“Strengthening the duty of AFMs to act in the best interest of their investors – our Value for Money proposal
“1.14 There is an existing duty on AFMs to act in the best interests of fund investors. In our view, as part of fulfilling this duty, AFMs should assess and justify to their fund investors the charges taken from the funds they manage in the context of the overall service and value provided. We believe this is important as AFMs are the agents of the investors in their funds; they are not just product providers. In CP17/18 we called this a consideration of ‘value for money’ (VfM). We have found that AFMs generally do not consider robustly whether they are delivering VfM, despite their existing obligations.
“1.15 For many retail and institutional investors, making informed investment decisions can be hard. To protect those investors that are not well placed to find better value themselves, we consulted on proposals to strengthen and clarify AFMs’ duty to act in the best interests of fund investors. Specifically, we said that they must assess the VfM of each fund against a non-exhaustive list of prescribed elements, conclude that each fund offers good VfM or take corrective action if it does not, and explain the assessment annually in a report made available to the public.”
Source: PS18/8, p. 5
In June 2020, the FCA published a consultation paper (CP) entitled CP20/9: Driving value for money in pensions. This document is pitched at a class of pension fund agents that does not have a direct equivalent in New Zealand (Independent Governance Committees/IGCs), but which sets out the regulator’s thinking in ways that could find New Zealand application. A principal concern of the CP is to address the issue of how consistency of VfM assessment can be standardized in practice. The CP states:
“4.8 In this CP, we propose to introduce a common definition of VfM and 3 elements that IGCs must take into account in a VfM assessment. This would be supplemented by further Handbook guidance about our expectations. This is designed to promote a consistent approach with TPR [The Pensions Regulator] for assessing VfM. Our proposals would apply to IGCs’ VfM assessment of investment pathways as well as DC [defined contribution] workplace pensions in accumulation.
“4.9 Based on our discussions with IGCs the 3 key elements we think contribute to VfM in pensions are:
- charges and costs,
- investment performance, and
- quality of service.
“4.10 We propose that IGCs are required to consider these elements as starting points when assessing VfM.
“4.11 We hope that these proposals can pave the way for the use of standardised metrics and/or benchmarks in initiatives such as the pensions dashboard or open finance. This may help at least the most engaged consumers to take greater control of their finances.”
(CP. P. 13)
In June 2021, the FCA published an updated version of the Chapter 6 Operating duties and responsibilities section COLL 6.6 Powers and duties of the scheme, the authorised fund manager, and the depositary of its Collective Investment Scheme Information Guide (COLL/COLLG) that forms part of its labyrinthine Handbook to state the rules, guidance and evidential provisions for AFMs with respect to VfM duties. The relevant items are COLL 6.6.19 R through to COLL 6.6.24 G. These items provide an example of an existing detailed regulatory system of accountability for fund manager VfM assessment of fees and services that is actually in current practice.
It should be noted that in the UK, AFMs and other entities responsible for assessing and reporting on VfM to investors are directly overseen by the FCA, whereas in New Zealand the regulatory infrastructure includes licensed Supervisors interposed as “frontline regulators” between the FMA and MIS Managers. But otherwise, apart from these structural differences, there are elements of the FCA’s approach to VfM that could fruitfully be applied in New Zealand.
Other VfM resources straight out of the UK
Apart from the FCA, other British state agencies have had input into serving the VfM reporting cause along the way including the Office of Fair Trading (OFT, closed in 2014) and The Pensions Regulator (TPR). Additionally, private sector entities such as the pension industry-led Cost Transparency Initiative (CTI), which is a project operated by the Pensions and Lifetime Savings Association (PLTA), and Deloitte UK’s Centre for Regulatory Strategy EMEA have produced excellent free resources to assist AFMs and others obligated to report VfM assessments with such work. In the rest of this article, we shall consider a sampling of these resources that might be of use within New Zealand’s regulatory environment for reporting VfM.
TPR has published an online guide called “5. Value for members ”(updated 2019) that is based upon a Codes of practice Code 13: Governance and administration of occupational trust-based schemes providing money purchase benefits. This how-to guide provides a detailed, step-by-step walk through to assist trustee boards to comply with British law concerning their duty to assess VfM in occupational trust based schemes providing money purchase benefits and comes as part of a set of six. TPR notes that:
“The guides aim to provide you with practical information, examples of approaches you could take and factors to consider. The guides are not intended to be prescriptive, though in some instances they state what we consider to be best practice. Often, the methods you choose to adopt will depend on the nature of your scheme and its membership.”
(TPR online guide number 5)
Although the online guide is written for a quite restricted audience, the advice provided on how to go about determining VfM for a workplace pension scheme could readily enough be translated into the context of a KiwiSaver scheme, for example, particularly concerning the value provided by scheme services to members, which might not always be exhaustively assessable by quantitative financial analysis techniques.