By Samuel Condry
Policy Lead: Standards
1. Be prepared to challenge priorities
As we’ve moved through the intervening months since the start of lockdown, many people’s priorities have naturally focused on funding and investment risks – as well as juggling the myriad tasks needed to provide an uninterrupted service to pensions savers.
In such a turbulent environment, it has been all too easy to lose sight of some of the more ‘hidden’ priorities. Investment costs can often be overlooked at the best of times – yet Covid has provided a real opportunity for schemes to reassess their priorities and to find unturned stones to peer under. Investment costs are certainly worth a closer look, as poor investment performance means their basis points-impact can be magnified just now.
As dividend payments and other investment returns are expected to be squeezed further over the coming months, some of the most progressive pension funds have already been finding significant monetary savings through renewed scrutiny of investment costs, as well as helping to exert downward pressure on fees, renegotiating where appropriate.
If you’re a trustee, or a member of an independent governance committee (IGC), this autumn will be a key time to ensure you keep investment costs on the meeting agenda. You should challenge your advisers and investment managers to justify any priorities, and be prepared to push back if you feel costs and charges might have been unduly relegated or dropped off the agenda.
2. Always consider the wider context
However, too great a focus on simply cutting back costs comes with its own risks. Any assessment of investment costs should be made with the wider context of value for money (VFM) firmly in mind. And when it comes to VFM, things are heating up.
The FCA has an open consultation on proposals to strengthen IGCs’ obligations to assess the ongoing VFM of workplace pensions (CP20/9 ‘Driving value for money in pensions’). The proposals include a three-pronged approach to VFM assessments, incorporating charges and costs, investment performance, and services provided (including member communications). While the FCA is unlikely to become overly prescriptive in this space, it’s apparent that IGCs will need to examine the moving parts of investment performance and costs together, and to some level of detail.
Similarly, pensions trustees are likely to have equivalent new obligations imposed on them, with The Pensions Regulator (TPR) and the Department for Work and Pensions (DWP) making it clear that they will be bringing forward proposals. At time of writing, the DWP has just published a consultation paper which details new requirements for small scheme trustees (schemes with less than £100 million in total assets) to assess key elements of value, including investment performance and charges. This is no bloodless process – trustees must proactively identify and recommend whether it might be in scheme members’ interests to move to a larger scheme (or an authorised master trust), which provides better value.
3. Dig out those details
A thorough assessment of investment costs and charges can be onerous, especially when time and resources are stretched by competing priorities. Collecting the necessary data can be time-consuming at best, even before you begin to wrestle with data quality and comparisons. Yet it’s just those areas of detail – such as incidental costs, administration costs, or governance-related costs – which can really add up to impact on the net return on investment performance.
This is where I want to plug the Cost Transparency Initiative (CTI), which the PLSA runs on behalf of the pensions industry, alongside its partner organisations the Investment Association (IA) and the Local Government Pension Scheme Advisory Board (SAB).
The CTI framework is an industry standard for institutional investment cost data – developed by industry, for industry. The framework consists of several templates and tools which enable asset owners to view all their costs and charges in a consistent and comparable way. These are all free to use and, if you’re a trustee or IGC member, you can use this information to get a full and detailed understanding of your investment costs.
Gaining such a detailed view of investment costs will allow you to make meaningful comparisons across investment mandates and across your different managers (including where in-house and external managers are employed); facilitating changes or other recommendations where appropriate.
The CTI framework has the benefit of compatibility, as it has been designed to be easily harmonised with other regulatory or reporting requirements, such as ILPA or MiFID II. The framework has also been incorporated into the services provided by the leading information providers (utilities) in the marketplace, as well as the LGPS Transparency Code.
Whichever approach you take to scrutinise investment costs, it’s vital to have open conversations with your investment managers and advisers about your requirements – help them to help you and make sure cost transparency is kept high on the agenda.
Further information about the CTI framework is available here.