A battle won – not yet the war; FCA demands cost disclosure.

FCA10

Another step towards transparency

 

 

I get worried by premature announcements of victory. The battle to get proper cost disclosure is a long one , hostilities commenced properly with the OFT report on workplace pensions in 2014. This reminded Government that we know nothing about what we buy (even if we buy on behalf of others).

OFT

The OFT were explicit; we should know what we are paying for.

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Now, three years later, the FCA have agreed with the OFT and yesterday made it clear it expects this to happen from January 3rd 2018.  While I am pleased that Policy Statement PS17/20 finally allows IGCs and Trustees to carry out their duty to properly report on the value for money “operators” are getting from their investment suppliers, this is not the result we might assume from the FT’s Headline “Victory for workplace pension savers over hidden charges”.

“Operators” is another term for “provider” and means the body that runs the workplace pension. Operators do not manage money themselves, they sub-contract to insurers who sub-contract to fund managers who sub-contract to brokers and dealers etc.). Occasionally the chain is shortened (NEST for instance do not generally use insurers to wrap funds) but the complexity of the various relationships means that (until now) , not even the IGCs and Trustees have no real idea how much “slippage” there is between what fund performance gross of costs and net of costs should be.

In practice it will enable IGCs and Trustees to get this answer when they send their fund managers a questionnaire (template courtesy of the Chris Sier disclosure committee). The answer will allow the IGC to establish the money that members are paying to have their fund managers. Hopefully the IGCs and Trustees will be able to add this to the charge made to the Operator to discover how much of the member charge is going on investment and how much is being retained by the operator to pay for other things (including the “member experience”).

Let’s be clear, members will not be allowed to see how much of their AMC is being spent on fund management. That number is still firmly locked behind an iron door locked by a non-disclosure agreement – unless you actually declare it (which L&G and Aegon do).

We will have to wait till the second quarter of 2018 before the FCA even begin to consult on what will be declared to members. Meanwhile we can hope that the DWP are intending to consult on member disclosure somewhat sooner. Even so , members cannot expect to see what they are paying for transactions for some time and there seems to be no plan to force operators to disclose what their Investment Management Agreements tell us about the cost of fund services they are purchasing from the fund managers or insurers.

In short, PS17/20 is another tiny step towards proper disclosure, but in itself, it will do little but empower fiduciaries such as IGCs and Trustees to be a little tougher on operators to be a little tougher on fund managers. This is not a great victory for savers of workplace pensions.  That hopefully will come later – let’s set a tentative target for the war to be over by 2020.



Coincidentally….

Having met with B&CE’s head of policy yesterday afternoon, I can confirm that its publication of the Peoples Pension’s “slippage” costs yesterday morning (within minutes of the FCA’s announcement – was a pure coincidence. Indeed, had it not been for a health problem with a member of said head’s family, B&CE would have beaten the FCA to the mark.

B&CE will be happy to know that , having followed the FCA’s original “slippage” methodology, the numbers they have published are pretty well the numbers they should be delivering to the Peoples Pension’s Trustees for analysis prior to the next Chair’s Statement, an event so pregnant with expectation that neither the Head of Policy or I could remember when it is. I have spent 30 minutes this morning searching Google, the Peoples Pension website and my own records for the latest Chair Statement from Steve Delo (trustee chair). I have drawn a blank.

So I think it most unlikely that the People’s Pension holds much store by the Annual Statement by its trustee chair and David Farrar – heading the trustee disclosure working group at the DWP, might like to ponder about disclosing anything via a trustee chair’s statement which is presumably available on request and after the production of a stamped addressed envelope to B&CE Towers – Crawley.

Having had my groan at the total nonsense that is trustee disclosure in workplace pensions, I will now applaud B&CE for getting State Street to produce the numbers and for presenting the numbers in a sensible way so that people like me (as well as the reticent trustees) can see them.  They are here

https://bandce.co.uk/technical-note-transaction-costs-disclosure/

First the headline number 0.04%

Transaction costs

Total transaction costs in the People’s Pension default fund from 1 Jan 2016 to 31 December 2016 were 0.04%. This is a combination of explicit and implicit costs as outlined below.

Here are the Explicit costs  -0.01%

These can be broken down to 0.01% explicit costs (e.g. brokerage fees, stamp duty and custodian fees). This is the figure which can be compared with figures disclosed by other pension schemes.

Here are the Implicit costs- 0.03%

These are  the difference between the mid-market price and the actual price e.g. due to the effect on price of placing the bid/making the sale). These have been calculated following the methodology set out by the FCA in its consultation, and now adopted (almost entirely) into FCA rules. B&CE are not aware that any other pension scheme has reported implicit costs yet.

I’d agree, no other pension scheme has reported not just what the costs are, but how they were worked out.

What’s more B&CE have also published the anti-dilution levy figures and their stock-lending figures (see my countless blogs about this!!).

So full marks to B&CE for disclosure, State Street for disclosure and People’s Pension for disclosure. If this lot can do it, so can any workplace pension provider!


The Pension Plowman challenge

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I  set myself this challenge. I challenge myself to make sure that by the end of this decade, every workplace pension is publishing not just the transaction costs of the funds used, but the costs to the operators paid to the fund managers.

I  set myself a second challenge. I challenge myself to produce a league table of these disclosures from every workplace pension analysed by http://www.pensionplaypen.com and even those we do not analyse as they don’t want to be on this platform.

I set myself a third challenge to collect consistent performance statistics and publish them alongside the transaction cost figures together with risk-adjusted performance figures showing the true value delivered by the fund managers.

Finally, I set myself the challenge of aggregating these numbers into a league table of workplace pension providers , showing costs, performance and the value for money of the default fund of each workplace pension so that people can see if their “operator is getting value for money.

I will not stop there!

Once I have got a league table showing the value for money that the operator is getting, I will take the final step towards establishing whether members are getting value for money. This will mean analysing the difference between what the operator is paying for funds and what the member is paying as a member charge for the workplace pension.

The difference is what the member is paying for the experience of being looked after by NEST, L&G, Peoples Pension etc. That cost too deserves a value for money number.

I will not cease from mental toil, until I have produced a second league table that shows what I consider “value for money” from this residual charge. Indeed I will only lay down my plough when I can show people not just the value being got on their behalf on their investments and the value they are getting from their operator as “member experience”.

I will lay down my plough when I can get an agreed number from the IGCs , Trustees and Operators of workplace pension called the “value for money score”, which I can publish against every workplace pension in one big fat league table showing all the other scores like “goals for and against” in the football table.


Why?

I will set myself the target of this happening by the end of the decade because

  •  Ordinary people deserve to know whether their money is being properly managed
  • Operators need to be held to account
  • IGCs and Trustees need to benchmark their operator’s performance
  • Government (especially the Regulators)  need to benchmark performance
  • There needs to be a proper way of switching from one provider to another if things go wrong – with an audit trail of “why”
  • Fund managers , operators , trustees, IGCs all need to be held to account if we are to create and maintain confidence in workplace pensions.

Transparency is the best disinfectant, this is what transparency in workplace pensions looks like. If you don’t want transparency and don’t agree in the challenge I am setting myself, you are free to tell me why not!

Nobody has yet had a vision like my vision, no-one has seen the whole picture and dared to write it down as I am writing it down now.  This has been a challenge and I am proud that I can write this down – four years into the Pension PlayPen project, because I really believe that together we can get this done!

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I want to be writing in January 2020 about that single league table that properly compares every aspect of the performance of a workplace pension and does so in a single “value for money score”! I want that table to be available to every person saving into a workplace pension and to all those who are considering doing so.

I hope that by then , we will be as one with my vision! Then the war will be won!

war won

War won!

 

 

 

 

 

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in auto-enrolment, pensions and tagged , , , , , . Bookmark the permalink.

6 Responses to A battle won – not yet the war; FCA demands cost disclosure.

  1. John Mather says:

    Henry you might consider another calculation the amount spent (or loaned) by Government in raising the pension pot of the bottom 50% of earners by say £10000

    Surely these are the people who need most help as they don’t read about pension no matter how many studies have been made nor do they concern themselves about the margin they avoided paying by doing nothing

    Liked by 1 person

  2. henry tapper says:

    A good idea – but after four years of trying- we’re still struggling to get past first base on workplace pension Vfm! One tiny step at a time

    Liked by 1 person

  3. Bob Compton says:

    Well done Henry, This challenge when achieved will be hugely beneficial for all employed in the UK. I would like to think that it should lead to formal recognition of your work, perhaps a knighthood? .

    On a separate note would it not be great if each “operator” acted as the Peoples Pension and voluntarily provide the information required.

    Liked by 1 person

  4. henry tapper says:

    That’s very kind of you Bob – a knighthood would be loverly – I was thinking more in terms of a Dukedom! About as realistic!!!

    Liked by 1 person

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