Cost disclosure distorts reality

The Global Pension Transparency Benchmark (GPTB) measured four factors in its assessment of transparency of pension fund disclosures, here Amanda White looks specifically at the level of cost transparency across pension funds globally.

Costs are a vital input into generating fund performance for members: they are measurable, manageable and certain.

Research based on CEM’s benchmarking database clearly shows that funds with cost-effective investment operations generate better net returns and value added than those that don’t. CEM says that clear and complete public disclosure of costs leads to better cost management.

However, when it comes to the transparency of cost disclosures for stakeholders the GPTB demonstrates there is much room for improvement.

While on average the 75 funds assessed in the GPTB ranked 68 for performance disclosure, the average for cost disclosure transparency was only 51, with individual fund scores exhibiting a huge range from 18-88.

The GPTB asked 57 cost questions across a range of criteria from total costs to external management costs and asset class level disclosure.

Of the 75 pension funds analysed in the GPTB, 88 per cent reported total costs. But looking a bit closer reveals that 70 per cent reported total costs when some external fees were included; and only 38 per cent of all funds reported total costs which included some transaction costs, usually brokerage commissions.

Work by CEM Benchmarking has previously shown that funds only report about half of their true total costs, which means tens of billions of dollars across the industry is not being reported. Transaction costs are probably the area that is most poorly disclosed.

In the benchmark analysis CEM says that all too often institutional investors only report costs that they pay explicitly (such as wire transfers) and do not report large costs incurred that are netted from assets under management. This is especially true for external management fees and transaction costs, which are typically the two most material costs for asset owners.

External management cost transparency was the hardest cost factor element to assess and score in the GPTB. This was due to the fact that external manager costs were often not identified separately, and assessment required imputing the extent of external management fees included in total fund costs. It is worth noting that disclosure reviews were also hampered by differences in accounting practices, which CEM says generally favoured form (how expenses are disbursed) over substance (directly netted expenses are usually excluded from the financial statements).
Of the funds analysed 27 per cent did not disclose or discuss any external management fees.

None of the funds reached the highest level of inclusion for private market asset classes, (detailing all costs and not netting rebates and other expenses).

And 20 per cent of all funds reported invoiced or paid expenses – of this group, 85 per cent disclosed implicit or directly netted expenses

The lowest scoring cost factor component was completeness of transaction costs (country average of 27), followed by asset mix cost disclosure (country average of 35).

Only 57 per cent of funds reported management expenses by asset class/option; 16 per cent reported performance fees separately; 32 per cent reported transaction costs by asset class/option; and 37 per cent reported asset class costs as a percentage of AUM, which is most helpful for context and comparability.

The Netherlands was the country that scored best for cost factor disclosure with a range across the five funds assessed of 71 to 88 and an average of 83. In fact, the top four scores were held by Dutch funds.

Mexico ranked the worst on cost disclosure with an average country score of 23 but Finland was not far behind with 28. Also, worth noting that while the US and Norway scored ok on average (41 and 42 respectively) they both had low minimum scores of 24 and 18, with Mexico’s minimum sitting at 19.

For all the analysis of the cost disclosure transparency and to see the fund’s that were highlighted as best practice examples, click here.

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