Caroline Escott says there should be alignment between the various policy and regulatory initiatives on value for money to avoid overburdening trustees.
In recent years, trustees have had a lot to contend with on the investment front, as they aim to achieve sufficient returns to pay out member benefits. Members are on average living longer, meaning defined benefit (DB) schemes' liabilities are increasing. Trustees also have to work hard to get strong investment returns and navigate the significant economic and financial headwinds in the form of a Trump administration, continuing uncertainty over the shape of the UK's Brexit deal and the unwinding of quantitative easing (QE).
Good investment returns are important to reduce reliance on scheme sponsors to fill any funding gap through contributions, especially as covenant risk moves up the trustee agenda in the wake of recent events at Carillion and the British Steel Pension Scheme. To support trustees in their decision-making on issues such as asset allocation, fund and manager selection, it is vital they have access to accurate and well-presented information on information costs, charges and performance. Only then can schemes hold their investment service providers properly to account and achieve the best possible value for money.
One of the biggest and most recent policy developments in this area has been the EU's MiFID II initiative which came into effect on 3 January and brought about a wide-ranging series of changes to the way in which investment information is disclosed to clients. This includes new duties on investment service providers when reporting cost and charges information, as well the steps taken to achieve ‘best execution' to clients.
UK policymakers have also been taking steps to improve cost disclosure to institutional clients. Key among these has been the Local Government Pension Scheme Code of Transparency and the Financial Conduct Authority's (FCA) Institutional Disclosure Working Group (IDWG), led by Dr Chris Sier, which is designing a costs disclosure framework for investors, building up from a set of more detailed templates containing granular data on costs and returns. The Pensions and Lifetime Savings Association and many other industry stakeholders take part in this group, which aims to produce comparable cost data for schemes and members to help them assess their investment providers. The first disclosure templates will be produced later this year.
The IDWG came out of the FCA's Asset Management Market Study, which sought to better understand the state of competition in the UK investment market. Another relevant market study development was the referral of the market for investment consultancy and fiduciary management services to the Competition and Markets Authority (CMA). Although the CMA is undertaking an investigation into many aspects of the supply of investment consultancy services, it is also assessing how well the demand-side is able to hold investment advisers to account.
In its issues statement, outlining areas of focus, the CMA said "…[we] consider that potential remedies to improve transparency over fees and performance are likely to be a particularly important focus of our thinking on remedies at this stage". Schemes and trustees should pay close attention to the progress of the investigation - and feed in any views or evidence they think would be helpful.
Although the CMA and the IDWG are reviewing different parts of the investment chain, there is the potential for an alignment in their work. Policymaker interest in this area is very welcome, but it is crucial that there is as much alignment between these and other initiatives as possible of the ultimate recommendations, to avoid overburdening trustees.
It is also important that the policymaker and industry messaging around costs is carefully considered by all involved, to avoid an outcome where trustees are encouraged to think that the lowest cost product or approach automatically represents the best option. We must ensure that conversations and communication around this topic encourage schemes to think about the broader value they gain from their investments, rather than simply the cost they are paying.
Ultimately, it is vital that schemes and trustees both keep up to date with developments in this area as well as ensure they use every tool available to help them achieve the best possible value for members' money.
Caroline Escott is policy lead for investment and defined benefit at the Pensions and Lifetime Savings Association
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