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Moving first on fee disclosure 'challenging' for pension providers

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The UK must fully standardise transaction-cost disclosure before commercial pension providers should be expected to publish costs, the industry has warned.

Peter Dorward, managing director of IC Select and an independent member of the Royal London Asset Management independent governance committee (IGC), questioned how viable it was for providers to act first on transparency.

Speaking at the Pensions and Lifetime Savings Association’s (PLSA) local authority conference, Dorward said it would be difficult for any workplace pension provider or IGC – the latter recently set up within contract-based pension funds to protect member interests – to “stick their head above the parapet” and be the first to publish cost data, as any such step would be “challenging from a commercial point of view”.

Dorward, responding to a question on the potential detriment to any pension provider from improving cost reporting, said there was a need for “full standardisation” of any cost disclosures before he believed IGCs would be able to publish all fees.

The Financial Services Consumer Panel, which advises the Financial Conduct Authority, has recommended the UK industry emulate the voluntary cost-reporting framework designed by the Dutch Pensions Federation, which the Dutch government made mandatory after the industry group published its first draft.

Improved disclosure

A number of UK pension providers have already sought to improve their data on asset management costs, including the £11.5bn (€15.7bn) West Midlands Pension Fund (WMPF).

Its head of finance, David Kane, told PLSA delegates the fund had applied a new cost-reporting framework – capturing management fees, performance fees and transaction cost, among others – starting with the 2014-15 financial year, and as a result saw its reported fees increase by £70m.

Kane said that, under the fund’s previous approach, the financial year 2013-14 would have seen reported costs of around £11m, which amounted to the costs of the fund’s internal investment team, and costs for which external managers directly invoiced WMPF.

However, costs captured by the revised framework would have risen to around £87m, falling to an estimated £81m in 2014-15, Kane added.

“So, these costs were previously not disclosed, and were being netted from returns amounted to about £70.6m,” Kane said, adding that the additional costs equated to about 70 basis points on the WMPF’s total portfolio.

A similar increase in cost was seen by RPMI, responsible for the UK’s £23bn Railways Pension Scheme.

RPMI chief executive Chris Hitchen said that, after it improved how costs were captured, management costs rose from around £70m to close to £300m.

“That’s a pretty big number,” Hitchen admitted, although he noted that the provider was heavily invested in private markets.

He also said that, while the increased costs could be regarded as hidden fees, RPMI was aware it paid carried interest to some of its managers, and that the fee structures were often 2/20.

“We are pretty good at negotiating,” Hitchen joked, “so we often got it down to 1.9/19, or something like that.”

He added that, while he could not claim anyone lied to RPMI, it was hard to tell whether the provider was fully aware of the myriad costs associated with some of the investments – such as debt arrangement fees, bank fees and others.

“We were surprised by the scale of [fees],” he said.

Discussing the next step on fee disclosure, Kane said he now expected feedback from the UK’s Investment Association on a disclosure framework.

The framework had already been presented to the Local Government Pension Scheme Advisory Board in January, and Kane said he hoped it would be finalised by the autumn. 

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