Value for money – we have won a battle not a war.


The FCA Consultation Paper CP16/30″Transaction cost disclosure in workplace pensions” is a very good piece of work and allows IGCs and Trustees to know what their members are paying to have their pension pots managed.

It unlocks one of the doors to establishing whether members are getting value for money. But there is more that needs to be done before trustees and IGCs can say with confidence that their fund managers are offering value for money.

We will now know what members are paying.

Specifically, while they may know what their members are paying, they cannot tell if they are paying too much. In order for that to happen, they will need benchmarks on what a fair price is , not just on the hidden costs but on the overt costs too.

CP16/30 rightly points to a divergence between fund managers in pricing of stock lending. Some managers charge , some don’t- the amount of the charge varies. The suspicion is that the overt charge for fund management (born by the pension provider out of the AMC) can be subsidised by covert charges for stock lending (born by the members out of fund performance).

But are they paying too much?

Such cross subsidies are rife in the fund management industry. Fund performance can be skewed by loading costs onto legacy funds to boost the performance of the latest “star manager”. There is increasing evidence that NESSIE (what the Investment Association refer to as these “mythical” fund costs) is not only alive and well, but working in service for fund management marketing groups. While star fund managers get fund performance with a free ride- the costs they should have borne depress the price of legacy funds.

The need for benchmarks

So we need a pricing benchmark for overt charges – the basis point charge levied by managers to trustees and insurance companies running trust and contract based workplace pension plans.

And we need a separate benchmark for covert costs- the amount coming out of funds through transaction costs. The criticism that can be levied at the FCA’s approach is that it doesn’t allow transaction costs to be split between those that benefit the fund manager and those that benefit the other intermediaries taking a cut of your money. The FCA argue (rightly IMO) that it doesn’t really matter who takes the money, a cost is a cost.

I would argue that there are specific areas – such as stock lending, that IGCs and trustees should pay special attention too. The rights granted asset managers are in the Investment Managment Agreements and we may need a third benchmark to cover specific items where cost leakage is most prevalent.

The peculiar conflicts of master trusts.

IGCs and Trustees of non-commercial occupational DC pension schemes are relatively unconflicted. Their duty of care is to the member, they do not have any commercial skin in the game. Their only conflict arises if they become dependent on the grace and favour of the fund managers (sports tickets, so called educational dinners and the like).

But the Trustees of Master Trusts can be conflicted between the commercial pressures of those who pay them (and most master trust trustees are paid) and the interests of those for whom they act. I do not see sufficient separation on many master trust boards between the trustees and the pension providers. This is particularly the case in the smaller master trusts where the fight for commercial survival is most acute. Put simply, self-interest is most prominent when their is a threat to you getting paid!

I am very far from convinced that the governance of many master trusts is suffeciently robust for trustees to challenge the kind of cross subsidies mentioned above. This is most specifically about the use by some passive fund managers of member borne charges to subsidise provider born fees (Stock-lending and AMCs).

Winning battles not wars

Of course knowing that the commercial entity behind a workplace pension is getting the right price and controlling costs for themselves and for members is only half the story.

Those costs may be buying services that are benefiting members – or they may not. To understand the value arising from the costs incurred, trustees and IGCs need another set of benchmarks. These “value benchmarks” may sound very precarious but in fact they do exist and are being used in the Netherlands (along with the pricing benchmarks mentioned above).

It is possible to measure the positive impact of fund managers in terms of risk management and market out-performance and that is precisely what the Dutch Authorities do. If you want to see a presentation of these benchmarks  check the Novarca and IBI slides (10-12) in this presentation.

Low cost fund managers tend to outperform

The Dutch IBI transparency index (slide 12) shows that fund managers that have low overt charges and covert costs tend to outperform those which are more expensive. But this is not always the case.

Trustees and IGCs that feel comfortable that they have found a fund that consistently delivers more value for the money than another , are entitled to promote that fund to a default option for the workplace pension, subject to the cost of that fund – together with the other costs of managing the pension – not exceeding 0.75%.

The big question for Government is whether the new found transaction costs should be included in that 0.75% or whether these costs can be added. In my opinion, the evidence of managers with high charges and costs delivering extra value is very sketchy and the capacity of good workplace pensions to offer full services within 0.75% quite common.

For instance the L&G Multi Asset Fund (3) which is offered as the default investment option for L&G Workplace Pension Savers at 0.13% reckons to have transaction costs of 0.01% and has – I am told – no charge for stock lending. L&G could easily absorb the 0.01% extra charge into the total charge for the plan of 0.50% or put prices up to 0.51% – retain margins – and still be within the cap by 0.24%.

How do we know what the best price is?

As members of workplace pensions, we do not know what price funds are being offered to IGCs or trustees of commercial mastertrusts. I have asked and been told by the CIO of NEST that the fees paid by NEST to fund managers are subject to a non-discl0sure agreement (NDA). When  I asked why NEST signed the NDA I was told it was to protect the fund managers who might otherwise have to offer similar prices to other funds.

I find that practice to be anything but competitive. It means that NEST can cross subsidise its commercials against rivals such as Peoples and NOW and the insurance companies. I as an L&G policyholder could be paying more to keep NEST’s fund costs down- not a deal I see as very fair.

In practice, I do not believe that the non- disclosure of fund management fees works in anyone’s interests other than the fund managers. There is a best price out there and by “best” I mean the economic price that offers a fair margin to the manager and a fair cost to the provider and member. Determining what that price is cannot happen if everyone is buying blind. If – and I suspect this is the case – most trustees and IGCs have no idea what the best price for the funds being bought for their members is, then they are evaluating value of money with their finger in the air.

The case for a centralised pricing benchmark

novarca fca

The costs providers pay for funds is well below the price that retail investors pay for that same fund. That L&G MAF3 thing is being knocked out to SIPP punters at over three times what I’m paying.

I can understand that there is a difference between the retail and wholesale price. Workplace pensions should be picking up the wholesale price and passing it on to members with a small turn as margin.

I can understand why fund managers want to keep the institutional (wholesale) prices secret (would you be happy paying three times as much as a retail customer?). That is a whole different argument which SIPP customers need to have with their platform providers.

I’m arguing here for the people using workplace pensions (who are generally just getting by and not in the business of investing in SIPPs).

These people need proper protection by IGCs and Trustees. Those IGCs and Trustees, should be able to see the price their provider is paying for funds, against the best price for that fund – or at least that kind of fund.

The best price index cannot be managed by a vested interest such as the Investment Association. I would argue it cannot be entrusted with consultants who are now so embroiled in fiduciary management as to have generally lost any claim to independence.

The case for a centralised pricing index is strongest when that index is organised by Government with the help of truly independent experts – such as Novarca (who the FCA have already used). The Dutch Government have come up with this solution and we should follow suit.

It may not suit the fund management industry to have best prices generally available to trustees and IGCs and I am quite sure it will horrify the wealth managers who will have to justify the gap between retail and institutional pricing. But if we are going to do this Transparency thing properly, I see no other way than this.

Winning the war by siezing the day.

Before I heard Theresa May’s speech and before I spoke with members of her policy team, I did not believe that we could have an interventionist Government in the near future. Having spent time in Birmingham this week, I have changed my mind.

Not only do I see the publication of CP16/30 as a significant battle won , but I see an opportunity to nail the value for money thing and win the war. The time is now right, the ducks are lined up and I hope that the Transparency Task Force will seize the day.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Value for money – we have won a battle not a war.

  1. Dear Henry,

    Thank you for referencing the Transparency Task Force in your excellent piece today. Whilst I am totally motivated to do all I can to help what we all know needs to happen, to happen,
    the reality is that years before the TTF was conceived many people including yourself have been battling away on the charges opacity front.

    So if there are any real wins in the months ahead we should be very mindful and appreciative of the likes of Dr. Chris Sier, Con Keating, Gina and Alan Miller, David Pitt-Watson, Dan Norman, Colin Meech, Gregg McClymont, Daniel Godfrey, Ralph Frank, Sunil Chadda, Shyam Moorjani, Paul Lewis, Tom Tugendhat MBE MP, Jo Cumbo, Margaret Snowdon OBE, Chris Sier’s Dad, Ros Altman and many others in the UK (and even more overseas) that did loads of ‘heavy lifting” without any recognition or thanks, for years and years.

    Some of these folks (I’m thinking Dr. Chris Sier in particular) made all sorts of personal sacrifices over and above the ‘call of duty’ to make possible what is now happening. Chris and others were made to feel daft for questioning the unquestionable. People tried to make them feel guilty for ‘undermining the confidence in the system’ (such a nasty and warped propaganda-like response to somebody brave enough to stand up not just stand by. I can’t stand that kind of reaction; totally un-Nessiecessary if you get my drift).

    If you looked at the transparency story through the lens of that lovely old film “it’s a wonderful life” each and every one of the people I’ve listed above could be the central character in the film; and the contribution each of them has made is beyond comprehension.

    Anyway, I reckon that within a couple of years, massive progress is going to be made, but it will because of what was done years and years ago, when the ‘this is wrong and needs sorting’ mindset was being formed in the minds of some wonderful people, who’ll most probably never get the thanks or recognition they deserve.

    I’ve had kind comments from people in the last few days commenting favourably about whatever part the Transparency Task Force may have played in encouraging something like CP16/30 to happen; the truth of the matter is that if any credit is deserved it’s to the folk listed above and many others not listed, some of whom I don’t even know about.

    But given where we now are I’m hoping that we can all focus on what we agree on and get the ball in the back of the net, one way or another.

    Proud to be playing on your side Henry, amongst many great players, who are all on the same side. We’re going to win, because the good guys (and girls) always do, in the end.

    Failure cannot live with persistency, and we’re a rather stubborn bunch, aren’t we!

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