On 5 September the Work & Pensions Committee (WPC) held a highly-focused debate on the challenges of extracting increased charges transparency from asset management firms with a view to establishing a ‘value for money’ benchmark and adding this new charges detail into pensions illustrations.
The debate, chaired by WPC chair Frank Field, drew on the expertise of the likes of Chris Sier, chair of the Financial Conduct Authority’s (FCA) Institutional Disclosure Working Group, and Andy Agathangelou, founding chair of the Transparency Task Force.
It is clear from a reading of the 30-page transcript of the debate that some very able and well-placed teams sitting within the regulator and in government have been working for upwards of 10 years to define what asset manager charges need to be revealed; and which underlying data sets might provide a notional ‘total asset management charges’ figure to be given out and added into pension schemes’ annual statements – and, in the future, made available at the click of a mouse via the pensions dashboard.
All these efforts have so far drawn a blank. Why? Is this about a straight refusal by asset management firms to provide the detail the market is looking for and MiFID II appears to demand? Is it about a complacent ‘we’ve never provided this information and have got on perfectly well without providing it’ mentality market-wide? Or, more seriously in some ways, is this linked to some operational inability to do so?
Reading between the lines, it appears to be about a combination of all these factors. However, the emphasis falls on the latter – an operational difficulty in assembling all the charge variables, making sense of them and providing full, accurate and standardised charges disclosure.
First, it is important to recognise the size and diversity of the market. Unlike the concentrated life assurer/pension provider world, there are 1,840 asset management firms in this market with some £8 trillion of assets under management.
Second, it is a fragmented market populated by firms holding too few common practices. Where acquisitions have taken place, firms are often hampered by not having uniform, fully-interoperable IT systems for charges data collection and collation.
It is also clear that some firms would find it very tough manually to ‘scrape’ the charges data from all intermediaries in the ‘investment supply chain’. So, if they were all asked by the regulator to provide specific charges data sets, there is no guarantee of establishing a usable ‘value for money’ benchmark.
In addition, there are up to 44 different types of charges that might contribute to any total charges figure, the committee found. The majority of these charges come from some 15 layers of intermediaries that might have a piece of the action on any transaction.
And some transactional charges even run negative – in other words, if the market moves in your favour as your pension scheme is purchasing shares, you can end up making money between the original request to purchase and the actual transaction.
It is argued that most asset managers would be happy with a sub-50 basis point annual charge. Part of the reason they can operate on such low margins is they make their money on your money, much like the banks. Firms may make a turn from your shares through ‘stock lending’. Effectively, they can lend our pension-held shares to hedge fund managers who will then attempt to make a turn on them – selling shares that are expected to go lower and buying them back and returning them to their owner.
Whether this re-trading is ultimately in the interests of the pension scheme holder is another question for a different article, but the point is that stock lending places asset managers in a strong position to drop charges as indeed we are seeing in the US with Fidelity recently launching its first ‘no-fee’ index fund.
An asset manager offering nil fees? Ha! Once you reach nil fees, you need to wake up and realise you must be measuring the wrong thing! Back to the reality of the current market, however – once you have added the charges from technology, infrastructure and other intermediary players, you might arrive at an annual charge figure of between 3% and 5%, according to the WPC inquiry.
Sier said his original paper back in 2009 came up with a mean cost of ‘owning a pension’ of 4.5% a year. That is clearly not acceptable in today’s low interest rate, low growth economy – spending that much in costs would totally negate the benefits of investing.
Assuming we first need to establish a full understanding of asset management charges, without potentially bamboozling the customer, where better to start than with agreeing what types of charges need to be disclosed? Defining the data necessary removes the wiggle room firms currently have and enables independent governance committees (IGCs), and ultimately the investor, to begin to compare firms’ performance in a meaningful manner.
One approach to establishing charges transparency is to agree a mandatory framework for collection and presentation of charges data, while assuring data integrity. The only model for this so far in play is the Local Government Pension Scheme (LGPS) Code of Transparency for asset managers.
More than 60 of the largest asset managers operating in the UK have signed up to this and, although it has apparently proved tough for asset managers to provide the necessary transparency, those that have done so are benefitting financially from being signed up to the LGPS Advisory Board’s Code. The virtuous circle works, and more firms are now being attracted to go through the hoops to offer the transparency to gain access to this lucrative part of the pensions market.
So how can we get that charges data properly defined? First, there is a need for a uniformly agreed set of numbers – simplifying the range of numbers some firms proffer variously termed ‘net total charges’, ‘gross total’, ‘gross gross total’, ‘net net total’ and something else called ‘client return’.
These all mean different things to different people and remain impenetrable to the end-investor and so should be scrapped. Instead we need a level playing field – an agreed set of charges with component parts clearly revealed and explained in plain English.
Field suggested during the WPC debate the Government could demand all asset management charges data and then try to make sense of it. This is clearly the nuclear option if asset management charges transparency cannot be achieved in the next couple of years.
There are, however, several initiatives underway that are moving us in the right direction, quite apart from the transaction cost disclosure requirements under MiFID II. The FCA’s work to establish the fiduciary responsibility of asset managers and their duty of care in a new Policy Statement published in April and the regulator’s consultation CP 18/09, proposing measures to improve the quality, comparability and robustness of information available to investors, will report before year end. These two pieces of work by the regulator should establish a standardised data set for gathering investment charges that will enable comparability.
It seems clear that, after more than 10 years of resistance to this level of scrutiny Parliament, regulators and expert commentators are all calling in unison for a greater degree of asset manager charges transparency. It is also clear that pensions charges transparency has risen a long way up the political agenda since pension freedom placed much greater responsibility for retirement income optimisation into the hands of the end-investor – and their financial adviser, if they are lucky enough to have one.
I want to end with a dose of realism. Can we hope to obtain full investment charges data onto a pensions dashboard in a format that is understandable to the majority of savers? No! Can we obtain disclosure to the point that an adviser can make sense of it all? Maybe.
Being realistic, however, advisers are as time-poor as their clients are demanding. So I am left with one last hope, which is that we can obtain asset management disclosure to the level that specialist adviser firms – the ones that service financial advisers, trustees and IGCs – can make sense of all this data and pass on their findings.
Adrian Boulding is director of retirement strategy at Dunstan Thomas