Investment - Articles - Life companies require more analysis of investment return


 Historically life companies have reported their unit-linked fund performance based on net (of charges) investment performance statistics, while reporting charges have been primarily based on annual management charge percentages. However, new regulations (e.g. on workplace pensions and PRIIPS) are set to change all this and Financial Risk Solutions (FRS) is of the view that in order for Independent Governance Committees (IGC) to meet their regulatory requirements, life companies will need to provide them with more detailed information than what is currently provided.

 Background:

 The funds industry has already embraced the need for change with the revised Statement of Recommended Practices (SORP) for the financial statements of UK authorised funds in May 2014, which requires disclosure on performance per unit, ongoing charges per unit and transactions costs per unit. Here, charge disclosure is clearly set in the context of fund performance. Therefore, for life companies offering workplace pensions, this will mean more comprehensive information on fund performance to be supplied to their independent governance committees (IGCs), because:

 • IGCs will be required to assess the level of charges borne by scheme members and all costs (direct and indirect) incurred in relation to transaction
 • IGCs will need to assess whether the characteristics and net performance of all investment strategies (including non-default investment strategies) are regularly reviewed by firms, to ensure alignment with the interests of scheme members
 • The FCA will expect IGCs to be able to challenge firms on the value for money offered by fund managers, brokers, and other third-party providers.

 Charge information is required on a look-through basis as set out in the DWP’s Command Paper “Better workplace pensions” of March 2014, with its vision of full transparency of all costs and charges throughout the value chain. Whilst the FCA’s Consultation Paper CP14/24 on charges in workplace pensions doesn’t specifically mention look-through (and the definition of administration charge therein might require some tweaking to ensure that look-through is appropriately dealt with), it is our understanding that the look-through data requirements would still apply. Therefore, we are of the view that that the type of information required by IGCs from life companies should include:

 • The net investment return of x% in the period resulted from gross investment return of (x+y) % and expenses of y%
 • Further analysis of the y% expenses by expense type e.g. AMCs, transactions costs, service provider fees and other expense groupings.

 Having this information should enable IGCs to address key questions such as:

 • What proportion of the total gross investment return do the investors receive?
 • What is the level of transaction costs in the fund?
 • What is the level of the various administration expenses in the fund?
 • How do the component parts vary by fund (and over time) and across firms?
 • What are the relative merits of active and passive trading strategies for a fund?

 Indeed, this level of fund performance detail could be extended beyond workplace pensions to encompass all investment funds provided by firms.
  

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