Defined benefit schemes should place more emphasis on cost transparency, Barnett Waddingham associate Sonia Kataora has urged.

Kataora said that although DB trustees aren’t required to disclose costs like their defined contribution counterparts, it would help them to identify portfolio leakages in a time where cash is becoming increasingly important.

Some estimates suggest transaction costs account for as much as a third of what leaks from your investment portfolio, in terms of fees and costs.

“It’s unlikely for DB trustees to have the same [financial reporting] requirements at least immediately, and not least because DB members may not have the same interest in the underlying investments than a DC member would”, said Kataora.

She argues that trustees will nevertheless be interested in knowing these costs to analyse fund managers' trading efficiency or when they are reselecting fund managers.

Kataora said: “A [cost disclosure] framework has already been adopted by the defined benefit Local Government Pension Scheme and has been signed by a number of major fund managers, potentially making more widespread adoption on cost disclosure much easier.”

Cost disclosure is particularly important as DB schemes start talking about cash a lot more and Kataora believes schemes must use liquid instruments to manage cash flow requirements more effectively.

She added: “First off, schemes are a lot more cash flow negative, so they will clearly have to make more of their assets available for pensioner payments.

“As cash is becoming more important to pension schemes, it is potentially becoming harder and more expensive to access. So as DC members are being advised to think about cash flow planning, that will become increasingly important for DB schemes too.”

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