What led up to the creation of KAS Bank’s cost transparency tool for pension funds?
We do a lot of work with institutional clients in the Netherlands, the UK and Germany, but in the latter two markets we have become something of a specialist, in that our growth strategy is focused on servicing pension funds. We haven’t always built our strategy solely on pension funds—since moving into the UK in the 1980s, we have focused on various sectors.
KAS Bank is more of a deli than a supermarket, offering select, specialist securities services. Client services is another area we have excelled in, focusing on clients’ needs and challenges, of which the data transparency tool is a good example.
Our overall strategic vision is to become the UK governance partner of choice for pension funds, and we believe that with our deep understanding of the challenges faced by the industry we can achieve this ambition. There are a lot of good initiatives going on at the moment. For example, The Pensions Regulator has implemented several new codes of conduct to improve the structure of the industry and also issued a paper last year looking at what it means to be a trustee in the 21st century. We have identified that there is an issue around data and information. You can’t expect to take good decisions based on bad data, and trustees often struggle to get accurate, fast and transparent data around investments. One of the reasons this problem has emerged is that investments have become increasingly complex and much harder to administer. Service providers are stuck with cumbersome technology, so they struggle to deliver the data in a fast and accurate manner.
This means trustees and pension funds are getting increasingly frustrated. The way to solve the problem is through technology, but we need to look outside the box, delve into the fintech world and look at the technologies available to us. In order to do this, we are creating a team with specialism in this area. Currently, we are discovering the main pinch points we need to focus on and the technologies that are available to us. It’s an ongoing project and there will be things that work and things that don’t, but the goal is to make things easier for our clients.
What are the major challenges here?
The door is open in terms of the technology we are going to use. If the problem around data was easy to solve it would have been done by now, but nobody has worked this out yet. We have discussed it with various fintech companies and even they are not quite sure exactly how to resolve this, but we are confident there is definitely a solution out there.
The pensions industry is very behind the curve on this topic, and so, perhaps, is the whole financial sector. As consumers, we are used to the likes of Uber and Amazon, but the financial sector is still not at that stage. The challenge is in bringing all the various stakeholders together, and KAS Bank certainly intends to do this. We have a strong tradition and a strong client base.
We service about 35 percent of the pension fund market in the Netherlands, and we have been utilising our experience there for the benefit of UK clients; now we just need to bring the right technology to them.
Our innovation journey begins with data transparency and our cost transparency dashboard is a first step towards meeting the governance challenges we have identified in the industry. We will build our team and delve into other technological areas to deliver further innovation.
Why is data transparency such big issue in the industry?
There is a growing call for transparency across UK financial services, in particular. The Financial Conduct Authority (FCA) has created a disclosure group with the aim of building a template to collect cost data from investment managers, and I’m sure they will have further ambitions as this develops over the next few months. We will be watching them closely.
In the Dutch market, several initiatives were put in place just after the global financial crisis of 2007 and 2008, which found a lot of flaws in the pension system. One of the biggest initiatives has been the consolidation of 800 pension schemes into 218. They also looked at governance and data issues. They wanted to fully understand what was going on in the schemes, and they wanted to implement reporting for various data points. The Dutch also started focusing on costs. In 2011, it became a recommended practice that funds must collect investment and pension management costs and report back to their regulators; this was made a legal obligation in 2015.
UK regulators and scheme representatives are demanding increased disclosure of costs, so we took the Dutch template and tweaked it slightly to suit the UK industry for the collection and validation of the cost data. We believe that, whatever the FCA announces as a standard template for asset managers, it is likely to be similar to the template we already have in place. In addition, we looked at the template for the Local Government Pension Schemes (LGPS) transparency code and compared it to ours to confirm it is very similar. We have also built an innovative dashboard and an app to present the data back to trustees and pension funds, in order to help them make more informed decisions. We have a lot of other exciting ideas focused on helping trustees as much as possible. That is our sole goal as a governance partner.
How do you think this tool is going to help?
Our Pension Monitor dashboard shows all the products and services we provide (for example ESG, performance, risk, funding levels), and lays out and interprets all the investment data related to a pension fund.
The Cost Transparency app simplifies the costs related to defined benefit (DB) pension schemes and provides a simple doughnut graph, which is split into pension management costs and investment management costs. Additionally, there are tailored views, tables and scatter-plot graphs with trending cost curves. The tool allows clients to compare their pension schemes with the whole universe of pension schemes in that particular market. The Dutch have to report their cost transparency per member to the local regulator, which this tool also does for our UK schemes. It gives a total overview of what costs are associated with running the pension scheme.
There is a lot of discussion in the industry about whether or not we should report costs to members or not, and in defined contribution I think we absolutely should, because the risk is on the members. However, on DB there is a debate about whether the member needs to know. Either way, we are very supportive of the push for greater transparency.
What has the market reaction been to the tool?
We have completed a successful proof of concept for the tool with three pension funds in the UK, and are very excited to add additional schemes so clients can start benchmarking costs across the industry. We’ve kept it as simple as possible and this has really helped when we have been presenting it to trustee boards. We have had positive feedback on the simplicity and the fact that trustees have probably not seen a lot of this data before. There are a lot of previously unreported costs displayed in the app.
It is intended to help clients get straight to the point by helping them to visualise the story—it’s much easier to understand than looking at a spreadsheet.
The industry has been very focused on transaction costs, because they have not really been reported before. This will take some careful management, because if you start reporting costs that weren’t previously reported, it can look like your costs have suddenly increased, when they haven’t. It’s very important for schemes to understand that we aren’t saying all costs are bad. We have won our first client and we have had a lot of growing interest, but pension funds aren’t known for moving particularly fast. We have also had many suggestions on how we can improve the tool further, such as adding risk data and benchmark performance.
Has there been any kickback?
There has been a little bit of negativity in the press in the past—although not directly involving KAS Bank or its clients—however, it typically stems from poor management of the message and the actual benefits to the industry that improved transparency delivers. Carrying out a review of costs will typically cause an element of discomfort for schemes and makes trustees cautious. At the end of the day, we are doing something that has not been done before in the UK, but if we look at the positive aspect, it simply allows for better governance by enabling more informed decisions. For example, when you look at the management costs for a specific asset manager in isolation, they can look cheap. But, when you add in transaction costs they start to look a bit more expensive. It’s an element of market practice. It’s not like managers are trying to hide anything, it’s just information that didn’t have to be reported previously. The world has changed massively—investments are much more complex than they were 20 years ago, and I think that’s why people are demanding more transparency. We do always advise that schemes must not look at costs in isolation, and elements such as strategy and risk must also be taken into consideration.
The need for accurate, transparent and timely data on investments is not an obvious problem, and I don’t think anyone has really looked into it fully yet. It’s not an easy thing to resolve, but I believe there is always a solution to be found, which will make a clear difference.