Jeff Houston: LGPS and investment cost transparency

The LGPS Advisory Board has been the first to sign up to a new disclosure template for investment costs. Jeff Houston explains what’s happening and why.

It seems a very short time since the mantra of “net return is all” was in the ascendancy throughout the LGPS and investment cost reporting was, by and large, restricted to invoiced fees. It is, of course, true that only net returns can pay pensions but for a number of reasons, including reputational and regulatory, the price of achieving that return is now firmly on the agenda.

The move toward investment cost transparency is an important factor in the perception of the LGPS as being value-led. Increased transparency is now included in CIPFA accounting standards and is an objective in the government’s criteria for pooling investments. Finally, the introduction of MiFID II has seen a greater obligation on managers to fully report costs.

The LGPS Advisory Board’s voluntary Code of Transparency was launched in May 2017.  Signatories to the code commit to the principles of transparent reporting and agree to complete a template of costs for their clients and submit to third party compliance checks. In return they are named on the board’s website and are able to use the code’s “tick” logo in their marketing material.

At the core of the code is a listed assets template which was developed during with the help of the West Midlands Pension Fund, Dr Chris Sier and the Investment Association.

Since the launch, the number of code signatories has grown at a steady rate, despite the restriction to listed assets, and now includes over 50 asset managers covering over £160bn of assets.

Following the release of the FCA’s asset management market study in the summer of 2017, the Institutional Disclosure Working Group (IDWG) was formed in order to “gain agreement on disclosure templates for asset management services provided to institutional investors.”

The group, chaired by Dr Sier, includes asset owners, managers and academics, and is currently developing a range of templates at both the account (manager) and user (trustee) levels. The templates will cover all of the major asset classes and are due to be released in the summer of this year.

At its meeting on 26th February, the Advisory Board agreed to adopt the IDWG templates, when available, for use in its code. This decision was taken for a number of reasons including:

• Consistency of reporting. It makes sense for both managers and asset owners if a standard format for reporting is used across the institutional space.
• Adoption of the IDWG templates will provide a route into the Code for those alternative and property managers who until now have not been able to sign up.  At the meeting of the 26th, the Board also agreed to an amendment to the Code which enables these managers to sign up in advance of the arrival of the IDWG templates.
• The IDWG user template provides a useful summary of costs for LGPS committees together with the ability to drill down into the detail of account templates when required.
• Whichever body takes over, the work of the IDWG will continue to develop and maintain an effective and relevant set of templates.

The adoption of the IDWG templates will, however, require existing signatories to make changes to their reporting systems.

The new templates will differ in a number of ways. Firstly, there will be a single listed template rather than separate segregated mandate and pooled fund versions. Secondly, there will be an increased degree of detail, although the actual extent of that detail is still to be determined.

Accordingly, the board agreed that from the point of release of the IDWG templates, although new signatories to the code will be obliged to use them, existing signatories will benefit from a transition period of up to 12 months.

Beyond the introduction of new templates, both the board and the IDWG will continue to face two important challenges. The first is to ensure LGPS committees and institutional trustees are able to make best use of the increased knowledge available to them.

The other, perhaps more daunting, challenge is to ensure that increased transparency is not mistaken by scheme stakeholders, the press and industry commentators for an increase in costs. It would be a shame if, in exposing costs in order to better manage them, we miss the opportunity to promote a better understanding of the mutually-beneficial relationship between asset owners and managers.

Jeff Houston is head of pensions at the Local Government Association.