Cost templates are an important step, but the ultimate destination is an independently administered network through which all parties can access data from source, writes Sam Lusty, founder and CEO of technology provider Byhiras
Better visibility, greater transparency, more data: UK pension funds have been making the same demands of their asset managers for decades.
The digital nature of financial services, coupled with advances in technology and the advent of big data analysis, should have heralded a revolution in how data on fees and performance is shared along the investment management value chain.
In reality, however, it is only in recent years that meaningful steps forward have taken place.
An example of this is the launch of the Cost Transparency Initiative (CTI) in the UK in 2019, which introduced a series of templates for reporting investment costs. But the limitations inherent to aggregating data via standardised templates mean this approach can only ever be a first step towards cost transparency.
That is not to downplay the achievements of the CTI – quite the opposite.
The partnership between the Local Government Pension Scheme Advisory Board, the Investment Association and the Pensions and Lifetime Savings Association has successfully developed and normalised a new minimum requirement for cost reporting to UK pension schemes. The widespread adoption of the CTI templates illustrates the demand within the UK investment industry for more efficient and effective methods of sharing data.
This has had meaningful practical ramifications. Asset managers recognise the need to provide increased disclosures on costs and pension schemes have a mechanism to obtain that information in a standardised format from their different investment managers.
This is to be welcomed: collecting more information is a necessary first step to managing costs and improving investment outcomes for schemes’ beneficiaries. Whilst templates are not the answer to the demand for transparency and accountability, they are an important first step.
“Templates abstract from the reality by cherry-picking a subset of decontextualised information”
The challenges inherent in collecting and sharing data in this way are widely recognised. Templates do not and cannot provide all the information that pension schemes and other investors and allocators need. As with other forms of prescriptive reporting, templates abstract from the reality by cherry-picking a subset of decontextualised information.
Furthermore, by prescribing the basis on which costs are measured, such as the arrival price methodology, the use of templates hides the true economic cost and reduces comparability.
Repackaged at each stage along the fragmented supply chain of administrators, custodians and investment managers, the data is invariably somewhat inconsistent, incomplete and inaccurate by the time it reaches the investor. However, the underlying data is sensitive and cannot be published without compromising commercial agreements.
The incomplete information that pension funds receive through templates is a result of the selective nature of its inclusion, the different methods of calculation and how it is summarised and aggregated.
Cost attribution gap
Templates do not provide cost attribution to service providers or visibility into funds-of-funds vehicles. This is a significant barrier to understanding all the costs for which an investor is potentially liable, the actual costs incurred in a given period, to whom those costs were paid, the risks taken and the services received in return – and critically the strategy pursued. All of these are needed for an investor to both understand and manage their costs and, crucially, to determine value for money.
As pension schemes and other institutional investors start to analyse the information provided by their asset managers in the CTI templates, they are increasingly asking questions for which they require a source of more granular data. Complete and timely data would also allow allocators to perform better analytics, providing insights into performance and risk and modelling alternative fee structures and scenarios.
Accordingly, we see institutions moving on from template-based disclosures as they seek to understand the commercial terms of their investments. Furthermore they don’t want to be dependent on infrequent or prescriptive reporting as it becomes available from a range of different service providers. Rather they need to be able to access data on, and analyse, their investments as and when required.
An independently administered network through which all parties can access data from source would not only allow pension funds to raise pertinent questions about costs and value for money, but also provide the granularity of data required to reach an accurate conclusion.
This is the logical next step in the UK investment industry’s drive to improve cost transparency and will serve not only to address the weaknesses of prescriptive reporting, but also to build on the momentum created by the introduction of cost templates.
There remains significant distance for investors to travel from templates to information sufficiently detailed to determine value for money from each of their different service providers. But templates show that investors and service providers have started the journey.
Byhiras is the technology firm behind the cost transparency compliance and validation system for the UK’s £291bn (€325bn) local authority pension system