The Pensions Institute at Cass Business School has called for active asset managers to disclose all “visible and hidden” costs ultimately borne by investors, citing research showing up to 85 per cent of a fund’s total transaction costs can be concealed.

The research centre argues in a white paper that visible and hidden cash costs could be relatively straightforward to disclose, while hidden non-cash costs could be more challenging to calculate.

A staggered approach to revealing all costs is therefore suggested, with the indirect, non-cash costs to be disclosed once IT systems capable of capturing the data are put in place.

Director of the Pensions Institute and author of the white paper David Blake said no good reasons have been put forward for why all the costs of investment management should not be fully disclosed.

“There is little point in requiring transparency where the reported measure for ‘costs’ does not include all of the costs, or in the short-term, as many costs as could currently be reported on an efficient basis,” Blake said.

“If total investment costs are not ultimately disclosed in full, how can there ever be an effective and meaningful cap on charges, and how can active investment managers ever asses their true value added?”

Last week Local Government Minister Brandon Lewis argued active management is not delivering value for money for local government schemes, and they could save up to £790m a year in fees by using passive strategies.

The Pensions Institute’s white paper divides costs into visible explicit costs, and hidden implicit costs. Quoted research from the Plexus Group identified commissions, taxes, fees, custodial charges, and acquisition costs as explicit costs accounting for 15 to 20 per cent of overall charges.

Implicit costs such as bid-ask spread, transaction costs in underlying funds, undisclosed revenue, market impact, information leakage, market exposure, market timing costs, and delay costs could account for 80 to 85 per cent of costs, the research found.

The report states that initially investment managers should be required to report all explicit costs.

Blake said the government should announce implicit costs will be investigated within a set period with proposed solutions subject to a resulting cost-benefit analysis.

Investment Management Association chief executive Daniel Godfrey said the IMA has already worked with government and regulators to implement a programme to improve transparency. While the work focuses on investment funds, he said, it could be transposed to the pensions environment.

Voluntary guidance published in 2012 comprised the first stage of the programme, recommending IMA members use the Ongoing Charges Figure rather than the Annual Management Charge.

“This is forward-looking, uses a standardised methodology and provides the best indicator of the charges a consumer will pay for the fund. We would encourage the entire market, including the media, to refer to the OCF,” Godrey said.

Further work has focused on pounds and pence per unit disclosure of all costs paid by a fund, including all direct transaction costs, in the context of performance.

“The third stage is to look further at how to account for indirect costs, and also to reach a consistent basis for the calculation and disclosure of portfolio turnover rates so that clients can better understand the relevant investment processes. The fourth stage is an ongoing review of existing disclosure codes to ensure that specific, costed disclosure is made to clients of the split in dealing commissions between execution and research. These three stages are all based on historic accountability,” Godfrey said.

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