By Alessandro Ferrari
The debate about the transparency of pension fees has picked up pace since the UK Government introduced a pension fund charge cap for auto-enrolled workplace pensions last year.
The pressure is mounting for pension trustees and governance committees to be more transparent on transaction costs and other charges.
As recently as March, the UK’s Financial Services Consumer Panel (FSCP) proposed a new reporting standard, which it hopes will provide better insight into the costs being deducted from funds.
While this news concerns the UK, it is part of a global trend within the financial services towards greater transparency and a better deal for pension holders. The time has come for pension funds to embrace a more open and transparent charging model, and this involves understanding better their own costs so they can report them accurately to regulators and pension holders alike.
This reporting has to include areas where costs can be opaque, such as the total cost of data used by asset managers to make investment decisions. There are times when these costs are charged back to the pension fund trustees, who must gain a better understanding of the fee structures imposed on them by asset managers.
However, a significant obstacle to delivering a more transparent fee structure is the lack of strong data governance that is exhibited in pension firms today. A recent survey of buy-side professionals identified that there is a distinct absence of data governance maturity across pension funds globally. In fact, the majority of pension firms (75 percent) state their data governance is a work in progress.
Without a streamlined approach to data governance, pension funds will not have access to an accurate, holistic view of the data being used and, by extension, how much of their overall costs is down to data. This not only has ramifications on the firm’s ability to meet commercial demands for cost transparency and efficiency, it also highlights a missed opportunity to gain valuable business intelligence about the acquisition and use of data across the organisation.
With this in mind, it’s more important than ever that pension funds get their data governance in order.
Yet, achieving the level of data transparency needed is easier said than done. Inefficient data infrastructures and processes make it hard for funds to truly understand what they are paying for. Firms frequently subscribe to redundant vendor data feeds, and must devote significant in-house resources to data collection, validation, remediation, reconciliation, distribution and maintenance.
Part of the barrier to true transparency is that the requirement for customised index & benchmarks data is becoming ever more commonplace. Indicatively, approximately two-thirds of the client datasets that RIMES manages now have an element of customisation, based on their clients’ requirements. Furthermore, according to a recent State Street global pensions survey benchmark data from more asset classes is now being used: 51 percent of respondents plan to boost their exposure to funds of hedge funds over the next three years, while 50 percent will increase exposure to real estate and 46 percent to private equity.
As the data used by firms becomes more varied in the face of shifting client and regulatory demands, calculating what data is being used along with its total cost becomes ever more challenging.
What is troubling is that, despite a clear link between poor data governance and a lack of data transparency, pension funds are still lagging behind. The RIMES 2016 Buy-Side Survey found that no pension fund surveyed rated its data governance as mature, compared to 17 percent of total respondents from across the buy-side industry.
Pension funds can no longer continue relying on sub-par data governance processes. It is only by having an accurate understanding of the data they rely on that funds will have clarity of the data costs they are being charged.
Once they have this understanding they will be able to properly fulfil their responsibilities and, where appropriate, even negotiate better fees with asset managers and pension consultants. After all, as the pressure on fee transparency continues, it naturally follows that pricing will become even more competitive.
Strong data governance brings far more than an ability to meet the global transparency trend. Pension firms that have adopted data governance best practice are better meeting stakeholder demands; from more detailed business intelligence for senior managers through to easier compliance with data guidelines and restrictions.
Facing such pressure, and with the benefits reaching beyond cost control and transparency, pension firms are showing a stronger appetite than ever to adopt good data governance systems and processes.
Alessandro Ferrari is EVP of global marketing at RIMES
