The FCA are commission a template to discover undeclared investment costs in the funds we use. They have finally published PS17/30 which gives IGCs the right to use it in earnest. The DWP are working in tandem on disclosures by occupational trustees. A great deal has happened but there is more to do before the public can clearly see if they are getting value for money from the operators of their workplace pensions.
The next critical step is for fiduciaries (trustees and IGCs) to disclose the proportion of the member charge that is being spent on fund management and that part that is being retained to manage the member experience and pay the operator. This is what is meant by “unbundling the price”.
It is likely that price unbundling will meet with opposition both from the operators and from the fund managers. Most Investment Management Agreements between operators and fund managers are subject to non-disclosure agreements (NDAs) to protect this information from being used against the commercial interests of the providers of these services.
But it is critical that these NDAs are removed and that the public can look-through to the behind the scenes pricing of the workplace pensions in which they participate.
It is widely acknowledged that the value of a workplace pension falls into two parts. The first- the investment part can be measured by looking at risk-adjusted performance and the total cost of fund management (what the operator pays and what is left in the fund as transaction costs). The other part of the workplace pensions value is the “member experience”, this is a subjective measure of the quality of administration and engagement offered by the provider and is set against residual costs within the member charge after the fund costs have been deducted.
The reason is so important to unbundle the fund costs is because these two aspects of value make separate contributions to the overall value of workplace pensions and should not be confused. The investment part drives the outcome, which we know is considered much the most valuable by members (NMG research for IGCs 2016). The member experience has value in keeping members engaged and helps members make good decisions (like paying in more), but its value is less direct.
For the moment, we need to focus on the investment part of the value for chain and we need to be able to score value for money on this investment part, discretely from any score we give to the member experience. This creates a hygiene in the measurement.
In the longer term, we can experiment by conflating the investment measurement and the measurement of member experience together, using some formula that can allow us to measure the overall value of the workplace pension but that is step two. We don’t need to go there just yet.
To suppose that we are there yet – is to be naïve. We are very far from knowing what operators are paying for funds. We will know what part of the overall fund cost is not met by this charge as this what the template being developed by Dr Chris Sier and his team will show us.
Once we know what the operators are actually paying the fund managers, we will be able to know whether they are getting value for money on our behalf or simply dumping much of the cost of funds on the members by allowing the fund managers to be rewarded by the back door. As you can imagine, there’s considerable capacity for the investment management agreements to work against the member!
The cost of financial services is invariably higher than ordinary people think, it is the function of the marketing departments of fund managers and pension operators to keep it that way. It is the job of good governance to ensure that full disclosure is made. The next few months will decide how close we can get to the nirvana of full disclosure.