- Cost Transparency
2018 has been a pivotal year for cost transparency, culminating with the announcement of the Cost Transparency Initiative (CTI), aligning the PLSA, Investment Association and the Local Government Pension Scheme Advisory Board to take forward the valuable work done by the FCA Institutional Disclosure Working Group (IDWG).
The next big challenge is for the industry to agree on the final template and hash out some of the more fervently debated areas around implicit costs e.g. slippage versus bid/ask methodology. The next challenge will be implementation (i.e. do we have legislation/regulation to enforce suppliers to provide the data to trustees and asset owners) and finally, adoption, to ensure best practice across the industry.
For cost transparency to be a success next year, the framework must be inclusive. The key to this, is ensuring that trustees and assets owners can confidently adopt and interpret the additional information on costs coming their way.
Education will be the underlying detail to bring the industry forward. Transparency workshops and teach-ins will form an important part of Trustee education in 2019, helping trustees improve their decision making and giving them greater control over their schemes.
The role of the regulator and the policymakers will be important to enforcing greater cost transparency, and value for money assessments, as an obligation. There will be some trustees that struggle with the underlying cost detail, and as a result may not fully understand the benefits of greater transparency. On another note, some DB Trustees may never embrace cost transparency, until this becomes a legal requirement.
The trend toward greater ESG awareness is taking place worldwide. In June, Japan’s Government Pension Investment Fund, the largest pension fund in the world with more than $1.3 trillion in assets, announced it plans to raise its allocation to environmentally and socially responsible investments to 10% of its stock holdings from 3% currently.
In the UK the DWP produced ‘The Occupational Pension Schemes Investment and Disclosure Regulations 2018’(47.), that will take effect 1st October 2019. This will require trustees to produce a policy on ESG, including climate change, to be incorporated in their Statement of Investment Principles (SIP). Trustees will also have to prepare a separate statement on member views when they next prepare or update their SIP.
There are a variety of products available which will assist trustees to implement their ESG policy in 2019, including mutual funds and ETFs, ESG Ratings and Indexes and compliance monitoring tools.
Whilst we consider these changes to be positive, this is just another complex area for some Trustees to consider, implement and monitor. Another one to be added to the long list they already have!
Collective Defined Contribution (CDC) pension schemes are a combination of defined contribution (DC) and Defined Benefit (DB). CDC schemes target an amount they will pay out to employees as a lifelong retirement income.
CDCs emerged in the Netherlands in the early 2000s as part of a gradual shift away from DB schemes. A similar move is occurring in the UK, with active membership of UK DB schemes decreasing from over 2 million in 2008 to 1.1 million in 2017, while active DC membership has increased from over 1 million to 7.7 million in the same period, largely driven by auto-enrolment. Despite this, there are concerns that DC schemes in the current set up, may not provide an adequate retirement income for its members. Average total contributions were only 3.4% of pensionable earnings in 2017, where an adequate retirement income may need average lifetime contributions of 43%.
In March 2018 the Communications Workers Union voted to set up a CDC pension scheme with the Royal Mail, reigniting the CDC debate, after the rework of legislation was put on hold in 2015 “given uncertain demand” for CDC schemes. A change in the legislation to allow for CDCs will be drafted after a consultation finishes in January 2019 and brought before Parliament in December of that year.
The implementation of CDC schemes in 2019 will pose legislative challenges and surely set up a debate between those for and against.