Cost transparency: We need to help trustees in spite of themselves!
Pardon the Interruption
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One of mallowstreet's key findings in its recent Trustee Report was on costs and charges for pension scheme trustees.
Not to put too fine a point on it, we need to help trustees in spite of themselves. The survey is a wake-up call. Respondents recognise that cost transparency is an issue of significance. They are not doing much, however, to promote good practice.
Seven out of ten respondents (69%) said that cost disclosures from asset management firms are not sufficient. In fact, only one in every five (19%) said that they are satisfied with the current cost transparency in the industry. They recognise the consequences of this state of affairs: “Insufficient cost disclosures reduce bargaining power.” Bargaining power is especially lacking for smaller schemes. Only a third of small schemes (36%), with assets of under £200 million, find that their bargaining power is sufficiently strong.
What are trustees doing about this situation?
The survey suggests that the topic is being a bit crowded out by a combination of broader scale issues and more immediate priorities.
We in AMNT say give a good prod to promote basic ‘housekeeping’ tasks and control their costs. At the same time, view them in their broader context. Our members tend to be discerning in their awareness of the difference between low price and value for money. They tend to remain clear that their overriding duty is to deliver sound financial health for their members. This should be self-evident. The Pensions Regulator, by contrast, has recently painted a picture of a long tail of poorly performing schemes that probably do not have this clarity of vision. It is here that the survey suggests that corrective action is needed.
Trustees should view costs in context, of course, as part of a bigger picture, and not in isolation. For comparison, some of the overall return yields that our AMNT members seek are as follows: (1) +3%, net of fees (with a bank rate currently 0.75%), (2) Gilt yields +3%, (3) Inflation +3% (RPI currently at 2.2%; CPI currently at 1.3%). DDGFs typically have a target of LIBOR +4%-5% a year. Against these yields come the costs and charges.
Asset manager charges may come in at upwards of 0.5%. Trustees will need to take a view on whether it is better value to go for passive management or pay a premium for active management. This should possibly be self-evident, but Skipton Insight's head of financial advice found it wise to spell out that “the higher the fee, the more important it is for your fund to perform. If a fund has a 1% annual fee, and the market rises 5% that year, the fund must therefore rise by 6% before fees just to break even”.
AMNT members note the costs of four big fee items. These are actuarial fees, investment advice fees, scheme secretarial services, and administration charges. There are reports that these last are tending to rise because administrators are being asked for answers to questions that were never envisaged when the data was first collected. All of these headings will incur core charges for ongoing services. All will probably incur extra one-off charges for specific needs that from time to time crop up.
Then there will probably be some specific extras. Covenant assessment is a new, and growing, trade, which is gaining currency. Legal fees seem to come in two main types: (1) trustees will probably face some policy issues; (2) individual cases will probably arise that are brought about by freedom and choice options, and also from new activism by the Pensions Ombudsman.
Audit fees need to be added: probably not great sums. The Pension Protection Fund levy, by contrast, might not be negligible. Some of our AMNT members report annual figures of up to £500k.
Cyber security is a new cost area, which will probably need increasing provision. In the future, fees for trustees may well need further attention, especially if TPR persists with its apparent drive to hound out MNTs.
Thus, trustees should not view the survey as a static snapshot in time. Rather, the results point to a need for further work in progress and action.