Yesterday’s keynote speech from David Farrar at the Professional Pension DC Conference contained some important messages. I wasn’t the only person in the room picking up a new tone on disclosure. The quote is a close approximation to what David actually said.
Cost and charge disclosure is far from consistent – Trustees and IGCs have a duty to ask – Asset managers no duty to disclose #DCCONF
— Pension Plowman (@henryhtapper) September 5, 2017
Not only did Farrar pick up on the asymmetry between the information available to fiduciaries and asset managers, but he pointed out inconsistencies in the reporting to savers into master trusts and GPPs.
DWP and FCA working as one
The really good news is that David has confirmed the DWP will be observing on the meetings of Dr Chris Sier’s disclosure group. Let’s hope that means that trustees – as well as IGCs- will be given the power to demand proper disclosure and that members who want to know what they are paying for fund management , can know the full answer.
Jesal Mistry, of Hymans Robertson, who spoke on the same matter, discussed with me the impediments to getting to this true cost.
I’d asked Jesal in his talk whether full disclosure should include the terms of the investment management agreement (IMA) which are typically subject to a non-disclosure agreement. Jesal, true to his profession (an investment consultant) was equivocal, recognising that NDAs had enabled him to get better deals for some trustees than had they refused to keep terms hid.
Listening to both Jesal and David, I am more than ever convinced that members must know what fund management actually costs – to occupational trustees and the trustees of GPPs. It is only by knowing this commercially sensitive figure that we can assess whether these trustees are getting value for money.
Of course the cost of fund management is only a tiny fraction of what we members are actually paying as an AMC and the AMC is not a fully inclusive figure until it contains a full disclosure of the costs borne by the fund which impact fund performance (transaction charges).
IMAs must be disclosed – NDA or no NDA
Jesal mentioned me a case where the trustees literally paid nothing for asset management and allowed the fund manager simply to take his cut from the stock lending fees he handed to the fund manager. This is only one example but explains why the terms of IMAs need to be fully disclosed.
It is only when we can see the deal, that we can work out whether it is a good deal. Farrar actually talked about benchmarking costs in his talk, something that is an anathema to many IGCs I have talked to. This proves to me that not just the FCA but the DWP are alive to the value of disclosure, which acts not just to educate members, but to give them assurance that they are being served by a competitive and transparent market.
Valuing the member experience
Once we know what fund management costs, we can ask real questions about the balance of the AMC.
The attempt last year by the IGCs to establish the value of the member experience, as measured by NMG was a hopeless failure. It failed because some IGCs stymied the full publication of results – we couldn’t see who were good or bad, we could only see the IGC’s interpretation of results. Even worse – we could not see what the member experience was costing us, since we had no way of splitting it out from the bundled charge – the AMC.
We all know full well that the balance of the AMC not used to pay fund managers is what providers of master trusts and GPPs make their money from. We also know that what appears to be a cheap AMC may prove expensive if it buys nothing in the way of fund management and a rubbish member experience. We also know that what looks like an expensive AMC can be cheap if it buys quality fund management and a great member experience.
In short, proper disclosure of investment costs (stripping away NDAs) will lead to proper exposure of the cost of the “member experience” and ultimately to a proper assessment of the value of the money that the member pays.
This information has to be generally available
Returning to what David Farrar said in his (excellent keynote), it seems that the DWP want this information to be available to members of occupational trusts (including master trusts) at the member’s request.
This – together with Farrar’s messaging about benchmarking, suggests that there will spring up central depositaries of information which will allow people to see costs, performance and the value assessments of the member experience in one place.
It is clear from my conversations with Government , that it does not see itself as being this depositary of information. There needs to be a central depositary arising from the private sector that can allow people to properly understand how well their workplace pension is working.
What do we tell our members?
David Farrar was clear; trustees can tell members where to find the information they need but they cannot ultimately be the judge of how well they are doing.
It is for the members, and their employers to determine whether they are giving value for money.
It is not what trustees tell members that counts, it is what members and employers tell trustees!
Thanks to Professional Pensions for their excellent conference to which I felt privileged to be invited. Thanks to David, Jes and all the speakers too.