UK pension regulators seek views on consistent, comparable transaction costs reporting

Both the Financial Conduct Authority (FCA), which regulates contract-based pension schemes, and the Department of Work and Pensions (DWP), which produces the regulations governing trust-based schemes, have asked the UK pensions industry for input on what costs should be included in transaction cost reporting and how these should be recorded. From April, IGCs and scheme trustees will be required to report annually on the costs and charges of managing and investing scheme members' pension savings.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that mandatory reporting of transaction costs would make it easier for pension savers to understand what their money was being used for.

"Creating a greater awareness of the true cost of investment is a really important step for savers," he said. "It will help trustees and IGCs assess whether a particular strategy is capable of making up the drag on performance created by transaction costs. A better understanding of transaction costs will also help to remove the 'blindfold' from those who intend to self-select an investment rather than stick with the default."

However, he said that better understanding of the role played by asset managers was needed too, "so that we do not judge their value on transaction costs alone".

Transaction costs are those that result from the trading necessary to invest the assets paid into a pension scheme, and are usually deducted directly from the pension fund. They can include the commission paid to brokers, bank transaction charges and the stamp duty paid when a fund manager uses a pension pot to buy or sell shares.

A 0.75% cap on charges on workplace pensions comes into effect on 6 April. Although this cap will not at this stage include transaction costs, trustees and IGCs will instead be required to monitor these as part of new governance standards, both to help employers offering DC schemes to see exactly how much they are paying the provider for asset management services and to enable pension scheme members to see that they are getting value for money. The government intends to review the impact of the charge cap in 2017.

Steve Webb, the pensions minister, said that the new disclosure requirements would "throw light for the first time on potential hidden charges". As part of the consultation exercise, which closes on 4 May, the government and FCA are seeking evidence on what costs should be included in the transaction cost report and how such costs should be captured and reported. The consultation also asks whether information about other factors that impact on investment return should also be included, along with when, how and in what format scheme members should be given this information.

The FCA has also published its final rules implementing the charge cap on default funds for automatic enrolment, as well as banning certain charging practices including consultancy charges and commission. The DWP will publish similar rules for occupational schemes in the form of regulations, for which the Pensions Regulator will be responsible, shortly. Rules for both types of scheme will come into force on 6 April.

Commenting on the FCA's final rules, pensions expert Tom Barton said that it was "encouraging" to see that the FCA had received consistent feedback on most of its draft rules.

"This means that the FCA's measures should be workable in most cases," he said.

"To further assist with successful implementation, providers will have some flexibility in their charge cap compliance assessment. This is to be welcomed, since an overly prescriptive methodology could be counter-productive. Although it is also helpful to have confirmation that neither the FCA nor the PRA have a policy objective to increase current capital requirements for underwriting life expense risk, providers are still left to contend with a grey area," he said.