The Government’s statement of intent over the need to improve the transparency of pension charges is a welcome intervention.
Whether driven by pressure from Labour or Lord Lawson, who was pushing a potentially embarrassing amendment to the Pensions Bill, or building on the Office of Fair Trading’s call for a better disclosure regime, the direction of travel is the right one.
Demanding full disclosure by adding some wording to the Pensions Bill is the easy bit. Co-ordinating, leading and working with the host of European and UK regulators and trade bodies to create a simple regime of genuine benefit to the end-saver is the hard job. But policymakers cannot shy away.
Some important cogs are already in motion. The OFT’s workplace pensions report, published in September, highlighted the lack of transparency and comparability of pension charges. It warned that simply seeking to bundle transaction costs into the AMC to create a single investment cost could create its own transparency issues but called for better visibility of such costs and more consistent reporting methodology.
The Investment Management Association has put in place enhanced disclosure guidance for reporting transaction costs, as a three-year rolling average. The IMA’s Statement of Recommended Practice, awaiting approval from the FRC before the FCA can consult on amending its handbook, offers a fairly simple indication of all the costs experienced by a fund in a calendar year, with a breakdown of transaction costs.
Other bits of the chain need cleaning up too. The regulator rightly wants to crack down on the murky world of bundled dealing commissions while the IMA has suggested banning the use of commission to pay for investment research.
An overload of new information is likely to confuse rather than benefit savers so a difficult balancing act must be achieved on investor disclosure. Improved transparency around metrics such as portfolio turnover and market spread costs should inform the decisions of professional fund buyers and trustees and so also benefit savers.
Upcoming European Prips regulations and Mifid II will also have an impact on charging disclosure. Some of these European rules will take years to be implemented but this is no excuse for delay. Here is a chance for UK policymakers and financial services firms to lead the way.