Six years ago, Australian superannuation funds were told to do more to gain transparency on fund management costs. Since then, they have hired ex-custodian and investment bank personnel – who have won battles with fund managers – and seen both a reduction in costs and greater clarity on fees. David Rowley reports
There are broadly three approaches to gaining better transparency on fund manager fees: introducing legislation to enforce greater fee disclosure by fund managers; finding a consultant to scrutinise the fees; or hiring a team of experts capable of asking awkward questions of fund managers and, crucially, getting answers out of them.
Whichever approach is relied upon depends on the scale of the pension plan in question, but the third option, and the most direct, will bring the greatest results. For this reason alone, greater cost transparency has been achieved for more members of Australian superannuation schemes than of UK schemes.
Down Under, most employees belong to one of 50 large superannuation schemes with assets of at least £500m. All of these would be capable of hiring specialist consultants trained at analysing fees, while the top 10 schemes (with assets of £15 billion-plus) would have large middle-office teams capable of standing toe to toe with fund managers.
In other words, as Peter Curtis, head of investment operations at the country’s largest fund, AustralianSuper, has gone on record as stating: “We are looking at all the leakage points where an agent is involved. Their motivation is different from ours – they are trying to meet a profit target, which starts to skew their focus a little.”
There are arguably fewer prize gunslingers such as Curtis in the UK, where the industry is thinly spread across 36,000 defined contribution schemes and 8,000 defined benefit schemes.
In Australia over the past few years, superannuation funds with more than £7.5bn have built up large, middle-office teams that are capable, for example, of challenging the timing of a foreign exchange transaction. The reason for doing so is that the timing of such transactions may be made to suit a broker with a position on the other side of the trade, rather than the pension fund client.
Crucially, these middle-office teams are staffed with ex-consultants, traders and custodians, who understand how brokers work and fund management costs are billed.
Take the 20-strong middle-office team at the £15bn Brisbane-based Sunsuper: once the team was set up in 2014 it quickly identified £5m of savings in one six-month period, more than paying for salaries. Some savings came from centralising trading activity across its separate fund manager mandates to reduce broker costs, and some from analysing the timings and costs of individual transactions and then challenging the fund managers to justify them.
Inspired by such successes, smaller superannuation funds are increasingly calling on their consultants to do some of this work on their behalf. Deloitte head of superannuation Russell Mason, who is based in Sydney and oversees investment consultant tenders for funds, has seen growing interest in consultants with specialist skills in fee negotiation and transparency. The biggest interest comes from funds in the £0.5bn-£5bn range, which cannot afford the kind of large, middle-office team described above.
Mason says: “Clients are digging deeper to find out what their asset consultant can or cannot do, and splitting up the work between [different] consultants.”
He adds that UK consultants with a model where they take commission from fund manager fees are part of the problem.
Role of regulation
Part of the reason that Australian superannuation funds are making progress is the Cooper Review, a large assessment of the system published in 2010 and named after its author, Jeremy Cooper, which called for greater transparency of costs attributable to derivative contracts and foreign exchange transactions.
The answer, Cooper said, was for funds to do their own detective work on the trading costs hidden in the buy and sell price of their assets. This is in marked contrast to the debate in the UK, which tends to focus on the role of regulation in enforcing higher standards of compliance by fund managers.
The reason for relying on regulation was outlined by specialist fund manager fee analysis firm Novarca, which wrote a report last year for the FCA. Novarca said neither UK GPP providers nor their underlying fund managers systematically calculated or collated transaction cost data and such GPP providers were unprepared for “industrial-scale reporting of transaction costs”. It proposed that fund managers should be encouraged to make more data available to GPP providers and that there should be uniformity in reporting transaction data.
UK in perspective
Andy Agathangelou, founding chair of the one-year-old Transparency Task Force, is aware of the gap in best practice set by the Australian superannuation funds and describes the UK pension system, by comparison, as “way behind the curve” on such cost control.
“You can’t manage what you can’t measure and our lack of transparency means it is terribly difficult for schemes to get full disclosure on all costs – explicit and implicit,” he says.
He is keen for regulation that will enforce greater transparency of fund manager costs, but he also recognises the need for pension funds to do some of the work themselves, not least because it is likely to bring greater returns. He cites the Railways Pension Scheme as a leading cost-control exemplar for hiring a forensic accountant, who discovered the fund was paying a lot more than it thought beyond the headline fees.
“That’s probably its best-performing investment,” he says. “I don’t understand why all schemes aren’t following its lead, with small schemes using a part-timer.”
Stonefish Consulting managing director Christopher Sier, who carries out such work independently, cites a similar exercise by the West Midlands Pension Fund to insist that all trading costs from its fund managers be invoiced. Once such costs had been itemised, the fund was able to identify rebates worth millions of pounds.
Sier says: “The moral of the story is that you should never take for granted the cost data you receive; always assume there are holes. A little bit of forensic effort pays huge dividends. You just need to ask the right questions.”
He agrees with Agathangelou that it is “insanity” that so few other funds follow this lead.
A reality check on how a fund can go in cutting fees comes from Aon Hewitt Consulting head of investment and senior partner John Belgrove. Although in favour of greater cost transparency, he says investors should not lose sight of value when assessing fees.
He highlights the decision of some funds to give up or avoid hedge fund investments on the basis of high and complex fees – a decision, he says, that is not guaranteed to bring higher returns.
“We think value and cost must go together in assessment, because cost-driven decisions alone may have negative consequences,” says Belgrove.
In Focus: Novarca CEO Marcel Staub
Swiss-based company Novarca was commissioned by the FCA to examine transaction cost transparency within GPPs
We are surprised at the lack of progress since we produced our original report back in 2014. Since then little progress has been made other than the establishment of the independent governance committees. The IGCs are a positive step but I always point to the Dutch example – it is better to do something quickly, however basic, than not do anything at all.
Progress on transparency should not be hampered by the Brexit vote. A lot of the time both asset managers and their clients the pension providers have said that they cannot deal with calls for transparency because they are dealing with Mifid and Priips. Now they do not have to deal with that, they should be able to focus on the transparency issues.
I am baffled as to why so many big institutions find it hard to get this basic information from asset managers. An obvious example is portfolio turnover, which can be a big cost drain. It should not be that hard for asset managers to be able to deliver this information, and it is a key factor in efficiency so it should be something they can access quickly. There are jurisdictions in the world where this information is given so it should not be that hard to find.
But the one positive is that the IGCs are now an identifiable group looking at this.