Transparency project begins to shine a light on LGPS costs

The Cost Transparency Initiative was launched to reveal the true cost of running LGPS funds. One year on, Liam Robson offers a progress report.

The LGPS has been at the forefront of investment cost transparency for a number of years now, and one year on from the launch of the Cost Transparency Initiative (CTI) templates in 2019 is a good point in time to review the recent progress in this area and look at what is ahead.

Updated CIPFA guidance on administration, governance and oversight, and investment expenses has resulted in a clearer distinction between investment expenses invoiced directly and those taken from fund net assets as well as set a baseline from which to move forward.

Initial efforts made by some LGPS funds to capture a broader range of costs were limited to what managers could provide, and without a collective approach, there wasn’t the incentive to develop capabilities to routinely report in more granular detail.

LGPS Code of Transparency

The Scheme Advisory Board’s Code of Transparency launched in May 2017. The number of investment managers signed up to the code has grown steadily since then, and for managers of listed market assets (public equities and bonds), reached saturation point some time ago. The templates have enabled LGPS funds to capture, in a standard format, a broader range of costs consistently, and this has shed light on previously less transparent investment expenses such as transaction costs, for example.

The concept of cost transparency is well understood, but the process of creating the framework and system, given the complexities of the scheme and its investment arrangements, required working with a range of stakeholders.

One of the challenges faced by the Scheme Advisory Board secretariat was to explain the roles of various organisations and their part in the bigger picture before bringing it all together. Fortunately, much of this was accomplished via a series of meetings and workshops across the UK in late 2019 and early 2020. There had been a marked change in thinking and acceptance of the transparency initiative since 2017, and the general feedback was that the code is working well.

Compliance system

In launching the code, it was always the SAB’s intention to check for compliance and, in order to streamline the process and bring efficiencies for all participants, procure an online system, built and provided by Byhiras, which was released in April 2020.

In specifying the system, the SAB placed great emphasis on security and confidentiality. By design, the template data held within the compliance system can only be accessed by LGPS funds, managers and authorised third parties with the express agreement of both the fund and the manager. The SAB only sees overall status reports which allow the secretariat to monitor the receipt of templates together with average and aggregate costs at scheme-wide level.

As of 30 June, 2020, more than 1,000 schedules had been set up and more than 900 templates uploaded. For the first reporting cycle, this should be considered a great success and, as expected, the secretariat is actively engaged with a small number of investment managers yet to upload templates. The reasons are understandable, and result from a combination of this being the first run (for example, validation errors on the templates), the unprecedented impact Coronavirus has had on business processes, reporting and, in particular, agreeing valuations, with auditors.

Perhaps one of the main benefits for less resourced authorities is that much of this has been achieved collectively, without the need to put in individual requests to their investment managers. Viewed from the LGPS client perspective, 99% of pension funds have templates uploaded to the system. However, there is still some work to do around solving technical issues. For example, the handling of templates submitted in currencies other than sterling and variable “late” settings for reporting deadlines, rather than transparency principles.

A second phase of development of the system will address this, and further functionality will include population of the CIPFA table set out in guidance which aggregates total costs for pension fund report and accounts, separating assets into inside and outside of LGPS pools.

Building on the success of the Code

The CTI framework has now been widely adopted by the investment management industry, and this trend is expected to continue. In a recent survey of schemes and advisers conducted by the PLSA, it was found that three quarters had a good level of awareness of the CTI framework. This, in turn, can only help with awareness of the LGPS code and, while the bulk of LGPS assets are covered by the code, will encourage new, or more niche, managers to consider signatory status.

Now that a standard CTI template specifically for private equity has been designed (with the assistance of the British Private Equity and Venture Capital Association (BVCA), and with acceptance of the ILPA template for managers based in the US, the code signatory list now includes several private equity managers covering a significant proportion of LGPS assets.

It is worth noting that there is enough momentum behind transparency that, even if investment managers are not signatories to the code, and where “cost informative” has not been the norm, it is still possible that they may be willing to provide templates on a “best endeavours” or ad hoc basis.

Analytics, average and aggregate costs

Data contained in templates improves accuracy but goes far beyond what is required for accounting purposes. The advantages of an LGPS system for collation make the template a far more powerful tool for understanding efficient implementation of investment strategies and increasing confidence in decision making.

The system has built in analytics which provides aggregated, anonymised averages for the LGPS at scheme level. LGPS fund clients are able to see their data points against the average and range, at scheme level and within each asset class.

The information provided in the CTI templates should be seen as a starting point for conversation rather than an end result. Contextual information supplied alongside templates should help in interpreting the detail. In addition, risk, return, and even client service form part of overall value for money.

At this point it is still a little too early to draw accurate reporting at scheme level, but at local fund level, it is hoped that where there has not been resources to collate information before, the system collection and analysis tools will help form part of good governance and investment stewardship for many funds.

Adding investment pooling, responsible investment, member and media scrutiny to the list of pressures on the scheme makes having a good handle on cost and cost effectiveness even more imperative.

Liam Robson is an analyst with the Local Government Association.