My guest on the podcast today holds something of a unique position in the world of pensions. He’s been a facilitator, networker, marketer, project manager and campaigner.
He’s been quoted as saying: “To get a pearl you need a bit of grit,” “I see myself as the bit of grit around which the pearl is created. I seem to have the ability to be the catalyst that helps others to do what they can do.”
Andy Agathangelou is Founding Chairman of the Transparency Task Force.
As you’ll hear in this episode, Andy has been involved in a number of collaborative communities, starting with the Association of Member Nominated Trustees, and more recently the Chartered Institute of Payroll Professionals.
He created and led the Friends of Automatic Enrollment Group, which had 1,400 members across the UK. Now he’s started the Transparency Task Force and is leading a mission to improve levels of transparency across pension schemes.
In this episode of Informed Choice Radio, I speak to Andy about the purpose behind the Transparency Task Force, why now is such a relevant time for this transparency push, the hidden charges being paid by pension scheme members, whether investors are the only losers from a lack of transparency, how the UK compares to other countries, and much more.
Welcome to Transparency task Force with Andy Agathangelou, in episode 183 of Informed Choice Radio.
Some questions I ask:
-Why was Transparency Task Force originally formed?
-What makes now such a relevant time for this transparency push?
-Can you describe some of the hidden charges paid by pension scheme members?
-Are pension scheme members the only losers from opaque and high charges?
-How does the UK fare on matters of transparency compared to other countries?
-Will the sector clean up its act following recent regulatory scrutiny?
-What steps should pension providers be taking?
Useful links mentioned in this episode:
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Martin: Andy, thank you for joining us on Informed Choice Radio today. Could you start by telling our listeners a little bit about you and about the Transparency Task Force? Why was it formed, and what’s its purpose?
Andy: Okay. My background, I started off in financial services way, way back in 1986. I worked in both a tide and an ISA-type environment. Most of my career has been in sales, marketing, business development, management of some kind and so on. Over the years, I’ve learnt that what are the best possible ways to bring about change in the marketplaces through collaboration? I really like and enjoy getting people together who have a similar point of view about market issues, and who have a motivation to try to fix the issues that they see.
In the last six years, I’ve found myself being involved with a number of collaborative communities. The first of these was the Association of Member Nominated Trustees, which I helped to create with a consultancy, a firm of professional trustees called Pitmans Trustees. The MD there, Richard Butcher, and I conceived and created the Association of Member Nominated Trustees. It’s since gone on to do some pretty good things.
I was also working for a client of mine, the Chartered Institute of Payroll Professionals. We realised that there was not one group bringing all market participants together that were involved in the auto-enrollment space. That led to me creating and leading the Friends of Automatic Enrollment Group which, at its peak, had about 1400 members around the UK. I’ve got a bit of a track record, if you like, in terms of bringing like-minded people together who want to drive change into the market.
I’ve got very vivid recollection of how the Transparency Task Force first started. I was having a meeting with Dr Chris Sier and Con Keating. Dr Chris Sier was explaining that in Holland, the levels of transparency are much, much greater than they are here in the UK particularly in relation to workplace pensions and the costs around workplace pensions. The conversation developed, and I figured it would make sense to attempt to bring together people within the UK market that felt strongly that our financial services sector was too opaque. That led to a meeting that took place on the 6th May 2015, I remember it very, very well.
We had about 23, 24 people in the room, senior people from various parts of the industry. Trade bodies, professional associations, the Investment Association were there, some consulting lawyers etc, the TUC and others. We found ourselves all agreeing on a few things. They were, first of all, that the financial services sector has a habit of harming itself when it comes to reputational damage. The sector has a predisposition to self-harm. Of course, that’s obvious to see. There have been many misselling scandals over the years, all sorts of things that shouldn’t have happened that have. All of it eats away at the confidence the market has in the financial services sector.
We also agreed that none of the existing trade bodies or professional associations would want to focus particularly on this reputational damage issue. Therefore, something new and fresh would probably be quite useful. We also agreed that unless something constructive was done, this reputational problem that the industry, as a whole, has would just get worse and worse and worse. Therefore, that we should try to do something about it.
Off the back of that meeting, Martin, I created the Transparency Task Force which since May 2015 has become quite a force, I’d like to think, in bringing together professionally minded participants in the financial services market, including IFAs, who want the reputation of the sector to be improved, who want consumers to be treated respectfully, openly, transparently, who want the market to operate more efficiently because it would have greater access to relevant, intelligible information about costs, charges, risks and all sorts of other issues as well that have often been clouded by a shroud of opacity for all sorts of reasons. That’s how it all started.
Martin: What makes now such a relevant time for this transparency push, particularly for pensions? Why has transparency become such a timely and hot topic?
Andy: Okay. The way I see it is that for decades, we’ve had the luxury of relatively high returns in the market. Stock markets had been doing very, very well for quite a long period of time. If you’re getting, let’s say, double digit growth and your costs or charges are, let’s say, two or 3% a year, for argument’s sake, then you can live with that. Whilst the charges are high compared to the high levels of return, it all works.
The market’s changed considerably. We now are in, and should expect in the future, to be in a relatively low returns market. If you’re getting, let’s say for argument’s sake, three, four, 5% returns and your costs are two or 3%, the proportion of your returns that represent cost is absolutely huge. Because of the shift from high returns market to low returns market that many people are experiencing, costs become incredibly, incredibly important.
Frankly, the longer the term of your investing, the more important those costs become. To throw some numbers into this, if a 20 year old invests until age 65 into a pension scheme, if the gross market return, in other words the pre-cost return, is 5% a year and the total cost of investing is 2% a year that it works out that 42.55% of his or her pension fund will be eaten up in charges, in one way or another. That’s a great proportion.
For investments generally, costs and charges are important. Einstein is reputed to have commented that the most powerful force in the universe is compound interest. Of course, we normally refer to that point when talking about how compound interest benefits long-term investing. Of course, it does. We all understand that. It’s also true in terms of the corrosive effect of costs over time. Pensions are particularly sensitive to higher than necessary costs.
Martin: Of course, it’s not just about high costs, high charges. It’s also about hidden charges, so the charges investors are not aware they’re paying. Which hidden charges are pension scheme members, and also investors, facing these days?
Andy: Yeah. These are good points. These are good points to raise. Before I go into the answer to that particular question, I think it’s fair to say that many of these hidden costs, for want of a better phrase, are hidden because they hide under complexity, obfuscation. They’re under this shroud of opacity that makes it really quite difficult to get your head around exactly what those costs are. Some might say that parts of the industry almost deliberately hide costs around opacity and obfuscation, almost deliberately. I’m not really too sure which of the two is true. I guess it depends upon how sceptical you are.
Certainly if we look at the types of costs that can, under some circumstances, represent a great deal of money for the investor, we’re talking about costs such as portfolio turnover costs, which is where the asset manager trades. Of course, an asset manager should trade, needs to trade. Buying and selling is what it’s all about. There’s evidence to suggest that sometimes that trading is unnecessarily frequent, to the point of it being detrimental to the consumer. The only person that seems to be benefiting there would be the asset manager who is incurring charges as a result of that activity. Transaction costs, portfolio turnover costs, these are the sorts of things that actually can be quite significant.
Martin: If costs are hidden, is there less of an incentive to actually reduce them over time?
Andy: That’s absolutely right Martin, that’s a key point. If you have an industry that actually benefits from opacity, and I’m not meaning to be discourteous here, but the fact of the matter is that if people aren’t aware of these costs, if they are in some way invisible, then where is the incentive to actually manage them down? To actually mitigate them, to optimise them. There really isn’t one. What we believe will happen, almost quite naturally, is that as we shine a light on costs and charges, they will become more visible.
People will notice, people will realise that these costs and charges are at the expense of the consumer, the investor. Market forces will start to work properly, and the invisible hand on the market will create a more efficient, a more competitive market, a more fair market. We expect that to bring costs down to everybody’s benefit.
I’d just like to add one caveat to all of that. Our mission at the Transparency Task Force is not to make everything cheap, because we understand the difference between cheapness and value. Some investment strategies are inherently more expensive, but they have the potential to deliver fantastic returns. It’s not about cost minimization, it’s about optimising costs, making sure the costs are as good as they can be for the type of investment and the type of investment strategy that’s at play.
Martin: Now clearly pension scheme members, investors are possibly the victims of an environment where costs and charges are not transparent. Are they the only losers from that environment or is it also damaging to pension providers, to investment managers?
Andy: I think you’ve, again, hit on a very important point there. One of the most important things in the whole market is confidence in the market. If we have a marketplace, a public, that is becoming increasingly sceptical about the way the financial services works, about what motivates it, about how it sees its purpose, then what we’ll have is a marketplace that’s reluctant to engage. It’s a marketplace that would be reluctant to buy.
It makes it difficult for good IFAs, good financial planners and good advisors to actually get the message across that you should be putting more into your pension. You should be putting more into your ISA. You should be protecting your family’s lifestyle properly through relevant insurance and protection products. All of those things become difficult if you have a marketplace that doesn’t trust. What we see very, very clearly, Martin, is a correlation between transparency, truthfulness and trustworthiness. If you can be more transparent, you’ll be seen to be more truthful, you’ll be seen to be more trustworthy.
If you want a marketplace that trusts the sector and trusts the industry, we really do have to work ever so hard at this reputational issue that we have, and make sure that the public can rightly trust us. Without that, then everybody loses. The entire sector loses. It would be far better, for example, if, let’s say, we could see somehow over time halve the cost of investment management, for example, but in the process double or triple or quadruple the amounts being invested. Consumers want value for money. Many of them don’t think they’re getting it at the moment. Many of them see the financial services sector in general terms, in asset management, insurance, risk management, they see it in a jaundiced way. They see it under a bit of a shadow.
Every time there’s some kind of a misselling scandal or some kind of a banking scandal, somebody being taken to court for some reason or another, it all adds to this sense of is this really a marketplace that I feel comfortable with? Is this really a marketplace I feel I can trust? People end up putting money into buy-for-lets instead or under the pillow or they don’t invest at all. The single biggest competition that any advisor or IFA has isn’t alternative investments or alternative investment strategies, it’s the competition of actually money being spent now rather than saved for tomorrow. This whole deferred gratification idea only makes sense if people feel confident that if they put money away for the long-term, it will leave them better off for the future.
Unless people believe that, there’s a risk that they’ll spend the money today on something they don’t need, rather than having it available in the future when they do need it. How else can we explain the woefully low levels of savings in our country, and the woefully low level of pension planning in our country? The very fact that we had to use legislation through automatic enrollments to make people join pension schemes is, frankly, an admission to failure. I genuinely, genuinely think that some of that failure is down to a lack of trust and some of that lack of trust is down to a lack of transparency over decades.
Martin: You mentioned earlier in your conversations which prompted you to set up the Transparency Task Force, Dr Chris Sier making that reference to Holland, where transparency levels are so much greater than the UK. How does the UK fare on these issues of transparency in comparison to other countries globally?
Andy: That’s a really interesting question. Without a doubt, there are some countries, perhaps Holland, Holland is certainly one of them. The Dutch Association of Pension Funds have done some terrific work over the last five, six years to mandate the transparency. In other words, to make it a legislative requirement that pension schemes are told costs properly by asset managers and others. They’ve really done a superb piece of work. Also Denmark, Norway and other countries too are further ahead than we are.
Interestingly, the Transparency Task Force has attracted volunteers. There are six teams of volunteers. Altogether we have about 160 odd people who are working on various activities to do with encouraging greater transparency in the market. One of those teams is the International Best Practise team. That was formed because Thomas Wyffels, from the Dutch Association of Pension Funds, flew over to our very first conference in October 2015. He told us about how things work in Holland. We were all very impressed. That made us realise that you know what? The UK really can learn a great deal from other countries, and maybe there are other countries that can also learn from the UK.
That led to an idea, a really simple idea. It’s turned out to be a pretty good one. The idea is to have a global transparency index whereby different countries are assessed using quantitative and qualitative analysis to evidence how transparent they are. What that’s going to do, Martin, is it’s going to mean that countries that aren’t very transparent can very quickly and very easily learn from those that are. Even countries like the UK can learn better about what’s happening in Holland, Denmark, Norway and other countries that we can also benefit from.
At some point in time, I’ll be able to give you a more scientific answer to your question about how do we fare compared to other countries, because we will literally have a global transparency index. That’s a project that’s one of the most important ones that we’re involved with at the moment.
Martin: Clearly the regulator, the Financial Conduct Authority, has an important role to play with transparency and making sure that the firms it regulates follow best practise. Last year, we saw them publish their interim report and its asset management study which was, I think fair to say, quite tough on investment managers and also the charges they levy. Do you think that the sector will now clean up its act as a result of any increased regulatory attention?
Andy: Yes, I do. Yes, I do. I think there’s a wonderful phrase which is that, “Sunlight is the best disinfectant.” The FCA has effectively shone a great big bright light on the way that the industry works, particularly the asset management industry, and the bright light has led them to see market behaviours and market practises that are not great. It’s forced them to ask all sorts of very, very challenging questions, some of which are particularly complex. Take, for example, active vs passive. Active versus passive investing, that’s not a simple straightforward issue. There are many factors involved with the relative pros and cons of active management versus passive investing.
Only by shining a light on these issues have you got a chance to actually drive out through proper research, proper analysis, proper scrutiny, what is the best thing for the consumer? Yeah, I’m absolutely convinced that the FCA’s work is a bit of a seismic shift in the way that the market is being regulated. They’ve been pretty tough, they’ve been pretty blunt. They’re pretty direct about it all. As you’ll be aware, they’re even looking to potentially refer the entire investment consulting industry to the Competition and Markets Authority which, if anything, just evidences how deep their concerns are.
I’m absolutely convinced that every part of the value chain within financial services is paying attention to what the FCA are looking at. All parties are going to become highly motivated to clean up their act, to become more transparent and, ultimately, think about putting the needs and the importance of the consumer first and foremost. That’s potentially, Martin, the single biggest improvement. If the marketplace, as a whole, were able to adopt some kind of philosophy whereby the interests of the client were put first and foremost, then that would be a tremendous step forward.
It’s just frustrating that not too long ago, the Investment Association were looking to do exactly that. For various reasons, we probably haven’t got time to go into right now, they decided to step back from the idea of putting the interests of the client first. I know that many, many IFAs, many of whom I know, have always, always worked in that way. It’s a case of encouraging the rest of the market to put the interests of the client first and foremost as well.
Martin: Absolutely. You’ve got a particular interest I know in automatic enrollment. You mentioned already about how we’ve had to use automatic enrollment to get people engaged in saving for their retirement for the future. What do you think the impact of automatic enrollment becoming so widespread in the UK will be on these transparency issues?
Andy: It’s going to act as a catalyst. It’s going to speed up the rate at which we move to greater transparency. The reasons for that, I think, is because if people are automatically being enrolled into a pension scheme where they’ve literally not had to do anything whatsoever to become a member of that pension scheme, hence auto-enrollment, then the responsibility on the industry to take care of those people, and those people’s monies and savings, better, as best as they possibly can, is even greater. I think automatic enrollment puts even more responsibility on looking after the welfare of the saver and the investor as best as we possibly can.
Things like charges on default schemes are really, really important. Things like achieving good outcomes is really, really important. The last thing that any of us want, and I must admit I’m a bit concerned about this point, the last thing that any of us want is a mass exodus from auto-enrolled schemes in years to come, because savers perceive that they’ve not had good value for money. Perhaps low returns and high charges or some other such factors. We really only have one chance to get this right. It’s absolutely imperative the people that have been automatically enrolled into pension schemes are able to look at their statements at two, three, four, five, 10 years from now, Martin, and think yeah, this makes sense. I’m really pleased I’m in the scheme. I want to carry on being in it.
If they don’t see that, then there are many, many other options about what they can do with their money, in terms of buy-to-lets etc etc. The last thing that we want is lots of people leaving automatically enrolled pension schemes because where do we go from there? We’d only have one place to go, and that would be compulsion. There are pros and cons around compulsion. From my point of view, that really is just a last resort strategy that should only be used if we really, really have to.
Martin: Thinking then to the future, what would you like to see specifically from pension providers, from asset managers to improve levels of transparency? What steps should they be taking?
Andy: That’s a great question. I think the industry, as a whole, all of us, everybody involved needs to buy into the idea that the interests of the consumer ought to be put first and foremost. We ought to be looking at pretty much every decision we make within the industry, regardless of what part of the industry we’re in, we ought to be looking at it from the point of view of what needs to happen to drive out the best outcomes possible for the saver, for the investor, for the consumer? In the belief that if we look after the consumer, then the market will become healthy. It will become efficient. It will become competitive. Then in the medium to long-term, all parties will benefit.
My criticism, I guess, is that sometimes we don’t think like that. We ask ourselves what’s good for the asset management industry, what’s good for the pensions industry, what’s good for the savings market. That’s the wrong place to start, as far as I’m concerned. We should be consistently client-centric. In other words, the client should be at the very epicentre of all of our decision making.
Asset managers, pension providers, insurance companies, everybody needs to look at the commercial issues they have but answer those commercial issues that they’ve got, from the perspective of what’s best for the consumer, how can we best serve the consumer, how can we drive profitable, safe, sustainable revenue growth as a consequence of doing a brilliant job in the marketplace? Not as a consequence of capitalising on the complexity and the obfuscation that most certainly does exist within the system currently.
We’re talking about, I guess, a bit of a shift in thinking, a shift in attitude, a shift in responsibility. This goes back to something that David Pitt-Watson talks about so brilliantly when he talks about the importance of understanding what the purpose of the financial services industry is. Until we all understand that the purpose of the financial services industry is to support and protect the interests of the consumer that’s using that industry, then we always end up with some kind of conflicted thinking, some kind of confused thinking and the kind of thinking that results in misselling scandals and all sorts of other things that are going on.
Martin: Andy, thank you so much for your time today, for being a guest on Informed Choice Radio. Before you go, where can our listeners find out a bit more about you and also the work of the Transparency Task Force?
Andy: The easiest way frankly is just to email me at firstname.lastname@example.org. We haven’t even got enough funds at the moment to have a proper website. It’s best just to pop me an email. I’d be delighted to hear from any of your listeners if they’d like to know more about what we’re doing, and ideally if they’d like to become part of the solution as well.
Martin : Thank you very much.
Andy: Thank you very much Martin. That’s been great, thank you.