The impact of NDAs on pension outcomes


NDAs (non disclosure agreements), have been much in the news in the past week.

The government says it will crack down on the use of workplace “gagging clauses” to cover up allegations of harassment, discrimination and assault.

Many businesses use non-disclosure agreements (NDAs) to protect commercially-sensitive information. But employers have been accused in high profile cases of using the clauses to silence victims of workplace abuse.

The proposed new laws will ban NDAs that stop people disclosing information to the police, doctors or lawyers.

Are NDAs in pensions being used to protect commercially sensitive information or to gag whistleblowers who have uncovered unpleasant truths about those who issue and enforce them?

Transparency – the best disinfectant?

Today I’m going to an event organised by the Transparency TaskForce looking at the “remedies” to be applied by the Competition and Markets Authority to fix what was considered a cracked market in pensions investment consultancy.

Working, as I do, for a pensions consultancy (First Actuarial) , I must declare an interest. We don’t want to be out of work as a result of these remedies, we hope that we won’t be out of margin – my feeling is that smaller consultancies that are not dependent on fund picking and vertically integrated fiduciary management have less to lose (and much to gain) from larger consultancies who have dominated the market for as long as I can remember.

Time will tell on that: but if the CMA can present a level playing field which encourages new thinking and disrupts complacency, the result should be better outcomes – especially in DB investment management.

What questions should I ask?

I am on a panel at some stage of the day and will be asking questions of those more expert than me in these matters.

I’m interested in DB and DC asset manager margins

The market dynamics for DB and DC are quite different. DC is not dominated by consultants and margin pressure comes from the insurance platforms (and from NEST) . Where trustees and consultants dominate in DC, it is the sponsor who picks up the bill (many large occupational DC schemes pick up asset management charges).

Investment consultants have encouraged active management and have not exerted such margin pressure in DB, I have never seen evidence of the impact on DB deficits of active management underperformance (net of all costs) but evidence elsewhere (from the likes of TEBI- the evidence based investor – Robin Powell)  suggests that it has contributed to increased pressure on funding.

My experience of working with consultants on DC (when with an insurer) was that they did not exert margin pressure on us. I don’t think that there has been high margin pressure on DB asset managers (see comments below).

With regards data sharing?

The consultant’s job is to provide Trustees with advice on what to do. I think this advice should be evidence based. Funded pensions in this country have been going long enough for us to understand what works and what doesn’t.

TEBI’s approach is to build up a database of evidence based on outcomes. This is what will happen if AgeWage scores develop as I hope. Over time we will see whether the outcomes within DC are influenced by the type of asset management employed.

While thinking about what I’d ask this morning, I solicited comments from friends who know much more about DB costs than I do. Here’s one of the responses I got

The Investment Association’s standard Investment Management Agreement has a confidentiality clause which essentially prevents schemes from sharing info on charges except in very limited circumstances. My assumption is that these clauses are enforceable, and are not trumped by UK/EU law. 

This is something that’s informed my own pet theory about asset management profitability. The FCA published some data as part of their interim report on AMMS which suggested, with caveats, that the rate of profit to asset managers in DB was about 38-42% and in DC was about 11%. My hunch has always been that the prevalence of mandates with NDAs in DB is the driver of this, in comparison with commoditised pooled fund  investment which is pretty much ubiquitous in DC. Alternatively one might argue that it’s the fact that active management is holding out in DB, whereas in DC it’s commoditised passive/rules-based. Or it might be a bit of both.

Another correspondent added….

The IMA clause does not preclude the client, or the clients designated representative, from getting the data. It does preclude wider sharing.

NDAs are not exclusive to DB;  NEST has signed NDAs with managers that it employs and NDAs govern the disclosure of underlying asset management costs at other workplace pensions.

As these costs are ultimately picked up in charges that DC members pay, it is critical that they are kept as low as possible. I do not think that signing NDAs is the best way for DC Trustees to ensure competitive rates.

That said, the much lower DC margins of asset managers suggest that when negotiating directly, DC platforms are getting a better deal.

Are consultants complicit over DB margins?

But large workplace pension schemes fight their own battles (and pretty successfully).  I am more worried about the comments about DB margins.

Why do they remain so much higher than DC margins. Could it be that this is where the broken market identified by the CMA – manifests itself.

Are consultants to blame and is the use of NDAs part of the problem?

With regards “value assessments”?

The issue is exacerbated by the latest move to divorce value from the value for money equation by introducing “value assessments”. Another correspondent writes

This (value assessments) automatically diverts the attention of clients from anything to do with money or cost and perpetuates the continued misapprehension (that costs don’t matter).

My concern is that investment consultants not only permit these NDAs to survive in IMAs but perpetuate the practice because they have no wish to be accountable for outcomes. They are much more comfortable with “value assessments” than “value for money assessments” because of NDAs.  NDAs combined with Value assessments kick the benchmarking of outcomes down the road and render consultants less rather than more accountable

These outcomes are of course a result of advice given by consultants on asset allocation, style and choice of fund manager. The impact of charges on the outcomes is material and should- in the interests of competition  be disclosed.

Although the IA clause may not allow benchmarking ,of charges, it does not stop third parties comparing outcomes. My Pentech “AgeWage” scores people’s DC outcomes against a benchmark established and maintained by a trusted third party, we hope that trustees and IGCs will set the ball rolling, comparing DC member outcomes to average outcomes.

If evidence suggests that active managers are producing better outcomes , we would expect to see this reflected in AgeWage scores. Outcomes based scoring takes into account all paid costs and charges as they are reflected in – “outcomes”!

It would be possible to simulate the impact of replacing a passive manager for an active manager (with the same platform cost) and I’d hope that more of such work is done. It would be particularly interesting this back-testing being done by fiduciary managers on the active management they employ within their fiduciary management agreements.

Will consultants put themselves under NDAs when buying asset management as fiduciary managers?

Will consultants assess their value for money – not just their value?

Will the CMA allow consultants to continue to be unaccountable for outcomes – especially under Fiduciary Management?

Consultants need to be asking tough questions not concealing information.

I would suggest that they would be better off being open and transparent about the costs they are paying for the management of the money they hold under fiduciary agreements, that means refusing to sign up to NDAs  and ‘most favoured nation” assurances and putting “value for money” as the focus of accountability.

I’ll finish with some stats from Annexe 8 of the FCA’s Asset Management Market Study (now 3 years old)

Screenshot 2019-07-23 at 09.12.53.png

I do not think enough has been done to address the disparity in margins between the two institutional products examined – DC is working for owners , DB for asset managers. My question to the CMA will focus on this.

About henry tapper

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