How much does it cost? It should be the most basic of questions from pension fund trustees when decisions are made about how to invest members’ assets, yet it appears this is often not the case. A lawsuit originating in the US state of Kentucky has the potential to change matters for the better.
Investment regulations for pension schemes in the UK take their lead from the European Union Directive on Institutions for Occupational Retirement Provision. Investments must be made in the “best interests of scheme members and any potential conflict of interest must be resolved in their favour”.
The recent Law Commission review of UK fiduciary duty stated that managing the costs of a pension scheme was an essential requirement for trustees, particularly to help ensure that sponsors would remain committed. Yet few trustees even consider the costs incurred in the investment chain.
Are trustees asking, ‘How much does it cost?’ No one would dream of buying a new car or a fridge without knowing the costs and performances of particular models but, unfortunately, the same can’t be said about the decision-making at pension schemes. Trustees seem to ignore basic principles when using the resources of their members’ investment fund to buy assets.
To tell you the truth, it is a dirty secret – no one wants you to know the costs. Why aren’t we able to gain a simple answer to such a simple question? Having spent the last three years asking that for UNISON’s Local Government Pension Scheme members, I think the answer is manifold.
In my experience, a typical response is “costs do not matter, investment returns do”. Well not good enough I am afraid; the more it costs to manage your investments, the lower the returns. Or, put another way, the more electricity your fridge consumes, the more expensive it is to run.
In the UK, if you are in an auto-enrolment workplace pension scheme, the chances are that costs charged against your fund are way over the 0.75 per cent cap laid against your fund. But if the costs are above that, say 1 per cent, over 25 years, that will take a quarter of your money, resulting in less to live on in retirement.
Concerns that meagre pension benefits will force people into poverty after retirement have led Chilean workers to demand the nationalisation of the nation’s system. Throughout 2016 and 2017, several mass demonstrations were held in Chile’s largest cities in support of the cause.
The country’s fully private structure was designed by José Piñera, minister of labour and social security in the military government of Augusto Pinochet. Piñera was a member of the so-called Chicago Boys, a group of economists employed by Pinochet, most of whom had trained at the University of Chicago under prominent free-market economists such as Milton Friedman and Arnold Harberger.
This private system has spread around the world, replacing traditional defined-benefit systems, which deliver a living wage in retirement. In the UK, defined-contribution schemes must set out their charges but the method to collect themis not up to scratch. Meanwhile, the country’s 6000 defined-benefit schemes have no obligation to be transparent.
This lack of clarity means workers and their employers don’t know whether they’re getting value for money or how the investments that will fund their retirement are performing.
Imagine you went into a large retail shop and found no price tags. The first thing you would do is ask where the prices are. Consumer law would demand that they be there but for our pensions, perhaps the largest purchase we make without a loan, they are invisible.
The solution is for schemes to start using new transparency templates that are now available in the UK through the Financial Conduct Authority, the regulator of financial services. These are simple spreadsheets that all of the contractors a pension fund hires – such as fund managers, custodian banks and consultants – should fill out.
In the Netherlands, compulsory reporting was introduced three years ago and investment costs have since fallen by more than a third. Members and employers in the Local Government Pension Scheme (LGPS) will obtain this transparency next year, because UNISON demanded the same system.
We think it’s time the UK Government, which ensured workers were put into a pension scheme, offered the same system for all types of workplace saving. Then workers and their retired colleagues could see a much welcome boost to their pensions.
It is troubling to think that two workers in similar industries with similar wages might find themselves in vastly different situations at retirement because one was in a system with a lack of transparency on fees and their impact.
It’s a scandal. Just because members can’t see what happens every time they pay more into their pension fund does not mean nothing untoward is happening.
We should believe the members of the US’s Kentucky Retirement Systems. They have won an important lawsuit alleging breaches of fiduciary duty by certain trustees and executives of the system, along with fund managers KKR/Prisma, Blackstone and PAAMCO, which set up customised hedge funds that were sold as providing stellar performance at low risk and turned out to be turkeys.
The members scored an overwhelming victory despite the defendants, some of the richest and most powerful in the US, throwing their biggest legal guns at them.
The members plan to continue to prosecute the case vigorously. Given the potential to set important precedents, and the demonstrated effectiveness of the members’ attorneys in presenting complex factual and legal arguments, which would be particularly important in a jury trial, do not expect them to settle.
Public pension plans in the US, along with their counterparts across the globe, are under attack from the threat of closure. A full exposure of the ‘box of tricks’ employed against trustees by asset managers will be welcome by all. Scheme members should not have to use the force of law to gain cost transparency – it is their fiduciary right.
Trustees and public officials should demand this before they purchase an asset manager’s strategy and invest in assets. That fiduciary principle is in desperate need of a shot in the arm. We hope Kentucky will deliver that.
UNISON believes that’s the least members deserve. Find out about our work in the LGPS here.
Colin Meech is national officer of UNISON, the second-largest trade union in the UK, with almost 1.4 million members.