From hearing the three presenters, it is clear they are 100% dedicated to making the CTI initiative a success. If you visit the PLSA website, you’ll find an abundance of materials which will help trustees and their advisors, and investment managers to complete the templates. There is no excuse.
Robert Waugh, member of the CTI Board, began his section by asking the audience what the purpose of finance is. He was met with a subdued silence, so his neatly prepared answer for us was to “allocate capital and manage risk”. He that then went onto illustrate the cost of finance is the same today as it was 130 years ago, and that innovation has traditionally been driven by rent-seeking – rather than good intentions. No surprise there. However, this is changing. The CTI is a great example of how technology can help pension scheme members to receive a better outcome.
Robert then went on to provide a case study of the RBS pension scheme of which he is CEO. It is clear to me that RBS is leading the charge when it comes to scrutinising total costs, but even he conceded that there are costs it just can’t accurately calculate.
What gets measured gets managed
In 2010 the RBS pension scheme undertook a huge exercise to establish its total costs. Since then it has reduced its costs from 53bps, to 23bps (as a percentage of total AUM). He conceded some of these savings have come from moving from higher yielding growth assets to more LDI and credit-focused strategies. Nonetheless, half of those savings have come from better negotiations with managers due to the ability to identify their total costs.
Robert also pointed out that when they began this annual exercise of calculating the total cost of running the scheme, it took the individual concerned two whole weeks. This year, with the introduction of the CTI template, it took 2 hours!
A question from the audience was whether they foresaw the introduction of an industry benchmark to help trustees contextualise their costs. We are a way away from that, but it would be hugely beneficial if schemes could compare their costs to that of other similar-sized schemes to understand if they are getting value for money from their manager and advisors. There would need to be a different benchmark for large, mid and small schemes (however you want to define size), as large schemes have always been able to negotiate more competitive fees than smaller schemes.
At AMX we use our economies of scale to negotiate lower manager and operational fees on behalf of all our clients. As each AMX fund grows, the costs fall for all investors. This means even the smallest of investors can potentially benefit in a way that they typically haven’t been able to elsewhere.
What is success?
Under MIFID II, managers have an over-arching regulatory obligation to disclose all costs and charges. However, good data is still a huge challenge. When polled, no one in the audience said they had sufficient data to identify total pooled fund costs. At AMX we believe in total transparency, and work hard to provide a detailed breakdown of costs.
Robert concluded his session by saying that success is every trustee in the room going back to their consultant and demanding that they calculate their scheme’s costs and publish it in their report and accounts. Every manager in the room was encouraged to lead by example, and make sure they are delivering an honest and transparent account of all costs. Pretty powerful stuff.
Could it be any clearer?
Despite all this good progress by CTI and the utility of their templates, there is still more that can be done. For instance, there are UK pension schemes still missing out on reclaiming withholding tax due to being invested in opaque fund structures. They stand to potentially save approximately 0.3% – 0.4% just from working with their asset managers to move to tax transparent fund structures like the Irish Common Contractual Fund. Find out more in our Tax Transparent Funds report.
So, I must add to Robert’s call to arms and urge trustees, consultants and managers to also look to their fund structures and whether they are unnecessarily suffering a tax drag on performance.