The new Financial Conduct Authority (FCA) study on the asset management market could deliver a welcome jolt to the defined contribution (DC) market, improving value for members through greater transparency and better reporting. Anne Swift, KPMG's UK Head of DC Investment, explains what needs to happen to make the promise of better value a reality.
The FCA has decided to tackle a long-standing and thorny issue. Until now, pension schemes haven’t had clear visibility on how the charges levied on DC scheme members stack up. That’s for two reasons. First, the way they are disclosed is hugely variable. And second, exactly where the charges come from is tricky to identify because of the number of parties in the value chain, from the DC provider and fund manager to custodians and other service suppliers. Trustees and employers – let alone members – therefore struggle to really judge true value from these suppliers, and schemes that are able to measure or disclose the true level of transaction costs are almost unheard of.
The FCA wants to change that and has already set out its Policy Statement on the disclosure of transaction costs. We would also like to see greater clarity around who’s paid what in the value chain, and a consistent approach to disclosure to allow a fair comparison across different funds.
We would also like to see DC providers being more consistent in their performance reporting by adopting the same benchmark or performance comparator as set by the underlying fund manager. Right now, provider A might show fund performance against an index benchmark, while provider B might plot the same fund against an industry average. Allowing investors to at least compare apples with apples would bring an important new level of clarity and, ultimately, help investors choose the right fund.
The FCA’s focus on potential conflicts of interest in the investment consulting industry is also important and relevant to the DC market. We are seeing more and more cases in which investment consultants also offer their own “delegated” DC solutions such as master trusts. What must not be lost is the ability of a scheme to take a step back and taking a broader, independent view. By seeing what others in the marketplace are doing, schemes can then scrutinise their own consultant or Master Trust provider and maintain strong service delivery so members continue to receive the best possible value from their pension.