Why every hidden cost matters.

Value recognised

A lot has been made about the hidden charges of running a fund over the past ten years. Over this time there have been two high profile campaigns to bring them into the open.

In the retail space, Alan and Gina Miller have run their “true and fair” campaign that has shown where the extra costs consumers pay for funds arise, gives an idea of their quantum and shows how much of this cost has not led to better performance – but the reverse.

In the institutional space, Colin Meech and Chris Sier have been working on data provided by LGPS to show that institutional clients suffer from the same problems as retail ones. Their problem is different – the assets are usually more diversified and more esoteric, the hidden costs are perhaps harder to find – but no less pernicious to performance.

The work of these people has been supported by commercial organisations who have profited from the reduction in the money institutional and retail customers leave on the table. Organisations such as Novarca have for many years been working with institutional buyers, not just to identify these costs, but to reduce them. Typically the commercial model has worked on a cut of the savings made in years following the consultancy work.


The value of work by pioneers such as these – is recognised by the FCA in their various value for money studies, by the DWP in the work they are doing on occupational trust disclosures and in the wider European context – through MIFID II and PRIIPS.

It has been given industry prominence by the work of Andy Agethangelou through the transparency task-force.



Value delivered?

However, the value of the pioneer’s work has yet to be recognised in this country by consumers and it’s worth asking “why not?”

true and fair3

Job done?

Firstly, many organisations are now buying funds for consumers with a keen eye for value. Speaking with an IGC on Friday, I was struck by its sense of weariness, it felt it had done the work, delivered the value and could do without further lectures from the FCA and others (especially when the FCA’s fund disclosures template has still officially to be delivered).

For those organisations that have got ahead of the curve and delivered value, there has been insufficient recognition that they have done a good job. Some might say that this job should have been business as usual for institutional purchasers, but clearly it isn’t. My study of the declarations of IGCs last April saw transaction costs recorded from negative to 36bps. Many IGCs were still saying they were unable to get slippage calculations from their insurers (or in the case of non-insured platforms – directly from the managers.

There must be some carrots for those who do the job, as well as a stick for those that don’t. Recognising good IGCs , trustees and statutory bodies, for good fund governance, is critical to the ongoing success of VFM as a concept.


Job not done?

Those we know are doing the job of cost disclosure and cost management properly are outnumbered by those who are doing it badly or not at all.

We know this anecdotally, by talking with those supplying data for MIFID II and PRIIPS (such as Alan and Gina Miller) and from organisations such as Simplitium who collect data and analyse it.

There is too inconsistent a picture between those bothering , not bothering, doing the work incompetently and perhaps a few who are deliberately supplying the wrong data. We are yet to find a way to separate the sheep from the goats.

How does a consumer get a feel for what is good?

If a fund is reporting costs on a “true and fair” basis , then it should be assessable for the value we are getting for the money paid.

But while we may know the impact of costs on performance (and perhaps the value of that money), the bigger picture – of whether the consumer is getting value from the fund as a whole, or the contract with the insurer or from membership of an occupational trust, remains unanswered.

It is as if one tiny part of the jigsaw has been completed, while the frame of the picture lies in disconnected pieces on the table.

The reporting of the overall value of a person’s “savings pot” is measured by outcomes. Costs may be very high, but if outcomes are high- then high cost savings pots are delivering value for money.

But there is no standard way of performance reporting which looks at returns net of charges and compares them with the gross return ….. and then benchmarks this score against what other options would have delivered.

So consumers have no real way of seeing how their savings have done, compared with the savings of the next person.

Why do transaction costs matter?

The point is this; if google maps can chart the Amazon Delta, it can get you from London to Southampton.  Mapping the pension genome needs to be as complete as mapping the human genome or the geography of the planet.

Novarca template

Novarca’s reporting template.

We do not need to know what is happening all over the world , or all over our bodies, but we need to know we can when we need to. Precisely the same goes for pensions.

The vast majority of pensions have transaction costs measured and under control, but there are places where this is not the case. Consumers need the confidence to know that where problems exist, someone is putting out the fires, cutting out the cancer and extinguishing the unnecessary costs.

Leaving it to third parties is simply not good enough. Read about what is happening in Australia right now, where Regulators let the market do what it liked for decades. The result is the findings of the Royal Commission.

We are about restoring confidence in pensions, this can only happen if people feel pensions aren’t going to rip them off.

We commit our savings to pension products for longer than any other type of financial plan, they really are “whole of life”. Those who get to manage those products have a whole of life financial obligation to deliver value for the money we pay them.

The intense scrutiny on the most hidden charges is the way that those who act as our fiduciaries can show that they mean business. It is up to those senior in pensions to ensure that a system of performance measurement which encompasses not just these hidden charges but all areas of charge that lead to performance are measure.

And last of all we need to display the performance and the drags on it , in simple ways that make sense.

Otherwise, we’ll continue to be regarded like this!

true and fair



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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