LGPS eyes upgrade to cost transparency system

The LGPS Scheme Advisory Board has issued a request for information for options to upgrade its data compliance system. The current version, run by technology company Byhiras, was introduced in 2020 and allows users to view full asset manager fees in one place.

The request – published on the government’s Contract Finder services as an “early market engagement” – will inform any future procurement.

It comes as the Scheme Advisory Board’s Investment Committee has noted that reporting standards at some asset managers may have “slipped”.

In a recent meeting, members discussed the compliance rate with the LGPS Code of Transparency, finding that “while overall the compliance rate remained high, there were some investment managers whose standards had slipped”.

Among the areas that are of interest to the board are the potential for machine learning to be used in its data monitoring and compliance systems. In particular, the board said it was interested in “ideas for using machine learning to validate inputted data based on past trends”.

It is also seeking input on ways to improve the accuracy and timeliness of private markets cost data, and on how to ensure any system can interact with commercially available benchmarking tools.

Ona Ehimuan, pensions secretary for governance and digital at the Local Government Association, told Pensions Expert: “The outcome of the exercise remains to be seen but we are open to receiving responses from any supplier that believes they have information that could be of use in the board’s decision-making process about the future of the system, and we will be accepting responses until 6 August 2024.”

An unlevel playing field?
Data from ClearGlass Analytics, a company that specialises in asset management cost analysis, indicates that there is often a wide range of prices quoted to different defined benefit (DB) schemes for the same mandate.

The data, first reported by the Financial Times last week, suggested that pension schemes could be being overcharged by as much as £700 million a year when comparing the highest and lowest fee charged for the same mandates.

Chris Sier, founder and chair of ClearGlass and a long-standing advocate of transparency in asset management fees, told Pensions Expert that the differences stemmed from discounts given to individual clients and different fee deals negotiated with the various major consultants.

In one example, Sier explained that for one UK passive equity fund, some investors were paying 10 times less than others.

“Then, the problem becomes one not of ‘value for money’ but of treating customers fairly,” he said.

Sier – who led the establishment of the Code of Transparency and the broader Cost Transparency Initiative – said any new system for the LGPS Code of Transparency had to be robust and with consequences for non-compliance, such as loss of mandates or reporting to the Financial Conduct Authority.

“You have to be utterly relentless,” he added. “There have to be consequences for non-compliance – there’s nothing worse for an asset manager than reputational damage.”

The Code of Transparency
The LGPS Code of Transparency was introduced in 2017 after a cross-industry working group investigated how to improve transparency of asset management costs. The group drew up reporting templates that are now used across the LGPS and by private sector schemes through the Cost Transparency Initiative.

There are currently 156 service providers signed up to the Cost Transparency Initiative, according to the Scheme Advisory Board’s website.

According to Byhiras’ website, at the start of last year the system was updated to support quarterly and biannual reporting from asset managers. The company said LGPS funds were “increasingly seeking more frequent and useful data” on investment costs.