In a revealing talk, Chris Sier, chairman of the Financial Conduct Authority’s Institutional Disclosure Working Group (IDWG), gave insight into the workings of pensions schemes and the asset managers they place money with.
Speaking at the Pensions and Long Term Savings Assocation’s (PLSA) London Trustee Conference on Wednesday, Sier detailed his work on asset manager cost transparency and peppered his talk with anecdotes about the reality of investing in an obscured market.
Sier is convinced just the threat of cost transparency will trigger asset managers to offer discounts to retail and institutional investors.
Life-long quest
Sier, an ex-policeman and quantitative analyst, spoke about his life-long quest to answer one question which will resonate with advisers.
“What is the total cost to the customer of interacting with capital markets through long-term savings products?”
He believes his work and that of the IDWG on providing transparency on this issue will force asset managers to cut costs – initially in the UK and eventually globally through the Organisation for Economic Cooperation and Development (OECD).
He gave the example of one hedge fund charging 1.15% TER on paper but in reality billing for 3.15% including a 1.15% performance fee.
Another example was a hedge fund manager who offered a 15% reduction “just on the threat of transparency”, saving one pension scheme £125m ($166.7m, €141.5m) per annum.
The IDWG is building a system using data that goes down to the level of a security – to give trustees the tools they need to get under the bonnet of costs and wheedle out the over-chargers.
By distilling the asset classes and supporting data standards, the IDWG is aiming to create a competitive market that could make London a better place to do business and counter some of the effects of Brexit, Sier argued.
The IDWG is not alone in this work.
Calpers (the California State Pension Scheme) has said it won’t work with managers who don’t provide enough data.
Siers argued investment consultants should follow Calper’s example by banning funds from their ‘recommend lists’ that don’t comply with IDWG transparency standards.
‘Lost’ invoices
Sier related one instance of an invoice for fund management handed to a scheme which with “some elementary financial forensics” he discovered was “100% wrong”.
In a second case, he worked with a pension scheme to discover two thirds of their invoices were missing making an £82m difference in their annual accounts as the cost had been misallocated.
These mistakes happen, he explained, because schemes file invoices they receive but don’t always ask for invoices, which they should have received but have not been submitted.
“Never take anything for granted,” Sier warned trustees. “I’m an optimist but I look at these things from an owlish point of view.”
If Sier and the IDWG succeeds in providing transparency where previously there appears to have been little, it will be a game changer in terms of investment costs.
A consultation on IDWG’s remedies concluded at the end of September with final rules likely to come into force in 2018.
