We are now well in to the IGC reporting season, where Independent Governance Committees tell us how well the insurers they oversee are behaving.
I had had low expectations going into this round, 11 of the key insurers had spent much of the year collecting feedback from 15,000 of their members telling them (what they already knew), that people wanted a good investment return and good information along the way.
I had assumed that this would take care of the “value for money” debate for another year and that we’d have to await the final report from the FCA on how we established value for money in investment terms.
That was until I read the Legal and General IGC report, which is the game-changer we needed. The breakthrough seems small, the publication of transaction costs for a handful of passive funds used within its Worksave Pension. But L&G have let a very important rabbit out of the hat and the implication for funds governance (let alone DC governance) cannot be underestimated.
Why L&G’s publication of fund transaction costs is so important
- Legal and General aren’t any old fund manager, they are Britain’s biggest and one of the largest managers (by assets under management) in the world.
- L&G’s funds aren’t just inside the L&G Worksave pension, they are in many rival propositions including Smart, Bluesky and even NEST.
- The costs are much higher than experts had anticipated and are material to the performance of the funds.]
- This means hidden costs must form part of a value for money assessment of investments.
- While L&G’s charging structure means that the impact of hidden costs keeps L&G compliant with the charge cap, those providers using similar funds and with an existing AMC of around 0.75% would become uncompliant if hidden costs were included in the cap.
L&G have just thrown a unpinned hand grenade into the fish-pond.
The reporting of the value for money benchmarking carried out by IGCs had – until this point – been feeble. The results of the NMG feedback was that all providers were seen as much of a muchness by members. Even so, the providers banned the IGCs from using the results to show that their provider was giving more or less value than a competitor.
Some work on transaction costs had been done by Scottish Widows, Phoenix (and no doubt others), but to date we had only had generalised assurances that the scale of transaction costs was insufficient to ring alarms. These hidden costs were well on the way to being absorbed into some general value for money score which could be published in April 2018.
This would have kept awkward questions from DC members of fund managers with high hidden costs at bay.
Since many of these funds are used by defined benefit schemes, it would have kept awkward questions from institutional trustees and consultants at bay too.
Most importantly of all, it would have made it very easy for the Regulator to ignore hidden costs in the DC default charge cap (which is under debate as part of the 2017 auto-enrolment review.
Had L&G not gone and published these hidden charges, everything might have been kept under the Investment Association’s hat and the fund managers, insurers and commercial master-trust’s margins would have been maintained.
When Pandora opened her box, winds flew out that caused chaos in the Mediterranean for years. No doubt the funds industry will turn on L&G and point this out!
For we now know, not just that hidden charges exist, but they can be quite high and that they are unpredictable. It will be impossible, going forward, to ignore hidden charges in any thorough performance report.
Those charges will need to be justified on a value for money basis and eventually we will want to report on those hidden charges as part of annual governance reports, manager selections and compliance reviews.
The lid is off, it cannot be replaced.
Since L&G have published, the onus is now on the rest of the IGCs to publish too.
For L&G DC investors paying 0.13% for the multi-asset fund (MAF) , the news that they are paying 0.06% additionally amounts to a 50% increase in yield-drag. The numbers are quite different for equity funds prompting many of us to ask whether we want to use MAF as our default.
We are now in the fortunate position to have this debate. The same debate cannot be had where the information is not on the table.
We should remember that this is about our money, not about some fund that pays defined benefits which is paid for by an employer, the risk for a DC investor of over-paying in costs and charges falls firmly at his or her door.
Many of us have campaigned for years for the right to know what it is we are paying for the management of our money and now – at least with L&G- we know. The lid is off- it cannot be replaced.
I now want to see the table below re-created by every IGC so that we can compare what we are really paying for our workplace pensions not just at L&G but elsewhere. And if we cannot have this information, I would like to know why not!
For its work on Value for money I give this report a green
For its effectiveness I give this report a green
For its tone I give this report a green (with a sniff of orange)
Lots of good stuff on the IGC reports, thank you.
I hope you don’t mind a few comments:
1. Perhaps the most important revelation is how low the extra costs are – various reports have tried to suggest “hidden” costs of 100-200bps so most funds in single figures is good news (even if it confirms what I expected).
2. The fund with the most extra cost is Fixed Interest, @24bps, it’s inclusion is the main driver of the MAF additional costs at 6bps and why MAF is well above index equity.
3. You can’t have a MAF without FI and it’s even more important in lifestyle or target date approaches. Switching funds, whether to rebalance to an original asset mix or to derisk is an essential part of such products. Such switchin axiomatically incurs transaction costs. Conversely how much would it cost in legal fees or redress if default funds were 100% UK equity at retirement and markets went down?
4. Overall the transaction costs are low and while significant in comparison to the IMCs are very modest in comparison to the cost of a default that goes down at the wrong time.
Peter, (I think you are the bloke that has done great work at Vanguard?) thanks for this.
I quite agree. I have no problem with the scale of the costs – bonds have spreads and MAF is growing too fast not to transact. Few people (including me) had an idea of the cost of diversification until these numbers appeared.
The publication of these numbers is the first indication the ordinary investor has about the price of funds (in terms of their management). I’m quite sure (as the True and Fair campaign have disclosed) that some active funds rack up 100bps + in fees but these funds are thankfully not used as defaults for workplace pensions.
There remains the question of what we are paying for the defaults of L&G’s rivals and the sooner we have this information in the public domain, the better