28 Feb 2018 - Estimated reading time: 3 minutes
In the world of social media, we live in a world of acronyms – BRB, LOL, BAE… but the one that came to mind yesterday reading the results of the Department for Work and Pensions' (DWP) consultation on the disclosure of costs and charges and the associated reporting guidance was TMI – too much information!!
Don’t get me wrong, I think it’s absolutely right that we ensure that members of DC pension schemes receive value from the funds they invest in and that fees are appropriate. But does giving them detailed information on transaction costs actually allow them to make better decisions on their pension savings? Or, as we highlighted in our response to the consultation, does this have the potential to drive ill informed decision making. After all, a member may currently be in a property fund for very good reasons. But when they see that transaction costs are significantly lower in an equity fund, might they be tempted to move to that fund, even if it is the wrong investment option for them? And if transaction costs are shown across a number of schemes that a member has savings in, is there a risk that they will move to the one with lowest charges, without being aware of the costs of transition and out of market risk when moving between schemes? – which could dwarf the differences in transaction costs.
The initial consultation didn’t refer, in detail, to how lifestyle strategies would be treated. The response suggests that disclosure should perhaps be at 10 year intervals. But how on earth would your average man (or woman) in the street be expected to work out which of the numbers relate to them? From our experience of speaking directly to pension scheme members, through no fault of their own, many struggle to understand things like percentages and very few take time to read their annual statements in any detail. Even if the numbers are put in pounds and pence, members are likely to find it hard to put the numbers into perspective. After all, “slippage cost” is not the easiest of concepts for anyone to grasp…
And almost as importantly, will the new requirements on trustees to disclose all transaction costs to members be another nail in the coffin of single trust occupational schemes? Chair’s Statements already run to numerous pages (some being longer than the report and accounts that they sit in!). Is this a governance requirement too far?
To my mind, the responsibility to judge whether overall costs (including transaction costs) represent value for money should sit with the relevant fiduciaries – i.e. the trustees in the case of trust-based arrangements. They are the people who are best placed to judge this value and could then simply provide an assurance to members that the charges on the funds they offer are appropriate in the context of the objectives and performance of those funds. I may be naïve, but isn’t that all most members really want?
TTFN! (Ta ta for now!)