Pension schemes may have a regulatory responsibility to measure costs, but lessons from the Netherlands show those that embrace transparency could make significant savings.
The good news for pension schemes is that reporting on costs is getting a lot easier.
That’s useful, because the regulators are ramping up pressure on trustees to make sure costs are properly understood, managed and discussed.
Since 2015, there has been a requirement for DC pension trustees to report on transaction costs borne by members in their annual Chair’s Statement.
However, most were unable to do so properly because asset managers couldn’t reliably disclose what these costs were in a detailed and consistent format.
Fortunately, the FCA brought in new rules in January 2018 which require investment managers (and insurers) to get better at giving schemes the cost information they need.
The rules say that those managing investments must provide information about transaction costs and charges in response to a request from workplace pension schemes.
This means that for the first time, IGCs and trustees can get a disclosure of the transaction borne by members – crucially – calculated according to a standardised methodology.
What does it mean for trustees?
Research from the Netherlands shows that schemes that embrace transparency should make significant cost savings.
The Dutch, quite famously, are long ahead of the UK when it comes to charges and transparency. In fact, they’ve had a cost reporting framework for seven years now.
And new research, carried out by KAS Bank, suggests that this focus on costs is beginning to yield results.
Specifically - those schemes that chose to work under the FTK framework saw the average Total Cost of Ownership (TCO) per pension scheme decrease by 37%.
High cost managers have been replaced with lower cost ones that perform similarly”
Furthermore, the average Pension Management Cost per pension scheme decreased by 31% and the average Investment Cost per pension scheme decreased 37%
Decreasing costs across the board by a third seems like a pretty good result.
Unsurpisingly, the schemes are delighted too.
Stichting Telgraaf Pensieonfonds said: “High cost managers have been replaced with lower cost ones that perform similarly.
“Across the industry, the increased cost awareness has also encouraged pension funds to let go of higher cost (alternative) investment types and instruments.”
Stichting Pensioenfonds TNO added: “We have benefited in the sense that the sector is more transparent and it’s easier to compare our cost levels with various other pension schemes.”
What should trustees, scheme managers and IGCs do next?
Quite obviously, better access to cost data is a good thing.
The evidence from the Dutch suggests it will lead to improved governance through more informed decision making and lower costs overall.
But trustees now have a job on their hands. Schemes must find a solution to help them with the collection, cleansing and reporting of the cost data.
They will be expected to report on charges and transaction costs not just in each default - but also for every fund that members are able to select.
Critically – they must also be able to detail the extent to which these charges and transaction costs represent good value for money. No mean feat.
Schemes must find a solution to help them with the collection, cleansing and reporting of the cost data”
Pat Sharman, Managing Director at KAS BANK, said: “There is a lack of awareness and understanding of all the costs and charges associated with managing a pension scheme.
”Scheme representatives don’t always know what to look for or ask for from their service providers, it is complex area.
“We recommend that Pension scheme representatives begin to develop their understanding of all costs and charges borne by the scheme, so they can ask the right questions and begin a search for a solution to help them with the collection and reporting of the cost data.”