2. How did you start your initiative? I got involved in the project via APG. Initially, I was a co-author of recommendations on administrative costs and author of a further elaboration on asset management costs. I wrote two treatises on pension cost management that were published by the Dutch pension federation in 2011 and 2012. By publishing the booklets the federation avoided formal legislation, proving the industry could self-regulate, and the Dutch central bank, our pension supervisor, adopted the cost definitions. Now countries like Italy, Belgium, Australia and Sweden are very interested and asking me questions about these standards. Our mutual fund and insurance industries may be next.
3. What costs did you target? We look at pension management costs and asset management costs. We do not look at asset management costs separately but always in relation to the return and the risks. At the end its net return thats important. We looked at management costs of the investments, consisting of costs of fiduciary management, portfolio management and performance fees, as well as custody costs. Other costs include advisory, administrative, and appraisal or accounting-type costs. Within asset management little or no attention has been paid to the cost of best execution and portfolio turnover. Transaction costs have not been transparent worldwide, especially the costs of fixed-income and derivatives transactions; at this moment, a rough estimation using defaults is sufficient. Its a bit tough, but were changing that now in the Netherlands.
4. Which pension costs are the toughest to surface? A lot of costs were hidden in the NAV [net asset value] reporting. Funds of funds, in hedge funds and private equity, are another place you only see net fees. There are a lot of cost levels underneath them. Asset managers cant get away with presenting only net returns anymore. Private partnerships will have to step up their reporting.
5. What are the challenges of implementing a standardized cost reporting system? Before the 2011 annual pension reports were released in April-May 2012, I met with the Dutch press to explain that 80 basis points in Pension Fund A are not necessarily greater than 40 basis points in Fund B. We didnt want reporters to just compare the costs without taking into account the risk profile, asset allocation and cost drivers like active or passive, internal or external management. Risks and returns of different assets are the central issues. Costs follow from these. You must always look at cost in relation to risk and return.