund-of-fund structures, renegotiated investment management fees, and in-sourced investment management activities where it had in-house skill.
RPMI has set up an internal fund manager fee forum to look at things such as commissions and transaction costs including market impact. "We need to know all of those kinds of costs so our next focus is to start and manage those costs."
The group has been set up across its private markets team, public markets team, Bell and the forensic cost accountant to start and drill down into the transaction costs - commissions and market impact. "We'll start to get transparency of those costs, and then we can manage them. I'm pulling all the information together for our first meaningful meeting in March to see because at the moment we're in the cost measuring stage. Then we can discuss and start to manage them."
Several people are looking at costs as part of their role across front office, back office and senior management, but the bulk of work on hidden costs is still done by the forensic cost accountant.
"We were lucky to have our friends in cost accounts. So we've got resource there that we can use and start digest the information that we're getting from our managers, and they can be a bit tenacious and push the managers to get that information. So we are quite lucky in that respect, but it's going to be a challenge."
Bell says over the past couple of years or so there has been a "gradual change" rather than a step change in asset managers' attitudes towards cost transparency.
"Around 10 to 15 years ago there were probably fund managers in our private markets funds who we weren't allowed to talk to [about these costs] or ask for anything. We gave them money to invest, they gave us standard quarterly reports, but if we had any supplemental questions or just wanted a deeper understanding anything further, it was difficult to get that. To go from that position to one where they are now giving us more information and are generally more obliging, is really good."
"You can kind of see how they could argue ‘why does it matter if our fees are generating the returns that you want net of fees?'. But we do need to know what the fees are. One of our funds that we invested in generated phenomenal returns, but we were paying around 27% in performance fees. And we were thinking ‘this fund manager's fantastic as they're generating phenomenal returns', but actually they were taking more of it than we were aware of."
The scheme is gradually bringing more investment in-house, and managed around £11bn out of a total £27bn assets at the end of December 2018.
The scheme bought all its £2bn property investment in-house last year to reduce the cost, while £3.7bn (70%) of fixed income is managed internally.
RPMI is taking "baby steps" with bringing equities in-house, having already brought in around £3bn which equates to a third of its total equity allocation.
"The trustee wanted us to take baby steps, because we had an unproven record in managing our assets in-house. So let's start small and then grow. But we'll be managing more and more in-house. It all depends on whether we have the capability to do it and if the trustee is happy.
"Where we're invested in more unusual markets like emerging market debt, for example, I can't see us bringing that in-house because we haven't got the skills to do it, so we will still use external managers where we feel they can add value and have the skills that we don't. We're doing more and more private market deals in-house - that's another area where we want to expand because that ties back into the cost reduction because private markets are obviously expensive and because of the layers of fees, the more we can do in-house, the lower the cost."
"In private markets there's quite a lot of unusual asset classes and within that we invest in healthcare and music royalties. We're having to look harder and harder to generate returns and find those investments."
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