The UK asset management and pensions sectors are well on the road towards getting greater transparency of investment costs and charges.
Understanding the costs incurred through investing is important to deliver value for money, but it has also been a challenging process.
A major problem was that some charges such as transaction costs, which are incurred when buying and selling financial securities, were generally not disclosed but were instead factored into overall investment returns after costs.
Historically, asset managers typically did not report on transaction costs, and pension funds did not ask for them because they did not to have to report on them.
However, measures introduced by regulators and industry groups over the past few years have changed that.
Since 2015, governance bodies on defined contribution (DC) pension funds have to obtain information on charges and transaction costs. Since January 2018, investment managers have legal duties under the Markets in Financial Instruments Directive II (Mifid II) and Packaged Retail and Insurance- based Investment Products (Priips) to calculate and disclose itemised breakdowns of costs and charges if investors ask for it.
Chris Sier, is executive chairman of ClearGlass, a cost data collection platform that sits between asset owners and asset managers. He says where managers have to report on transaction costs, they will largely be in accordance with the prevailing regulatory requirements, such as Mifid II.
“If they are prepared to give data, then they will give transaction data. And there are very few managers who don’t give any data whatsoever – the consequences of refusing are too large. We’ve had clients drop managers for failing to supply data.”
They have also mostly got to grips with the MiFID II and PRIPS slippage methodology to report on transaction costs, and most have developed a capability to create the calculation, he added.
Minding your step
Slippage is the impact of any change in the price of a security between placing and executing a trade. It arises from market movement during any delay in transacting and can be positive or negative. Disclosure of ‘slippage’ was controversial because of the confusion around negative transaction costs.
“We haven’t seen many negative transaction costs – perhaps a handful across 5,000 portfolios we collect data for,” says Sier.
Gathering data has now been made much easier by the Cost Transparency Initiative (CTI), which all pension funds can use to receive standardised cost and charges information from managers. Previously, managers sent it in different formats, which made it difficult to analyse.
The voluntary CTI framework launched in May 2019 has now been widely adopted by pension schemes and i nvestment management firms.
PLSA head of governance and investment Joe Dabrowski says: “One year in, the overall picture looks pretty good but there’s still work to be done. We’ve been really pleased at the way the asset management community has stepped up to the mark.
“Managers have had a lot to do in the last year or so with building systems and getting ready and reporting, and the feedback we get is that people are engaged and positive.”
Of the data that ClearGlass has collected from 450 managers across more than 5,000 portfolios, only around 5 per cent are not using the CTI templates, which require transaction costs to be reported according to MiFID II requirements where applicable. The platform now has around 1,000 pension funds coming onto it.
Sier noted that while managers “haven’t adopted it as quickly as they should have done”, the CTI has been a “storming success” in terms of the “remarkable insights” it is delivering to pension funds.
Across a sample of ClearGlass’s DC pension funds, around 32 per cent of their total costs were previously unidentified transaction costs, ranging from 5 to 20 basis points.
Dabrowski added: “The key thing is making sure that the CTI gets embedded across all parts of the community, whether that’s asset managers, consultants, or pension schemes, and we need to kind of make sure that everybody is utilising it. We’re not quite at that point yet but we’re heading in the right direction.”
Mercer partner Brian Henderson says it has been “quite a struggle” for schemes to get the data and it is hard to do meaningful analysis without benchmarking.
“There’s a slight frustration from pension trustees that they’ve gone through the process and now don’t know what to do with it.
“At some point we will have league tables of costs and charges but we’re not at that point. We have transparency but we’re not really seeing the action.”
The DWP discussed including transaction costs in 0.75 per cent charge cap DC pension default arrangements as part of its call for evidence on costs and charges that closed in August.
The Investment Association, the asset managers’ trade body, said it would “harm” the investment process and impact the market costs necessary to deliver an investment return.
It said: “In this regard, capping transaction costs will not improve outcomes for members, and indeed is likely to make them worse, by hampering investment managers’ ability to trade for the benefit of members, as well as creating operational challenges that will make the investment process less efficient for DC schemes.”
PLSA policy lead for DC Alyshia Harrington-Clark also says they should not be included in the cap because it would restrict asset managers’ capabilities to deliver in the best interest of investors:
“Restricting transaction costs also doesn’t seem very consistent with the DWP’s support of illiquid investments in DC pension funds,” she adds.
Illiquid investments such as private markets and infrastructure tend to incur unpredictable transaction charges.
“The DWP issued a separate statement as part of their DC outcomes paper which said theyare not minded to include transaction costs in the cap, because including something like social impact and infrastructure in defaults would then be a nightmare,” says Henry Tapper, CEO of AgeWage.
The DWP is more likely to look at how to widen the use of the CTI framework. It could require trustees to disclose their use of the CTI templates in existing scheme returns to The Pensions Regulator. The DWP is scheduled to publish the findings of its call for evidence on costs and charges by the end of 2020.
In a November 2019 consultation on simpler annual benefit statements, the DWP proposed to include transaction costs information in pounds and pence on statements to members of DC schemes.
Hymans Robertson partner Rona Train says reporting should focus on trustees.
“We know that many members struggle to understand and engage with numbers and we need to make sure that we make any disclosures clear, easy to understand and meaningful for members.”
Member feedback from the new simpler annual statement suggests that less is more, she says. “So we don’t support p u tti ng transac t i on cost information into these.”
Tapper explains that the DWP may also be against putting costs and charges on the statements, because of potential unintended consequences.
He says: “They adopted this position because of a lot of consistent lobbying from people who said telling members how much something costs would likely stop them saving or discourage them from future investment.
“The contrary position to that if you actually put the price at the bottom of the bill, customers are rather more likely to trust you. I suspect we will not see transaction costs included in disclosures on simplified statements because it’s in the ‘too hard’ box. However, it is likely that a pounds and pence figure will eventually emerge.”