The FCA’s drive for greater transparency of aggregate transaction costs within the workplace pensions market is not a new area of regulatory scrutiny. Workplace pension charges have been in the spotlight for a number of years and the core issues of transparency, disclosure and value for money (VFM) have long been key parts of the regulator’s approach.
The question is how successful the proposed measures, such as the standardization in reporting the costs incurred by workplace pension investments, included in the FCA’s latest consultation paper (CP16/30), will be in driving more effective transaction cost disclosure.
What are the current requirements?
Independent Governance Committees (IGCs) were set up in 2015 by workplace pension providers to assess the ongoing VFM for scheme members. However, the current regulatory burden falls on providers to determine whether they are providing VFM and the FCA has not set out how it expects providers to make this assessment.
Providers are expected to consider this issue by weighing up the quality of the scheme relative to the costs to its members. The quality can be measured through the strength of the design and execution of the investment strategy used, as well as the administration of the scheme and how effectively the provider communicates any changes. With the regulator’s focus around customer inertia and information asymmetries, the more a provider administers, communicates and educates its members, the easier it is to argue that the scheme is delivering value to members.
The sticking point in the VFM calculation is often the cost of the scheme and it is critical for firms to demonstrate that the costs and charges passed on to its members do represent value. However, the ability to quantify the scale of costs that members incur through the investments they hold in their pension schemes varies across providers, making it challenging for skilled IGCs to determine the range of transaction costs and charges applied.
What are the proposed changes?
The recent proposals around transaction cost disclosure are further evidence of the regulator’s commitment to increase transparency in the marketplace. The intention is to ensure workplace pension providers demonstrate:
- there is a clear VFM methodology in place;
- there is a drive for complete transparency around transaction costs and charging structures so that members can also make the same assessment; and
- they will receive a full breakdown of transaction costs from their asset managers.
The measures will give IGCs a sharper tool with which to hold their providers to account and enable them to standardise the process of transaction cost disclosure. This is a clear first step in being able to effectively determine the VFM being received and providers should be already looking at developing their methodologies and reporting mechanisms in response to this growing regulatory demand.
However, while the proposed measures do take into account the importance of a standardised approach to calculating VFM, it fails to assist or address the perceived lack of clarity around customer-facing disclosure or seek to improve the levels of engagement that members have with their scheme. Given the FCA’s concerns around both disclosure and consumer engagement in the financial services industry as a whole, this is likely to be the next key area of focus for the regulator within workplace pensions.
With the FCA consultation set to close on 4 January 2017, it is important that relevant firms provide their feedback, to ensure that potential impact of the proposed changes are taken into account from a number of different perspectives.
Matt Hodey, director of strategy and markets, The Consulting Consortium