Richard Butcher highlights the overlooked issues and costs of April's changes.
So April has finally arrived and with it the mayhem of all of the defined contribution (DC) legislative and regulatory changes of the last 18 months.
From the 6th the industry will have to offer freedom and choice, in a charge capped world, to certain defined governance standards, to members informed by Pension Wise and a set of scheme/insurer level "second line of defence" health warnings. All change for a bright new future.
One change that has attracted little comment, yet is in the centre of all of this, is the need for the pension governance function (trustees in trusts or independent governance committees or governance advisory arrangements in insurers) to obtain information on transactions costs and to assess it for value for money/good value.
The principle behind this is that it will drive down investment costs and so driving up net investment returns is difficult to argue against – it has to be a good thing.
This is also the case with the second part of the process, the disclosure of the results; greater transparency will lead to increased competition and so lower costs again. That said, the execution of the process is fraught with difficulty and so runs the risk that it will become a pointless box ticking exercise, or worse still, that it will result in people making decisions based not on value but on cost alone.
The assessment objective will apply to IGCs a year after they come into force. Trustees will have to make their first assessment within seven months of their first year end after 6 April (although not if that year end is before 6 July in which case they get 12 months grace).
The FCA and DWP currently have a joint consultation on the process – due to close early in May.
So what are the challenges?
The first is access to data. Transactions costs are a function of the investment process. The investment process is a function of a contract of engagement between the governor and a manager. The manager may, in turn, have sub managers.
The duty, as framed, is merely for the governor to ask for the data. There is no corresponding obligation on the manager to provide it. If the manager says no, the analysis is thwarted.
The governor could, of course, threaten to fire the manager, but that seems a little draconian, particularly if it is not the managers fault – the refusal may come from a sub manager.
Each of the contracts, all the way down the line, will have confidentiality clauses. It will not be easy for governors, or, frankly, the legislators to force a breach of these.
The second is the sheer volumes of data that could start flying around if there is disclosure. Any given transaction can have half a dozen transaction costs. A simple passive equity fund might have hundreds of transactions a year.
That's hundreds of items of data. A more complex fund, say a diversified growth fund, could have thousands of transactions a year.
The third problem is what to do with this data.
It's impossible to say whether paying GBP 5 for a trade is good value without some comparatives, and none of these yet exist (although they should emerge).
The fourth is how we present the results to members. We need to find a way that (a) means something, (b) is not overwhelming and (c) does not create the risk of decisions being based on cost alone.
An actively managed fund will "cost" far more than a passive fund, but there are many who argue they produce a better result. The best model proposed so far is an "efficiency chart" similar to those seen on domestic appliances.
Underlying these problems is one nagging after thought. Although the objective seems noble it's hard not to feel that the legislators and regulators are again trying to treat a symptom as opposed to the disease. The symptom is high charges, the disease is poor governance. Unless they treat the disease, there will always be symptoms.
Written by Richard Butcher, Managing Director, PTL.
