Out-Law Analysis | 16 Oct 2018 | 12:41 pm | 4 min. read
First introduced in 2015 in response to the Office of Fair Trading's workplace pension market study, the charges and governance regime includes independent value for money assessments and a 0.75% charge cap. The latest piece of the puzzle, introduced this year, is new reporting requirements for asset managers and governance bodies, designed to improve transparency over transaction costs.
The pensions team at Pinsent Masons, the law firm behind Out-Law.com, recently hosted a lunch to consider how to handle these reporting requirements and what might come next. We were joined by Jon Parker of Redington and David Brown and Colin Musgreaves of PTL, as well as others from different parts of the pensions and investment supply chain.
While there might well be some room to grumble about the level of detail required, and precisely how asset managers and governance bodies should go about their new reporting duties, the general consensus from attendees is that greater transparency will ultimately benefit schemes and their members.
Once the new regime beds in, members can expect to benefit from better transparency and, potentially, improved value for money. For better resourced schemes, the reporting requirements also give them the opportunity to really educate the membership, and engender confidence that their savings are being well looked after.
From the trustee point of view, the transparency measures should allow for a more educated relationship with asset managers even if they do not generate significant enough results to drive investment decision making. It may also help to push consolidation, by increasing the burden on employer-run schemes and raising questions of value for money for smaller schemes.
Reporting by asset managers to governance bodies
To quote Jon Parker of Redington, the policy and regulatory intent from costs and charges disclosure is clear: greater transparency for governance bodies and pension scheme members. However, the ability to make a meaningful assessment of the value of the data remains a little way off. This is due to a lack of consistency in the methodology used and the level of detail provided by asset managers.
Rules requiring fund managers to respond to requests for transaction costs from pension scheme trustees and governance committees came into force on 3 January 2018. The rules require fund managers to provide this information in a standardised form using the 'slippage cost' methodology, which calculates transaction costs as the difference between the price at which the transaction was actually executed and the price when the order to make that transaction entered the market. They must also provide information about administration charges and appropriate contextual information.
In practice, the flow of this information is still in its infancy, despite the legal and regulatory requirements. At the same time, the information that is coming through is not always quite what the trustees need to work with, and it may take some time before this is addressed.
The regulatory requirements on asset managers stem from the trustees' duties of transparency to scheme members. Managers are only required to disclose costs and charges information in response to a request from the trustees or governance body but, once a request has been received, must do so within a reasonable time and in a reasonably acceptable form.
The Department for Work and Pensions (DWP) has indicated that trustees will not be penalised for failing to disclose information that they do not have, but this surely cannot apply where the only reason they do not have that information is that they have not properly asked. Trustees therefore need to take ownership of the process, bearing in mind their own reporting requirements and suitable timescales.
Potentially, trustees could consider putting a formal disclosure arrangement in place as part of their contract with the asset manager. Ideally, this should be tied into the scheme year and the trustees' own reporting requirements.
Assessing the data
Once received, the next step for the trustees is to make sense of that data and perform the value for money assessment.
This is not as easy as it sounds. The nature and impact of transaction costs is much more complicated than other forms of costs and charges. Transaction costs are not of themselves a 'bad thing', but rather a function of asset managers doing their jobs. The transparency measures are not intended to penalise, but simply to flush out more information.
While well-resourced trustee boards should be able to get the help they need to understand and process the information that they are provided with, Colin Musgreaves of PTL pointed out that trustees would generally need a professional opinion to help them understand what the transaction cost analysis is telling them and if it is providing value for members. Trustees and managers can use third party services to make greater sense of the information, and these may well grow in popularity as the challenges of the new regime make themselves apparent.
Reporting by governance bodies to scheme members
The final part of the new transparency regime involves reporting the position to scheme members. It's fair to say that the industry is finding this last part difficult, so we need to spare a thought for the members.
Compliance with reporting requirements is one part of the puzzle, but there is also an education piece around how the information should be presented to members. Pension saving isn't free: administrators and investment managers charge for their services, and payment comes out of member pots.
The trouble is that too many members don't realise this, and there is a danger that they will react badly when they find out that costs and charges have been deducted from their savings. Negative perception of pension saving can lead to some serious adverse consequences in the medium to longer term: members failing to contribute enough; leaving pension saving altogether or even transferring their savings to scammers, who promise too-good-to-be-true returns.
The DWP's reporting template provides a helpful starting point for presentation of some of the facts and findings, but it might not produce a very understandable message for members.
Instead, it seems logical to consider producing a separate summary or messaging document intended for members, alongside the more detailed compliance material. This should help members to understand the key points without getting distracted by less impactful charging categories that look worse on paper - and guard against poor decision-making by members which could come back to haunt them, and the trustees should they decide to make a claim.
Tom Barton is a pensions expert at Pinsent Masons, the law firm behind Out-Law.com.