Chris Sier explains why making fees more transparent is key to restoring trust and delivering value for money
Why is transparency important?
The principle. How can you possibly make any decisions or deal with the problem of reputation unless you are transparent? It’s a fundamental component of trust.
No transparency, no trust – and we live in a low trust environment.
No transparency, no trust – and we live in a low trust environment. Also, cost transparency is fundamental in the DC space because of the statutory requirement to report value for money. You cannot do that without knowing costs.
What is the scale of the problem?
There’s the private markets example from Railpen where they uncovered hundreds of millions of pounds of fees from asset managers. And in the public sector, the West Midlands Pension Fund had a similar experience. The Chartered Institute of Public Finance and Accountancy guidelines say you have to report faithfully all the invoices you receive, but if you don’t receive invoices there’s no explanation of what you should do.
The fund pursued these invoices they hadn’t received and found a large number of them, largely because the private market fund managers were not reporting explicitly costs on invoice – they were reporting a valuation net of their fees.
On a like-for-like basis in the year they measured, their costs went up from £10m to around £90m – an 800% increase
On a like-for-like basis in the year they measured, their costs went up from £10m to around £90m – an 800% increase. That shows you the degree of poor reporting just on the explicit costs. And that doesn’t come anywhere near the reporting that is not done on implicit costs – market impact, bid offer spreads, commissions, the cost and pricing of owning and maintaining overlays, stock lending, cash management, FX. Almost none of this is explicitly reported.
How have you worked with local government funds to address this?
Last year the Financial Services Consumer Panel published a paper I wrote on this issue, in which I suggested one of the first things we should do was adopt a standard.
We went through a long process of negotiating this standard with the Investment Association and successfully got them to adopt it
Holland has a standard – managed by the regulator, but we’re a grown-up market and should be able to do this ourselves – so I suggested a standard, and it was adopted by the Scheme Advisory Board as the standard they would use to collect costs in the run up to the pooling exercise. We went through a long process of negotiating this standard with the Investment Association and successfully got them to adopt it.
The standard is similar to the Dutch one but with a bit more bite. Local government pension funds are going to start using it for listed asset managers from the end of the year, and we are working on a similar template for unlisted markets.
Why did you start with the LGPS?
It’s the largest single pool of assets in the UK that has a single governance structure and collectively the Local Government Pension Scheme (LGPS) has a lot of power. It has £260bn of assets in England and Wales, 89 pension funds and several hundred asset managers.
If they are doing it for the LGPS, it is very hard not to do it for other clients if they ask nicely
But there is a concentration, with 80% of the assets managed by 20 firms. So if you get those 20 asset managers over the line, which we’ve done, the rest will have to follow. If they are doing it for the LGPS, it is very hard not to do it for other clients if they ask nicely – it provides us with the lever that overturns the stone.
We need to get the standard adopted, and it needs to be progressive so we can move it forward. The Financial Conduct Authority is looking at things like turnover costs and trading costs, so we need to move into that implicit world and incorporate its stance on transaction costs. We need to get widespread adoption. The model I’m following is to build a utility that will help to collect that data.