For many years, the true cost of running a UK pension fund was at best opaque; at worst, it was sometimes completely mystifying. Indeed, even highly experienced trustees were often left scratching their heads, trying to work out how much they were paying and for what.
But this state of affairs is changing - and changing for the better.
13 Mar 2019
When KAS BANK conducted a survey of the Dutch defined benefit pension fund market last year, the results came as a pleasant surprise. Dutch pension funds have been legally required to report on their costs since 2015. When we compared the average costs of our own Dutch pension fund clients, from 2015 to 2017, we found that costs per member had fallen by 19%.
The biggest fall was in the area of investment costs, where the average cost per pension scheme fell by 18% in the three year period - and this was largely attributed to lower transaction and performance costs. This was partly due to greater transparency, but it could also have been the result of cost pressures on fees and managers’ inability to beat their performance benchmarks that year. Whatever the cause, however, it marks a step in the right direction. Indeed, the Dutch pension experience highlights the benefits of implementing a comprehensive cost reporting framework that can improve the operational efficiency of the market, with a 25% reduction in Transaction costs in the three years of legislation.
The Netherlands still holds the bulk of its assets in Defined Benefit schemes with a mere 6% of assets in Defined Contribution assets. The UK, conversely, has 19% in Defined Contribution assets and this area continues to grow rapidly. Some independent UK commentators have identified this as a possible problem area since very few DC schemes currently have the tools to determine what costs they’re paying.
When we introduced a comprehensive reporting framework for our own DC scheme, we discovered that 23% of our costs related to transaction costs. By asking our investment managers some tough questions to ensure that they balanced their transactions more carefully when it came to turnover in their portfolios, we were able to control our transactions costs much more tightly.
My colleague, Claire Linane, Chair of the Trustees at KAS Bank, observed that “despite working within the pensions industry, identifying and analysing all the costs associated with our scheme was a daunting task. The first challenge was to identify all the costs, obtain the required information from all the associated parties and then analyse them to understand if they represented good value for members”.She added that she would not have been able to carry out a cost-benefit analysis without engaging with a Cost Transparency expert to collect all the data, challenge stakeholders on what was provided and analyse and present findings in such a way as to promote discussion amongst the Trustee Board.
In November, the Financial Conduct Authority published the final report and cost disclosure templates of the Institutional Disclosure Working Group (IDWG). In conjunction with the PLSA, the Investment Association and the Local Government Pension Scheme Advisory Board launched the Cost Transparency Initiative (CTI) to take forward the work of the IDWG. A pilot phase for the templates is due to finish in March with some 20 companies – both providers and investors – having taken part. A full roll-out will follow this spring.
KAS BANK is a long-time supporter of this initiative and is actively involved in the pilot. We believe that anything that enables pension funds, whether DC or DB, to have greater clarity on costs and the ability to compare charges between providers is a positive development. To date, there’s been no common yardstick. However, in addition to the cost transparency templates, a scattering of companies are now beginning to offer benchmarking services, including KAS BANK, to help pension funds determine the true cost on their funds. Ultimately, it’s all about delivering better value for money for fund members and employees.
By Pat Sharman, UK Managing Director, KAS BANK
* Willis Towers Watson 2018 Global Pensions Assets study