Transparency Times January 2018

Edition 21

J A N UA RY 2 018

A lang cat production for The Transparency Task Force

THE

TIMES

Does transparent charges mean fair charges? P7

Using the Principle of Fiduciary Duty to identify ethical issues How MiFID II means greater transparency for fund charges Have your say in the Global Green Finance Index Is the security of DC assets being overlooked?

P4 P12

P14

P16

Highlighting the issue of passive pension funds with active fees

P22

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3 Hello from the Editor 4 How to avoid stepping into the ethical abyss 5 The Transparency Task Force Teams 7 Is Transparent Fair?

10 Upcoming Transparency Task Force Symposia 12 The lang cat view 14 How green is your financial centre?

15 Transparency Statements 16 How safe are DC Assets?

18 The Directory of Pro-Transparency Organisations 22 The scandal of passive pension funds with active fees

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Hello from the Editor Honesty is the best policy so I’ll tell it exactly as it is. I really need support and I know I shouldn’t let pride get in the way of asking for it, hence this article.

I would like to liaise with all individuals and organisations that are authentically aligned with the overall aims and objectives of the Transparency Task Force to explore how they can support the cause for greater transparency.

Even just a little support can make a big difference right now.

You can provide financial and/or operational support and there are options to suit all situations, so you’ll be able to help in whatever way is best for you. I’m sure we can craft an arrangement that represents a good outcome for each of us.

The mission of the Transparency Task Force is to help fix financial services by harnessing the transformational power of transparency.

I think we are bravely addressing profoundly important issues such as conflicts of interest, opacity on costs/charges, asymmetries of information, mis-selling, scams and scandals, poor outcomes, harmful incentive structures, the trust deficit, a prevailing culture of profit before principle and so on.

These are very serious problems that damage the reputation of the sector. Every ethically-minded individual and client-centric organisation should want them to be tackled as quickly as possible.

As you may be aware, the Transparency Task Force became co-signatories to the United Nations Global Compact at our very first Transparency Symposium, held at Dimensional Fund Advisors in London on 7 October 2015. The

United Nations Global Compact is an important UN initiative designed to drive positive change, globally. At that Symposium I signed a Letter of Commitment to His Excellency Ban Ki-Moon, then Secretary-General of the United Nations, pledging to campaign for greater transparency in financial services around the world. I have taken that pledge seriously and done all I can with very little resource to try to make a difference. My personal resources are now pretty much exhausted and I need to ask for support.

Andy Agathangelou Founding Chair, Transparency Task Force

• Spoken at dozens of conferences and events • Recruited 22 Ambassadors • Built a growing presence in 18 countries • Published the Transparency Times which carries relevent thought leadership articles and goes to 12,000 people each month

In my opinion, what the Transparency Task Force has achieved so far without any backing or support has been pretty impressive and certiainly very worthwhile. We have:

I believe it is fair to say that the Transparency Task Force is now established as the collaborative, campaigning community, dedicated to driving up the levels of transparency in financial services, right around the world. We have become an informal but increasingly influential forum of ethically-minded people that care about the industry and the people it serves.

• Run 15 Transparency Symposia; 13 in the UK, one in Boston, one in The Hague

The question is: what could we now achieve with some proper industry-wide support?

• Awarded 14 Transparency Trophies • Held two special meetings at the House of Commons; the next is on 7 February • Recruited over 300 volunteers, organised and mobilised into 12 teams • Respond to seven formal government/industry consultations • Had dozens of meetings and calls with regulator and government officials • Produced three thought leadership white papers • Gathered over 100 Transparency Statements • Had hundreds of articles/comments published; been on Radio 4 twice (the third is coming soon)

I’ve produced a slide deck that explains what the Transparency Task Force is doing, why we’re doing it and how you can support our work for the benefit of all concerned. Please do invest some time in taking a look . You can download the slide deck here.

In conclusion, I would be most grateful if you would be open-minded enough to talk through some ideas with me and I am sure a win/win can be achieved. Please get in touch through andy.agathangelou@ transparencytaskforce.org and we’ll fix up a no-obligation telephone call.

Thank you!

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How to avoid stepping into the ethical abyss AN ANIMATION BY THE SEVEN PILLARS INSTITUTE FOR GLOBAL FINANCE AND ETHICS

This short animation provides a straightforward and useful insight on how to use the Principle of Fiduciary Duty to spot ethical issues and thereby avoid stepping into the ethical abyss.

The Transparency Task Force’s Team Americas is campaigning for the widespread adoption of the Fiduciary Rule in the USA.

DR. KARA TAN BHALA

Dr. Kara Tan Bhala is President and Founder of the Seven Pillars Institute for Global Finance and Ethics.

The Seven Pillars Institute is the world’s only independent think tank for research, education, and promotion of financial ethics. The Institute was shortlisted in the Prospect Think Tank Awards 2016.

Kara is based in Kansas and has over twenty-three years’ experience in global finance. She is lead author of International Investment Management: Theory, Ethics and Practice, one of the first books to provide a comprehensive understanding of investment principles, synthesize three theories of finance, and apply ethics in financial practice focusing on Asian cases.

She was named by Ingram’s as one of the “50 Kansans You Should Know”. Kara has five degrees across three disciplines and has lived in London, Oxford, Singapore, Hong Kong, New York, and Washington, D.C..

Kara is also an Ambassador of the Transparency Task Force and a member of Team Americas. She delivered a first class presentation on ethics in finance at the Transparency Symposium held in Boston MA in September 2017.

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The Transparency Task Force Teams The teams are the Transparency Task Force’s collective response to what we see across the global financial services industry that needs to change.

We firmly believe that those who can see problems, admit to them and are motivated to tackle them should collaborate to put things right. It’s in everyone’s interest to do so.

The Transparency Task Force teams are less about individual experience and more about understanding the potential power of working together to drive much needed change.

Team

Focus

Banking

Improving transparency and professionalism.

Foreign Exchange

Challenging the opacity.

Market Integrity

Championing ethical practices.

Costs and Charges

Helping investors access better value for money.

Stewardship and Decision Making

Working to correct the ‘asymmetry of information’ problem.

Scams and Scandals

Raising awareness to help shut them down.

Global Transparency Index

Mutual learning to inform the Global Transparency Index.

PISCES

Purpose, Impact Investing, Sustainability, CSR, ESG and SRI.

PAM

Progressive asset managers working together.

Financial Stability

Working to mitigate the risk of another Global Financial Crisis.

Team APAC

Promoting transparency in the Asia Pacific area.

Team EMEA

Promoting transparency in Europe, the Middle East and Africa.

Team Americas

Promoting transparency in North and South America.

If you want to make your opinion count by joining our 300+ strong group of volunteer team members, contact andy.agathangelou@transparencytaskforce.org for more information and details of the monthly conference calls.

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The Transparency Task Force Ambassadors While we value every member of our campaigning community, some go over and above.

They are particularly aligned to our cause and, as such, are profoundly impactful for positive change.

They are our Transparency Task Force Ambassadors.

Name

Role

Organisation

Jackie Beard

Director of Manager Research Services EMEA

Morningstar Europe Ltd

JB Beckett

Consulting Chief Investment Officer/UK Lead

Steve Conley

Chief Executive

Stephen Davis

Associate Director and Senior Fellow

Richard Field

Director

Institute for Financial Transparency

Ralph Frank

Co-Head DC

Cardano

Ian Fryer

Head of Research

Chant West

Daniel Godfrey

Non-Executive Director

Big Issue Invest Fund Management

UK

Catherine Howarth Chief Executive

ShareAction

UK

Con Keating

Head of Research

BrightonRock Group

UK

George Kinder

Founder

Kinder Institute of Life Planning

David Knox

Senior Partner

Mercer

Markus Krebsz

Interim Chief Risk Officer

UNECE GRM

UK

Jon Lukomnik

Executive Director

IRCC Institute

USA – New York

Matthew Murray

Co-Founder

Bernie Nelson

President – North America

Centre for Business Ethics and Corporate Governance Style Research

David Pitt-Watson

Consultant

London Business School

UK

Robin Powell

Founder Professor of Law and Director, Labor and Employment Law Program

Ember Regis Group

UK

Marquette University Law School

USA

Paul Secunda Kara Tan Bhala

President and Founder

Henry Tapper

Founder Lecturer in Strategy and Corporate Governance Founder and Managing Director

Anna Tilba Eric Veldpaus

New Fund Order Consulting/ Association of Professional Fund Investors Values Based Adviser Harvard Law School Programs on Corporate Governance and Institutional Investors

Seven Pillars Institute for Global Finance and Ethics Pension PlayPen Newcastle University Business School Institutional Benchmarking Institute

Country UK UK UK USA – Boston USA – Boston UK Australia

USA – Boston Australia

USA – Washington USA – Boston

USA – Kansas UK UK Holland

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t n e r a p s n a r ?

T r i Is Fa

BY BOB WARD

Or is Fair Transparent? The two terms have been popular in recent press with the aim to enhance the members’ service and long-term benefits, but one doesn’t automatically mean the other applies. Something can be fair even if costs are not transparent and all being clear may not result in it being fair.

Both these terms are appropriate and equally important to the member experience.

for the consumer and failure to coordinate the move

In the debate of pension costs, transparency is important for establishing all applicable costs but how do we know whether the result is fair to the members and sponsoring employers? Transparency is a start but on its own will not be the solution. Fairness is one of the goals we aim for in the search for best member outcome and again I would extend this to the employer, being the overall instigator and provider of the eventual pension (fund).

complete openness and display information in a form

What is missing in the debate thus far is the question of how fairness is measured. The answer can only be by comparing a common denominator with one’s peers.

Such a denominator must be simple to understand and absolute so not to confuse.

New disclosures: Best execution and costs

The most common comparison in the pensions industry at present is percentage of cost relative to the size of assets – the UK Government’s introduction of the blunt instrument charge cap of 0.75% of funds under management (FUM) in default funds for auto-enrolment epitomises the lack of understanding of what is good

within the wider global financial industry to promote easily understood by the consumer. This is borne out by the implementation of MiFID II, from 3 January 2018, requiring both percentage and monetary amounts to be included when disclosing costs. The UK Government has adopted this approach for the banking and investment management sectors so why hasn’t it been applied to the whole UK finance industry?

MiFID II places new duties upon fund managers including full point of sale (ex ante) disclosure and annual postsale (ex post) disclosure. Costs must be aggregated and expressed both as a percentage amount and as a monetary value.

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The forerunner of cost comparisons for loans was APR (annual percentage rate) and the previous FUM comparator was TER (total expense ratio), which the EU replaced with OCF (ongoing charges figure).

But whilst both these methods have provided stable comparators for the investment world, they are not sufficiently transparent to meet the current demands.

MiFID II now recognises the importance of a monetary amount and the pensions industry should conform to this transparency requirement for all costs.

Using percentages alone hides the appropriateness and fairness of the charges For defined contribution pensions it’s easy to quote “the charges applied to your pension funds are 0.75% p.a.” but that is not the whole story of the costs of running ‘your pension fund’ and of ‘who pays what’.

For defined benefit pensions, the disclosure is even more masked and why should it be acceptable for charges of 0.8% or more? All styles of scheme should have standard charges capped.

Costs paid for by employers are just as important to members as those applied either directly or indirectly to their funds. Employees are not thick! They know that costs met by employers will affect the amount available to pay them or put more into their pension pot. How much is being paid in administration, technology, legal, advisory and trustee fees? These costs are not relative to fund size and should not be disclosed as a percentage of fund value. Often, legal fees and system costs are billed direct to employers and are not included in the scheme costs. True transparency means it should be compulsory for all associated running costs to be disclosed, irrespective of who pays them and how.

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Costs of acquisition and administration are the same for every member irrespective of fund amounts Why should a member with £100,000 fund value (or cash equivalent) pay 10 times more than a member with £10,000 for the same administration functions?

These costs should be disclosed on a per member basis so that members and employers can compare the efficiency of their scheme against peer schemes.

Obviously, scheme costs will differ according to the practicalities of scheme size: • A small self-administered scheme (SSAS) should have little cost of acquisition, payroll process and fund allocation.

• Other scheme categories should have say: – less than 250 members – easy to administer, simple payroll extraction.

– between 251 and 2,500 – may require better payroll systems and slightly more administration/ queries.

– over 2,500 – best served with full API (application programming interface) functionality for payroll and administration automation.

• For a while it may be necessary to distinguish between DB and DC, not because DB is more complicated, but because of the legacy administration systems and current run-off of contracting out tidying up, but eventually there will be no reason to differentiate.

Auto-enrolment introduced many more complications in administration compared to historical pension schemes in terms of assessments, joining, opting out and re-enrolment (when auto-enrolment became

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operative in October 2012 there were 12 different standard assessment letters to be issued according to age, income, banded or full earnings). Under the old fashioned manual administration procedures of legacy schemes this became a nightmare and no wonder traditional pension providers were reluctant to come into the auto-enrolment market. However, now that technology has caught up with these relatively simple computer configurations, the cost of acquisition is microscopic compared to the old costs of issuing a new member pack at £12 (paper, printing, administration and postage) or more.

Once we have a uniform cost disclosure regime for pension schemes of all types then market forces may have a chance to influence the ‘acceptable’ level for basic running costs.

There is a current stampede for CETVs (Cash Equivalent Transfer Values) triggered by the pension freedoms and fear because members have been let down by scheme trustees and business owners. There is talk that schemes as large as the British Steel Pension Scheme (BSPS) could lose a third of their membership. Whilst scheme costs are grouped under the percentage of FUM, the cost per member of those who remain in the future scheme (BSPS 2 or the Pension Protection Fund) will be hidden in the overall fudging of ‘around 0.8% of assets’.

This scheme TER of course may be affected by the proportion of member CETVs leaving as opposed to the notional liabilities of those who remain and, from what we have seen thus far regarding transfer values, is likely to increase substantially. However, the increased burden on the remaining members for administration will not be truly reflected.

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We have not seen any comment on the effect of actual proportionate costs to remaining members If the scheme membership reduces by a third but the aggregate CETVs is a higher percentage (or even if it were proportionate for that matter), then the margin made out of the revenue from the TER will reduce relative to the FUM. The costs of scheme management will remain the same and the consequent cost per remaining member will increase. No commentator or trustee of say the BSPS, or even the regulator, has mentioned that operational costs MUST reduce as a consequence of the extraordinary reduction in membership, and they must do so urgently as there will immediately be a higher strain on scheme costs to support the remaining members.

If costs were fully transparent and in monetary terms per member, then these could be factored properly into forward planning models and information packs before decisions on scheme changes are made. I even wonder if the enormous disproportionate effect on remaining members has been fully appreciated by the scheme actuaries when calculating the CETVs, as the higher scheme costs of the third who have jumped ship will continue to fall on the remaining two-thirds.

As it stands, with no thought of the proportionate changes to costs mentioned in any of the reports or information to members, this is likely to be a disaster waiting to happen for any member remaining in either scheme.

BOB WARD

Bob Ward is an avid pension member champion with over 35 years’ experience in the operations and management of corporate pensions for DB and DC and wider protections and investment operations across financial services. With a grasp of IT processes, he has initiated improvements and innovative solutions. He has been at the forefront of major innovations in the financial services sector, covering real-time point of sale transactions, latest payroll to pension API, RTI and design of auto-enrolment administration through the creation of a master trust.

He brings together the knowledge of a qualified IFA, project management, Trusteeship and IT end user engagement to enhance standards and member experience. Through his participation of the Friends of Auto Enrolment and Pension PlayPen Bob strives to improve member outcomes affected by scams and tax relief inequalities and encourages trustees and scheme managers to seek better solutions.

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Upcoming Transparency Task Force Symposia Each Transparency symposium that we run is an important step forward in galvanising support for our mission to help fix financial services by harnessing the transformational power of transparency.

Get in touch through andy.agathangelou@ transparencytaskforce.org if you would like to be involved with any of these events or to suggest topics for future events.

Wednesday 7 February, the House of Commons The “Ideas to Help Reduce the Chance of Another Global Financial Crisis” event is the result of work by our Financial Stability Team, the members of which have produced a White Paper outlining further steps that can be taken to better protect the global financial ecosystem. If all goes to plan our event will initiate the launch of the All Party Parliamentary Group on Financial Stability.

Wednesday February 28, London An event about the workings of the foreign exchange market. The focus will be on how pension scheme trustees and other fiduciaries can improve net returns by learning how foreign exchange transactions create significant costs, many of which can be reduced if you know how. A not-to-be missed event for those keen to drive up net return whilst reducing litigation risk from disappointed members.

Wednesday 14 March, London This event looks at how trade bodies, professional associations and standards groups in the UK financial services sector can positively impact market behavior through sharing best practice on codes of conduct.

It is the output of TTF’s Market Integrity Team, which has been working with dozens of organisations.

A ‘must-attend’ for those interested in improving market behavior.

Wednesday 21 March, London An event focusing on the areas of interest covered

by TTF’s Team PISCES (Purpose, Impact Investing, Sustainability, Corporate Social Responsibility, Environment, Social & Governance and Socially Responsible Investing). This event will bring together several areas of interest into a cohesive call for change, made possible by harnessing the transformational power of transparency.

Tuesday 24 April, London An event entitled “Time for Transparency – The Future of Asset Management” which will be about how the UK’s asset management industry will need to evolve in light of the Financial Conduct Authority’s Asset Management Market Study. The event will encompass the thought leadership being developed within TTF’s Team PAM (Progressive Asset Management).

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Venues wanted for events in all of these locations

Amsterdam, Auckland, Beijing, Berlin, Boston, Brussels, Cape Town, Chicago, Dubai, Dublin, Frankfurt, Geneva, Hong Kong, Johannesburg, London, Los Angeles, Melbourne, Montreal, New York, Ontario, Paris, San Francisco, Santa Monica, Shanghai, Singapore, Sydney, The Hague, Tokyo, Toronto, Vancouver, Washington D.C. and Zurich.

For further information please get in touch through andy.agathangelou@transoarencytaskforce.org

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the lang cat view Each month the lang cat shares its cat’s eye view of all things transparency-related.

this month consulting director Mike Barrett reflects on a key outcome of MiFID II

MiFID II disclosure shines a light on the true cost of investing Transparency fans will need no reminder that MiFID II was finally implemented early this year. The regulation touches on a wide range of internal and external operations for most market participants with the themes of transparency and accountability hard-coded throughout. Finally, the industry is being forced to change.

One of the most potentially significant requirements is for fund groups to disclose the additional transaction costs that are charged to their funds, on top of the previously disclosed ongoing charges figure (OCF).

We’ve dug into what this means in real terms, and the results are an eye opener.

Our table, on the next page, shows the total cost of investing, combining the previously disclosed OCF with the newly visible transaction costs, for the top 20-selling funds of 2016 (as determined by Fundscape), based on charge data from FE Analytics.

These are purely fund costs – most investors will also be paying platform fees, and potentially advice and DFM fees too. The newly disclosed transaction costs include the explicit costs the manager incurs whilst administering the fund (broker commission, taxes, custodial charges) as well as any implicit costs associated with trading activity.

So, what does our table tell us? Out of the top 20-selling funds 13 have additional transaction charges, ranging from a few bps for the high conviction/low turnover funds such as Fundsmith Equity, to some much larger figures for the likes of JPM Global Macro Opps and Investec UK Alpha.

Now, before we all go off on one its worth keeping a couple of points in mind. No-one’s charges have actually gone up. Investors have always been paying these fees, it’s just that now the fund groups have the good grace (read: obligation) to tell you what they are charging. Secondly, most of the funds shown here are delivering good/excellent returns.

Advisers and investors will make their own value judgement, but we suspect many will continue to conclude that their investments in these funds represent value for money.

However, that all said it still feels a bit grubby. Most advisers knew there was more to fund costs than the OCF showed, but in the

absence of formal disclosure this was just speculation, and they had to work with what the fund groups told them. They now face the uncomfortable task of telling clients that whilst they thought they were paying xbps, they are actually paying xbps+ybps.

From an investor’s point of view, it’s likely to be a real turn-off.

Numerous surveys over recent years have shown how people regard financial services at roughly the level normally reserved for politicians and estate agents. And with fund groups now saying “Oh, sorry, when we said we were charging you xbps, we actually meant a figure over a third higher.” it’s not hard to understand why.

It will be interesting to see how people, both advisers and end investors, react to this level of disclosure. Transparency is now the norm, and people can see exactly what they are paying to invest. If providers/asset managers continue to deliver value as a result, everyone will be happy. If not, then there is nowhere to hide.

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Fund

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Transaction costs

Actual cost of ownership

% difference (between OCF and new actual cost figure)

Fundsmith Equity

1.05%

0.05%

1.10%

4.76%

Woodford Equity Inc

0.75%

0.28%

1.03%

37.33%

Blackrock Cash

0.32%

0.00%

0.32%

0.00%

Invesco Perpetual Global Target Returns

0.88%

0.35%

1.23%

39.77%

Vanguard LS 60% Equity

0.22%

0.11%

0.33%

50.00%

Henderson UK Absolute Return

1.06%

0.79%

1.85%

74.53%

Lindsell Train UK Equity

0.72%

0.00%

0.72%

0.00%

JPM Global Macro Opps

0.78%

0.66%

1.44%

84.62%

Lindsell Train Global Equity

0.75%

0.01%

0.76%

1.33%

Old Mutual Global Equity Absolute Return

0.85%

0.40%

1.25%

47.06%

Vanguard LS 40% Equity

0.22%

0.12%

0.34%

54.55%

Old Mutual Cirillium Balanced

1.62%

0.00%

1.62%

0.00%

FP Balanced Portfolio Overlay

0.67%

0.00%

0.67%

0.00%

Fidelity Moneybuilder Income

0.56%

0.18%

0.74%

32.14%

Investec UK Alpha

0.83%

0.64%

1.47%

77.11%

Aviva Investors Multi-Strategy Target Income

0.85%

0.25%

1.10%

29.41%

Troy Trojan Income

1.02%

0.00%

1.02%

0.00%

Old Mutual Cirillium Moderate

1.66%

0.00%

1.66%

0.00%

L&G Global Inflation Linked Bond Index

0.27%

0.22%

0.49%

81.48%

Dimensional Global Short Dated Bond Fund

0.29%

0.00%

0.29%

0.00%

Average

0.77%

0.20%

0.97%

30.70%

Data source: FE Analytics. 18/01/2018 Main unit for each fund has been used. Other units/share classes might have different costs.

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How green is your financial centre?

BY GREG FORD | SENIOR ADVISOR, PROJECTS AND STRATEGY WATCH

The NGO (non-governmental organisation) Finance Watch and think tank Z/Yen are producing a global index – the Global Green Finance Index (GGFI) – to rank financial centres according to the depth and quality of their green finance offering.

They will publish a league table of financial centres every six months with the aim of encouraging a ‘race to the top’ among financial centres and helping green finance markets to become mainstream (see article in Responsible Investor).

The index incorporates a survey of green finance experts, and that is where you could help. We are seeking respondents who are interested in green finance and familiar with two or more financial centres.

They could be finance professionals,

people working in corporates, policymaking, academia or civil society.

If this sounds like you, please complete the survey at this link: http://survey. greenfinanceindex.net/ The survey is quite short and should take around 5-10 minutes to complete. Each respondent can opt to receive a copy of the report and invitations to GGFI events.

Please complete the survey and, just as importantly, forward the link to any people in your network you think may be interested.

The more responses we receive, the better the rankings and the more it will help green finance markets to develop.

Thank you!

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Transparency Statements

the link work fine just need to set it in

Transparency statements are a great way for individuals and organisations to show support for our international campaign for improved transparency in financial services.

We believe that higher levels of transparency are a pre-requisite for fairer, safer, more stable and more efficient markets that deliver better value for money and better outcomes for consumers.

Transparency breeds trust. By fostering greater transparency across financial services, together we can positively impact the reputation of the market as a whole. Which is good for everyone.

You can add your transparency statement by completing this sentence: ‘I believe there ought to be higher levels of transparency in financial services because…’ and sending it to andy.agathangelou@transparencytaskforce.org

Here are some examples from thought leaders showing their support.

Andrew Eschtruth

Matthew Murray

Associate Director, External Relations, Centre for Retirement Research at Boston College

Board Member, CFBE (Centre for Business Ethics and Corporate Governance)

“ I believe there ought to be higher levels of transparency in financial services because it will increase consumer confidence in financial institutions.”

Francis Evans Assistant Director, Department for Business, Energy and Industrial Strategy

“ I believe there ought to be higher levels of transparency in financial services because there has been a loss of trust and transparency will rebuild that trust.”

George Kinder Founder, The Kinder Institute of Life Planning

“I believe there ought to be higher levels of transparency in financial services because without it, markets don’t work and democracy isn’t secure.”

“ I believe there ought to be higher levels of transparency in financial services because globalisation can and must work more effectively to provide wider access to economic opportunity and create more jobs.”

Robert Pajak Investment Advisory Representative, First Affirmative Financial Network, LLC

“ I believe there ought to be higher levels of transparency in financial services because it is the right thing to do.”

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How Safe are DC Assets?

BY RONA TRAIN | PARTNER, HYMANS ROBERTSON LLP AND CHAIR OF THE SECURITY OF DC ASSETS WORKING PARTY

Tom and Jerry. Laurel and Hardy. Motherhood and apple pie. The best things often go together – but that doesn’t mean they always agree or see eye to eye.

Across our industry, a lot of time over recent years has been focused on the transparency of costs and charges, particularly within defined contribution pension schemes. And rightly so. Charges can have a significant impact on member outcomes.

However, in this drive to expose costs and charges, one important and related aspect has sometimes been underplayed; that of the security of members’ assets.

I currently have the pleasure of chairing the Security of DC Assets Working Party. The Working Party is made up of representatives from trustees, legal

advisers, consultancies and platform providers. We have been working for the past three years to gain clarity from the main industry bodies, as well as the government, as to the levels of protection that exist across the range of investment vehicles available to DC schemes. We have also sought to highlight to trustees (and engaged employers) the aspects they should consider when examining the security of funds. We have made some progress over that time – and it is now recognised more widely that different protections exist for insured life funds, OEICs and other investment vehicles. But many trustees (and

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indeed Independent Governance Committees) would still struggle to answer the seemingly simple question “How safe are my DC assets?”.

Some structures will provide recourse to the Financial Services Compensation Scheme (FSCS) in the event of an issue – some won’t. Some insurers take on the re-insurance risk of funds underlying their top level fund offerings and some pass this risk on. So while we believe that fiduciaries should consider costs and charges, this is only one part of the jigsaw.

So let’s take an example. We recently had a client who was moving to a new platform provider due to a number of issues with the incumbent. The previous platform offered a ‘retail’ version of one of the selfselect funds (and was not prepared to change this) but the new platform offered the ‘institutional’ version of the fund. The good news was that the fee paid by members on the new platform was meaningfully lower than on the old platform. That helped the Trustees demonstrate improved ‘value for members’.

However, we also needed to consider any change in the level of security and potential compensation on the fund were anything to go wrong. The retail version was structured as an insured life fund – the institutional version was structured as an OEIC. So these funds not only had different charges but also different legal structures and hence levels of protection. Importantly, we took both into account in our recommendation to the Trustees.

Trustees are required by The Pensions Regulator to understand the levels of protection on the funds they offer and to communicate this to members. However, while many have spent considerable time exploring costs and charges, fewer have been willing to spend sufficient time and budget to explore their fund structures in sufficient detail to understand the risks to members if anything did go wrong.

Even where an effort has been made to consider this, it’s not a one-off exercise. Funds, and indeed platform providers, change over time – just think about the consolidation that is currently taking place in the platform provider industry. The protections afforded, for example, to a BlackRock fund on a BlackRock platform may well be different to the same fund on an Aegon platform. The current trend away from traditional insured life fund structures towards tax transparent fund vehicles will also change the level of security, as well as potentially the charges, on funds.

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RONA TRAIN

Rona Train is a Partner and Senior Investment Consultant at Hymans Robertson LLP, specialising in DC. She worked for 18 years as a client manager in the fund management industry before moving to Hymans Robertson in 2004.

Rona works with a range of Hymans’ larger DC clients. She also leads the firm’s DC governance proposition as well as chairing Hymans Robertson’s own Staff Pension Plan’s governance committee. Rona is a regular contributor to the pensions press and presenter at DC-related conferences.

She is also a member of the Working Party which is considering the security of DC members’ assets.

So whilst costs and charges are a vital aspect of any decision about which funds to offer to members, let’s not forget security too. The Working Party has already issued two guides on member security and these are hosted on the website of the Association of Member Nominated Trustees. A further guide is currently being finalised that will help fiduciaries understand the implications of changes to fund and platform structures. We would urge all decision makers to read these guides to ensure they have the full picture in relation to offering value – and security – for their members.

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The Directo r y of Prcot-oTrryan fparenc o s e r i D e y Th O ragraennicsyation p s n a r T s Pro s n o i t a s i n a g r O

A business shouldn’t stand out because it’s ‘pro-transparency’, it should be the norm.

If you lead a pro-transparency organisation, join those already advertising in our directory.

The more firms are seen here, the more weight gathers behind our argument that transparency is a commercial virtue and not a threat.

We’re happy to consider classifications beyond those shown here. Please contact andy.agathangelou@transparencytaskforce.org for more information.

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ACADEMIC INSTITUTIONS Prof. Dr. Heinz-Dietrich Steinmeyer University of Muenster, Germany School of Law, Universitätsstrasse 14-16D-48143 e: steinmeyer@uni-muenster.de Muenster phone: 49-251-8329744 m: 49-171-8384816 I am a professor for Social Security Law, Labour Law and Civil Law at the University of Muenster Law School. My special field is pensions – occupational/ supplementary pensions as well as public pensions. I am doing consulting work nationally and internationally including international organizations (EU etc.). I am the Chairman of the European Network for Research on Supplementary Pensions.

AUTO ENROLMENT Steve Conley, Managing Director, Workplace Pensions Direct e: Steve.conley@wpd.email w: www.workplacepensionsdirect.co.uk t: 0113 457 4563 m: 07850 102070 Since 2015, Workplace Pensions Direct has made auto-enrolment simpler for small businesses, enabling employers to focus on running their companies without having to worry about pension law, and the cost of poor pension decisions. Workplace Pensions Direct offers an affordable, end-to-end, auto-enrolment solution that guarantees compliance with the law. With professional expertise, a century of payroll and pensions experience, and professional indemnity insurance – Workplace Pensions Direct has removed the worry and risk of autoenrolment for thousands of small businesses and their advisers.

Gavin Perera-Betts, Chief customer officer, NEST e: Gavin.Perera-Betts@nestcorporation.org.uk w: www.nestpensions.org.uk t: 020 3056 3719 NEST has been set up by the government especially for auto enrolment. We’re here to make sure that every employer has access to a workplace pension scheme that meets the requirements of the new pension rules. But we do more than just meet the regulatory minimum. NEST comes packed with the sort of high-quality features you need, whether you’re saving with us, using us for your workers or helping your employer clients.

COMMUNICATIONS CONSULTANTS Lesley Alexander, Managing Director, Ferrier Pearce e: hello@ferrierpearce.com w: www.ferrierpearce.com t: 020 3772 5360 Transparency – clarity, straightforwardness, honesty. As communications consultants, we support transparency in financial products, especially long-term savings. This applies not just to charges, but to the way we describe the products and their benefits to consumers. We believe the language we use should be clear, unambiguous and direct, helping people to make the most out of their money.

DATA SERVICES Larry McLaughlin, CEO | GSAV Ltd e: larry.mclaughlin@gsav.io w: www.gsav.io t: +44 203 655 2182 m: +44 7771 978 118 US m: x+1 646 946 5272 GSAV Ltd is Reg Tech/Fin Tech company exclusively serving the Buy-Side and delivering pricing solutions in the Collateral Lending Market to benefit Beneficial Owners and enable Managers to meet their Fiduciary and Regulatory obligations. GSAVr is a specialist pricing, tracking and regulatory tool and provides an independent price for collateral lending transactions that defines rate and use in a manner that the Regulators feels meets the test of both price and use.

GSAVr is the only solution available today that addresses the current challenges of any form of collateralized lending, full price discovery and full price transparency.

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David Rich MIod, CEO | Accurate Data Services e: david.rich@accuratedata.co.uk w: www.accuratedata.co.uk t: 01603 813366 m: 07919918623 David is Chief Executive of Accurate Data Services, a specialistdata quality and positive people tracing business that is focused on unclaimed assets in the financial service sectors. ADS traces lost members, clients and policy holders for a variety of organisations including Life and Pensions funds, Banks and Asset Managers. The goal is to help businesses reunite their customers / members with their assets and deliver positive consumer outcomes. David is an active campaigner for transparency and action around the large unclaimed assets issues present in the UK.

FIDUCIARY MANAGERS Ralph Frank, CEO DC (UK), Cardano e: info@cardano.com w: www.cardano.com t: +44 (0)20 3170 5910 Cardano was founded in 2000 and now has over 150 staff with backgrounds in the areas of risk management, investment management, research, actuarial and investment advisory.

Cardano studies the causes and impact of risk and costs in order to significantly improve financial performance and resilience. We currently provide Investment Advisory or Fiduciary Management services to over 1.3m pension fund beneficiaries with assets totalling over £120bn.

FINANCIAL PLANNING Mike Stafford CFP, Director, Stafford Wealth Management e: mas@staffordwealth.co.uk w: www.staffordwealth.co.uk t: 01992 501601 Stafford Wealth Management was formed in 1986 to provide bespoke lifestyle financial planning and investment services to private clients. It is one of a small number of elite firms in the UK that is accredited by the Chartered Institute for Securities and Investment. Stafford Wealth Management is authorised and regulated by the Financial Conduct Authority for investment business.

INVESTMENT CONSULTANTS Marcus Whitehead, Head of Investment Consulting, Partner, Barnett Waddingham e: marcus.whitehead@barnett-waddingham.co.uk w: www.barnett-waddingham.co.uk t: 0333 11 11 222 Barnett Waddingham has grown to become the UK’s largest independent provider of actuarial, administration and consultancy services. Our total headcount is now over 850 – with offices in seven locations around the UK. The investment consulting practice provides bespoke, independent investment advice to over 360 pension schemes with assets from the millions to billions. We continue to provide the personal, quality, tailored approach that has made us successful and has led to high levels of client retention.

INVESTMENT GOVERNANCE CONSULTANTS James N Meenan, Principal | JNM Investment Governance e: james@jnmresearch.com w: www.jnmresearch.com t: +353 (0)1 687 1027 m: +353 (0)86 257 2646 JNM Investment Governance gives trustees independent coaching and support to develop strategies and techniques to stem the overwhelming resource handicap they face in discussions with investment professionals. JNM’s objective is to facilitate a constructive two way dialogue with attendant benefits for all parties.

Henrik Pedersen, Managing Partner & Co-Founder, Clerus LLP e: henrik.pedersen@clerus.co.uk w: www.clerus.co.uk t: +44 20 3356 2845 m: +44 7767 656234 We partner with pension schemes and other asset owners to review and improve investment decisions, governance and value-for-money, through independent and informed investment analysis. As a result, investment outcomes can be improved without the need to change service providers or taking on more investment risk. We offer a free initial assessment, so why not try us out?

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INVESTMENT MANAGEMENT Robin O’Grady, Head of Business Development, Hawksmoor Investment Management e: Robin.ogrady@hawksmoorim.co.uk w: www.hawksmoorim.co.uk t: 01392 410180 m: 07468 697900 Hawksmoor specialises in providing high quality discretionary investment management services for private clients including trusts, pension schemes and charities. We are a privately owned business with no ties to a bank or any other financial institution. Our experienced and well qualified team of investment professionals is focused solely on providing clients with the best service and consistently good performance.

NOT FOR PROFIT Dr. Kara Tan Bhala, President & founder, Seven Pillars Institute for Global Finance and Ethics e: kara@sevenpillarsinstitute.org w: www.sevenpillarsinstitute.org t: +1(785)865-8824 (mobile) Seven Pillars Institute (SPI) for Global Finance and Ethics is an independent, nonprofit 501(c)(3), nonpartisan, organization whose mission is to highlight and analyze issues of moral philosophy in global financial markets with a view to enhancing ethical practice and policy.

PENSION ADMINISTRATION Margaret Snowdon OBE, Chairman, Pensions Administration Standards Association e: info@pasa-uk.com w: www.pasa-uk.com m: 07983 565955 The Pensions Administration Standards Association (PASA) is a not-for-profit organisation which acts as a focal point to engage with industry and government on pensions administration matters. It was created to provide an independent infrastructure to set, develop, and provide guidance on pensions administration standards. It is an independent accreditation body, assessing the achievement of good pension administration standards by schemes and providers.

RESEARCH Jackie Beard, Director of Manager Research Services EMEA e: Jackie.Beard@morningstar.com w: www.global.morningstar.com/UK Morningstar is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data and research insights on a wide range of investment offerings including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than USD $200 billion in assets under advisement and management as of 31 December 2016. The company has operations in 27 countries.

SALES & MARKETING

COLOURS CMYK C100 M88 Y0 K0 C0 M0 Y0 K0

WEALTH MANAGEMENT

COLOURS CMYK C100 M96 Y8 K5

Arno Kitts, Founder & Chief Investment Officer, Perspective Investments C0 M0 Y0 K0

e: Arno.Kitts@PerspectiveInvestments.com w: www.PerspectiveInvestments.com t: +44 20 3290 6486 Perspective Investments is a multi-asset multi-strategy investment COLOURS CMYK C100 M88 Y0 K0 manager. We invest on behalf of our clients, including our founder C0 M0 Y0 K0 family. Our commitment to our clients is to help them achieve their financial objectives. We do this by aiming to deliver higher returns with lower volatility and better capital CMYKour investment performance track record preservation than conventional equity portfolios. Of course, COLOURS while C100 M96 Y8 K5 is consistent with this aim, past investment performance is not necessarily predictive of future results.

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The scandal of passive pension funds with active fees

BY LAURENCE JULIUS | SENIOR ADVISER, CAMPAIGN FOR FAIR FINANCE

With all the focus on active funds charging high fees for closet trackers, another group of funds has been overcharging Joe Public high fees on tracker funds.

Well respected names in the pension industry routinely live off their reputations and charge rip-off fees for index trackers. A quick survey of 50 funds revealed that while most funds did not charge rip-off fees, there are notable exceptions.

It is another great example of where parts of the financial services sector have conned Joe Public out of monies which should have gone into providing a better pension but instead have lined the pockets of the asset management and pension industries.

Joe Public is not sophisticated. If you show him an index fund which has delivered 48% over 5 years, he will compare this with the 2% interest rate he pays on loans and think it looks great. Figures provided on performance, fees and charges are often full of financial jargon and unless the reader is financially literate they will not understand. MiFID II will do little to improve this.

The marketing blurb will talk of tracking an index, not tracking an index less charges of up to 1.50%, and they provide no comparison with other funds tracking the same index.

Pensions are a very sticky product – people do not make transfers between

funds and people rarely transfer pensions to new managers. No wonder pension managers like having high fees on sticky index tracker assets under management.

The research was based on figures published by FE Trustnet for a sample of pension tracker funds covering the FTSE All Share, US and North American markets. The companies may offer discounts and there may be slight timing differences (one day). The study was not exhaustive.

In the worst cases annual management fees of up to 150bps are being charged.

The difference in return over 5 years could be as high as 15% on UK and over 23% on US tracker funds.

Several firms offered more than one tracker – with differing returns – linked to the level of charges.

One company benchmarked its US tracker against the North American Index to show outperformance.

What is needed is for the regulator to put a cap on charges on tracker funds. It is immoral to charge high fees preying on the ignorance of the investor.

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UK FTSE All Share Tracker, return over five years Best in class Aviva BlackRock UK

62.8%

LG Equity Index PMC 17

62.3%

Worst in class Royal London FTSE All Share

48.7%

Scottish Equitable UK Index

52.7%

Pru M&G Index

53.7%

North America Best in class L&G North Am Equity Index

138.6%

Worst in class MetLife N Am

127.8%

US Best in class Aviva L&G US Equity

148.3%

Worst in class OMW iShares US Equity

124.9%

LAURENCE JULIUS

Laurence Julius is currently a Senior Adviser with the Campaign for Fair Finance and a Trustee/Treasurer with several not for profit organisations.

Prior to retiring Laurence was a trustee of a major UK hybrid pension fund. He is a risk and finance professional and chartered accountant with 35 years’ experience in the banking and energy industries.

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