Last year I learnt to box. I did this for no other reason than I like exercise and a new challenge. At the end of the training programme I had a fight. It was an experience I won’t forget, but I came second – not badly second but second non-the-less. I lost despite the chap I fought being, as am I, white collar and middle aged. It’s fair to say that one of the lessons I learnt, amongst others, was that I don’t have a hidden talent for boxing.
In a bid to get me to explore my limits a little less violently, my wife booked me a singing lesson last Christmas and the coach duly turned up at our house one Saturday morning. It was another experience I won’t forget, but it wasn’t great – it wasn’t bad, but it wasn’t much better. It’s fair to say I learnt that I don’t have a hidden talent for singing.
Don’t get me wrong. I do these things for the adventure – not because I’m in a constant search for some hidden value within the proposition that is me. By strange coincidence, though, over the same period of time I’ve also spent a lot of time looking for hidden value in the pension proposition.
And I’ve found it.
The law has, for the last three years or so, required DC trustees to ask their asset managers for their transaction cost data. The many trustees who have done this have found it, frankly, a fairly fruitless exercise – because asset managers had, until January, not been obliged to provide anything in response. (Even now they can, reasonably, hide behind the excuse that they don’t have the data – although that excuse will run dry next January.) A few asset managers have, however, been able to supply some data. And here is the source of hidden value.
Transaction costs occur whenever an asset is bought, sold, borrowed or lent. By our reckoning there are around 40–50 different transaction costs than can be incurred on any trade (from stamp duty to FX fees to exchange fees). Magnify that by the number of transactions that can occur (many thousand in a year with an actively managed fund) and aggregate them at the top level (for example, in a diversified growth fund) where more costs can occur and you’ll find there can be significant leakage of value. We’ve not come across any horror stories yet (the disclosures have been voluntary – the horror stories will come with involuntary disclosure) but that’s not to say we haven’t been able to improve things.
The gradual disclosure from managers to trustees is, for the first time, allowing the market to do its magic. Visibility permits challenge and wide visibility permits informed challenge, with the result that asset managers have to improve the efficiency of their suppliers and their own back offices. They are, in other words, having to shape up or be shipped out – to the benefit of DC members and DB sponsors.
Asking for transaction cost data gives trustees the chance to tap into a vein of value not explored before. Don’t get me wrong. This is real hidden value in the pension proposition.
Richard Butcher, Managing Director, PTL.
