How we’re responding to the FCA’s Asset Market Study

Pension PlayPen response to the FCA Asset Management Market Study Interim Report (MS15/2.2)


This response focusses on “proposed remedies” and how to make them effective. The aim of Pension PlayPen is to restore confidence in pensions, we see public confidence undermined by poor controls within asset managers, poor governance and poor consulting. We welcome the interim report which addresses many of our concerns. We have expressed these concerns through our blogs ( and, through meetings (with the FCA, tPR and Government departments) and through participating in the Study.

Pension PlayPen is partly owned by First Actuarial and Henry Tapper is a director of both organisations. In these matters, Henry Tapper is not speaking for First Actuarial.

General response

The remedies proposed are right and they address the problems that exist. The questions are about how to enforce these remedies. To address that we need to the practical problems we have when trying to advise small employers on what makes for a good workplace pension.

These are

  1. Getting accurate information on each stage of the journey between asset purchase and the delivery of returns to the consumer – the cost of intermediation
  2. Understanding value for money; either by analysis of the journey or through the reports of IGCs and Trustees
  3. Trying to get remedy for what we see as bad practice where we see it.

We are hampered from doing our work in a number of ways.

Asset managers do not see themselves as accountable to consumers or advisers due to privity. Their customers are insurers and insurers customers are trustees or are approached via IGCs. We see it as critical that asset/fund managers are directly accountable to the beneficial owners of the funds they manage.

Requests for information to trustees and IGCs have to be passed via the insurer to the fund/asset manager. Our requests are often lost and when we get an answer – it is unclear who feels responsible for owning it.

By way of an example, we became aware of different ways of treating the revenues from stock lending. Some asset managers keep a proportion of the revenues to cover risk and the costs of lending, others don’t. Some managers do a lot of stock lending, others do little. We wanted to understand the practice of State Street and LGIM as they impacted People’s Pension and L&G Workplace pension. While we had a clear answer from L&G/LGIM , we were only given incomplete information from People’s Pension. The People’s Pension referred the matter to their trustees, who referred it to the IGC of B&CE who referred it to B&CE who may have referred it to State Street.

Our conclusion from this and other requests is to suggest that the AMFs of asset managers become a source of information for consumer requests and that the practice of putting insurers and trustees under NDAs about the nature of the investment management agreements in place should be banned.

Consumers and their representatives (advisers/lawyers/unions) should be able to make reasonable requests for information about a fund, the terms it is offered to insurers/trustees and an explanation of performance (specifically underperformance) against stated benchmarks/objectives.

Specific matters on which the FCA are asking us questions



Our concern is to ensure that the AFM is open to the consumer and that it is not just a private source of information for Trustees/IGCs. Though we recognise that the performance delivered to the consumer is solely down to the fund manager, we see the bulk of value and cost being generated at this level. Asset managers have hidden behind fiduciaries in the past, we think that making them accountable to members and their representatives would ensure that firms acted in the best interest of investors.

Our preferred method would be to create a role of “Pension Fund Fiduciary” to cover all member of AFM Boards. The role would extend to those with specific responsibility for the provision of funds through retail and institutional platforms including platforms used for workplace pensions, for SIPPs and for trustee investment plans purchased to manage assets in defined benefit schemes. We would have this role enforced by the SM & CR. We think that this role – with its attaching fiduciary duty, should be created by statute. The Pension Fund Fiduciary would be responsible for sharing any information required by any legitimate party trying to establish the value for money of a fund proposition.

The single charge


Paying for fund management is typically via a single charge levied as a percentage of the units owned. Currently, there are a number of single charges which depend on the interpretation of that is being taken by a manager and what is incidental to the running of the fund. We think that this apportionment of charges is academic to the consumer who is interested in outcomes not the internal accounting of a fund manager.

We do not think that a cap should be put on a single charge but we do think that for all funds, whether retail or institutional, the underlying cost of the fund should be made known. This means that where a fund is being bought by a platform and then resold at a different price (typically under a reinsurance treaty) that the underlying cost of the fund should be disclosed.

For instance, many passive funds are available to workplace platforms at well under 0.10% but are offered to members at 0.50%+. What is generally unappreciated is that the bulk of the re-pricing is for non-asset management costs (record keeping, marketing, administration etc).

What is seldom appreciated by the consumer is that the cost of a fund on a platform may represent variable value for money. To use the example quoted above, when People’s Pension moved from offering a default investment managed by LGIM to one managed by State Street, the underlying cost of the fund management changed, but the price to members did not. It is important that in evaluating value for money, the consumer can understand whether the reduced cost of State Street will mean a reduced service or whether it represents both a win for People’s (in lower costs) and a win for them (in better service and/or investment returns).

This level of disclosure is not available today as most of these “sell-ons” are subject to Non-Disclosure Agreements. We are opposed to NDAs at every level. Their purpose is to prevent envious investors paying higher prices, from trading down to the best price available. We think a better way is to publish fee scales based on assets under management which offer lower charges the more money is invested.

Performance measurement


It’s hard to think of any other product or service one could buy which didn’t give you a clear description of what you were buying. Fund management should be no different; if the aim of the fund is to provide the market return less fees, then it can be judged against its record of achieving its aim and chosen on that basis and the more fundamental assessment of whether the market into which the fund is invested, is right for the investor.

It makes no sense to pay performance fees unless the investor is equally compensated for under-performance. Few managers will make a market in their own performance. Managers should not be aiming to out-perform, they should be aiming to meet the fund objective, out or under performance may be achieved along the way but short-term performance is secondary to the proper management of the fund to meet its objective.

Persistent underperformance needs to be addressed and this is part of the governance function of an AFM. If a fund is so broken that it cannot be fixed, an AMF would need to take radical action such as passing management on to another firm but this would only be in extreme circumstances, more usually clear disclosures to all parties about what has gone wrong and what remedial actions are in place to fix the problem, should suffice. Investors have the right to vote with their feet. If an AFM lets sleeping dogs lie, it would be up to the Regulator to call on complacency.

As regards future returns, we think the best indicator is an assessment of the AFM’s previous reports which include any relevant performance measurement – especially risk adjusted performance but also a clear commentary on how the fund has fared in terms of its management of costs and the success or otherwise of historic decisions re asset allocation/stock selection etc.

Getting consumers the best price


It is not the Government’s job to find the best price, though it should encourage people to be financially aware, to shop around and to generally encourage competition.

It is the Regulator’s job to ensure customers are treated fairly. If a fund is available at a cheaper price, whether directly or from a platform, then the firm offering differential pricing should make customers aware of price differences and the reason for those differences.

If, for instance the difference is because of legacy issues, then a means to upgrade to a new fund with lower charges should be made available (with the option to remain where one is).

As a personal example, some years ago I was offered the opportunity to move money in a guaranteed annuity rate linked fund to the same fund without the GAR but with lower charges. I am very glad I chose to turn down the lower charges and keep my rights to a guaranteed annuity rate. Automatically upgrading is fraught with such issues – some legacy fund structures are expensive for good reason.

That said, we support a pass-porting system where a manager declares to consumers that a move from Fund class A to Fund class B, can be made at no consumer detriment. We also support bulk switches for people who do not opt-out of a switch – typically after 3 months of an announcement of the intention to move to a cheaper class.

Awareness of charges


We support greater transparency in the disclosure of cost and charges and do not get concerned by proportionality. The pendulum may swing too far in terms of over-disclosure but a proportionate position will be established over time. That the full range of costs of intermediation are now being disclosed is a good thing, it will help in decision making and it will make people think twice about high cost funds which may not be appropriate.

There are better ways of illustrating the costs of pension funds than through numbers. People do not believe projections and don’t usually read them. Simpler ways of expressing the impact of charges might include illustrations of cherished items (cars, houses etc) and a comparison of the erosion of value from higher charges (Lamborghini downgraded to Skoda).

Public awareness of the cost of financial services is improving but it takes a Martin or Paul Lewis to make this kind of thing generally sexy! We applaud the work done by pioneers such as Alan and Gina Miller of True and Fair and of Andy Agethangelou’ s Transparency Taskforce. Unfortunately, these campaigns have not yet found the general consumer as they should have done.

Presenting performance information


We strongly recommend that both absolute returns and risk-adjusted returns are produced on the same sheet. Information should be the responsibility of the AFM who would be held accountable for any mistakes.

We are meeting with the FCA in January to discuss a template for reporting for both Trustees and IGCs, we would like to see league tables of funds so that Trustees and IGCs can have a clear idea of the positioning of their funds relative to the market. Clearly risk warnings about not simply comparing price would need to be in place!


The pooling of funds happens pretty efficiently at present. We really don’t think there is much more scope for pooling but there is a scope for rationalisation of many active funds which have not achieved critical mass and/or are acting as closet trackers.

The way that investors get better outcomes is not from asset pooling (which is happening already) but by the use of a few Investment Management Agreements (rather than many). This can only be achieved by bring schemes together under one IMA and this requires the merger of schemes (whether trust or contract based,

The logistical challenges in pooling assets are relatively small, the challenges in merging schemes are much larger.

Information on charges


Since all institutional investors in the pension space have to appraise their funds in terms of value for money, it is critical that they understand the “money” side of the equation.

We have commented at length on these questions in the FCA’s recent consultation on transaction costs. There is very little cost to asset managers in providing this information, we have been involved in negotiations for the LGPS funds template and have met little resistance to disclosure on cost ground. There is concern that the more you disclose to the retail customer, the less likely he or she will be to invest, if this is true, it is a sad indictment both on our financial literacy and on previous standards of disclosure!

We have reservations on providing cost information on alternatives, partly because we regard this as an area of specialist investment which can safely be quarantined and partly because of the time and effort needed to establish an equivalent methodology to long only quoted funds. We are similarly concerned about directly invested real estate funds.

We would recommend that all costs of intermediation are included in the fund disclosure and that the information is published based on historical costs with any adjustments for the future being properly explained. For instance, we expect the LGIM’s multi-asset fund to have its total cost rising from 013% to 0.14% in 2017 due to the expansion of the fund’s size causing it to physically trade more stocks.

We cannot see any detriment in disclosing historic costs on a fund or giving estimates of likely future costs.

Fiduciary management costs


Fiduciary management is similar in concept to the workplace DC pension arrangement. The charge is typically for a bundle of services that goes beyond asset management into a fund of funds management service.

As with bundled DC, the trick is to unpick the costs of asset management from the cost of fiduciary services. Benchmarking the performance of the assets is relatively easy but benchmarking fiduciary service is harder (as this is an undeveloped science). As many fiduciary managers were previously the scheme’s consultants, trustees often apply the same measures for fiduciary managers as consultants. In reality, it is hard to draw the line between the role of a hands on implemented consultant and a fiduciary management – other than in the level of discretion granted to the latter to take decisions without reference to the trustees.

Ultimately it is in the Regulator’s gift to support or oppose fiduciary management. As with vertical integration, we see the blurring of the lines between advice and asset management as a difficulty for trustees and have no easy answers to the questions above.

Investment consultants


We will respond separately to the MIR consultation. Broadly speaking we are in favour of a root and branch reassessment of the role of investment consultants. We have grave reservations of their value for money and would like to see them more accountable for the advice they give and their engagement with the key issues of value for money.

Investment consultants live in a charmed world where they are opinionated but not regulated. They need to be better regulated and their activities overseen by the FCA. Similarly, employee benefit consultants operating in the workplace pension space are often shooting from the hip with only the most minimal of experience or knowledge of what makes for some good investment outcomes.

There is no obvious remedy to the problems identified in the section of the Market Study dealing with investment consultants other than to bring them down a peg or two.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to How we’re responding to the FCA’s Asset Market Study

  1. John Mather says:


    The is a problem with your logic It is the members representatives the trustees who have the contract with the investment adviser not the individual member Are you suggesting a class action against trustees?

    There is also a presumption that you invest in funds why not hold securities directly and widen the remit of the actury to analyse securities worth investing in charges often exceed the cost of a team of analysts

  2. I have read this several times and cannot believe the naivety displayed.

    Perhaps you will publish, here in your blog, the cost of regulation to financial advisers and fund managers together with a cost : benefit analysis of regulatory value. The cost of regulation to my company was 9.4 % of gross turnover.

    I wonder if, analising you analysis above, Henry, whether you understand commerce at the sharp end?

    I do believe that fund managers must be answerable for extortionate fees. I too believe that the consumer has a right to ask questions and get answers but unless and until the regulator acknowledges that right and provides that information about its own affairs, and be answerable for its regulatory costs , faults and failings then it is hardly in a position to oversee your plan even if it were commercially acceptable.

  3. henry tapper says:

    Well I’m a Director of two profitable businesses and we don’t have the scale of regulatory costs you mention. Of course the FCA would like to regulate investment consultants and they probably should. In my book, high regulatory costs arise from the failure of the business model, as these costs get passed on to customers, i suspect that you are in a lose lose situation, Which is why I got out of retail advice some time ago and why i am an advocate of collective solutions,

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