Samuel Condry, Policy Lead: Standards, brings us up to date with progress on the still-evolving Cost Transparency Initiative.
It is now over a year and a half since the Cost Transparency Initiative (CTI) was launched online, and in that relatively short space of time many have now come regard the framework as the standard method for obtaining information about investment costs.
A survey of schemes by the PLSA at the end of 2020 shows both high levels of awareness and usage of CTI in the pensions industry. But there are still further improvements to be made and new areas of development, to give schemes a truly ‘3D’ picture of all their investment costs.
About 80% of schemes taking part in the survey said they know either a ‘fair amount’ or a ‘great deal’ about CTI – with a similar proportion having already made use of the CTI framework. This is very encouraging and a big increase from spring last year, when only just over half of schemes surveyed said they were using CTI.
As schemes – and their asset managers and advisers – increasingly get to grips with the new, granular costs data which CTI is able to provide them, they have also been providing vital feedback to the CTI Board (which coordinates and promotes the CTI framework, on behalf of the pensions and investment industry).
One aspect of this feedback is that schemes need costs reporting to be tailored to the needs of particular investment (and related) services. On the one hand, costs data should be easily retrievable and easy to provide – it has to ‘fit the box’. And on the other hand, costs data should say something meaningful about the specific service to which it relates, and how that relates to the overall services provided – what’s ‘in the box’. An example which the CTI Board is currently looking at developing is around costs reporting for custody services.
Another theme which often comes up is how to give asset owners a full look-through to the costs and charges associated with the underlying funds in which they are invested (fund of funds).
Custody and related services increasingly play an important role in the investment chain, with new solutions which address increased digitalisation in investments being added to existing services ranging from asset servicing and administration to transition management and FX-related services. While it’s probably fair to say that custody services in general amount to a relatively small proportion of your overall investment costs, these can still add up to a significant amount. Costs can therefore be an important factor in deciding which custodian you ultimately choose.
While the CTI reporting templates currently provide costs data on custody services for pooled fonds, this functionality is not currently available for segregated investment mandates. But if you’re an asset owner, what happens if you want to compare custody costs across both your pooled and segregated mandates?
Feedback from schemes has also made it clear that benchmarking, and other comparisons between different investments costs, are an important part of assessing value for money; and the CTI Board is focused on helping to enable this wherever possible. Hence, the CTI Board intends to meet this call and will shortly be developing new reporting templates for segregated mandates, which are likely to cover costs for safekeeping, reporting and other custody costs. Watch this space!
Fund of funds
But it’s not just the breadth of vision – with sightlines to the full gamut of investment services – which asset owners say they want. The depth of field of vision is perhaps equally important. This means being able to see not just the top-level costs of a fund, but to be able to ‘look through’ at a more granular level to the costs of the underlying funds. Some people have used the metaphor of an onion, where you need to peel back each layer of a fund to find the underlying costs.
In principle, this can be an issue which arises across a range of different investment types, including listed funds. In practice, however, asset owners are perhaps most likely to be interested in private markets. Hand in hand with the increasing interest of institutional investors in private markets – including venture capital, private equity and private debt – there also goes a recognition that the potential for high returns must be justified by the cost of investing. Ongoing debates about the relative attractiveness of private markets can only be settled by a full awareness of net returns – and for that, you need accuracy and depth of vision about the underlying costs.
This is not an easy task. Among other practical difficulties, managers do not necessarily have full sightlines themselves into how underlying costs are apportioned. Differences in reporting systems and procedures can lead to incompatibility and difficulties in making comparisons, as well as being potentially very time-consuming for firms. And, of course, private markets are increasingly global, which means managers of underlying funds may be following different cost reporting protocols or regulatory requirements.
However, the CTI is as much about trying to make life easier and more streamlined for asset managers as it is about making information clearer for asset owners. The British Private Equity and Venture Capital Association (BVCA) is an invaluable member of the CTI Board and will be helping to advise on how best to solve this challenge.
The PLSA’s website has a growing body of resources to help pension schemes adopt CTI and make the most of the initiative. Here are just a few examples:
Main account template
This is a cost disclosure template to be completed by asset managers, covering the majority of assets and product types. The template has been designed to be machine readable, to improve consistency and compatibility across different internal systems. It also incorporates technical guidance and definitions that asset managers can use to help them when completing the template:
Fiduciary management fee summary template
The fiduciary management template is a cost disclosure template which may be completed by fiduciary managers.
Liability-driven investments template (preliminary)
The PLSA is currently developing a template for reporting costs associated with liability-driven investments (LDI). We’d welcome your comments on how it could be improved.
Find out more about the Cost Transparency Initiative and download the full range of CTI templates here.