Standardised transaction costs reporting will help pension scheme value for money assessment, expert says

Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, was commenting on proposals published by the Financial Conduct Authority (FCA), and open for consultation until 4 January 2017. IGCs and trustees of workplace pension schemes are currently required to request and report on transaction costs as far as they are able, but asset managers do not need to fully disclose these costs in a standardised form.

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.

The FCA has proposed that asset managers become subject to a general duty to disclose aggregate transaction costs to pension schemes that invest in their funds, either directly or indirectly; as well as an additional duty to provide a breakdown of transaction costs on request. It has also proposed a standardised methodology for evaluating transaction costs known as the 'slippage' cost, which would compare the price at which a transaction was actually executed with the price when the order to make that transaction entered the market.

Governance standards for both contract-based and trust-based workplace pension schemes require annual reports of the costs and charges of managing and investing scheme members' pension savings. The regulations introducing those governance standards also imposed a 0.75% cap on member-borne management charges on default funds in DC schemes used for automatic enrolment, which the government has suggested could be extended to cover transaction costs at a later date.

Barton, a pensions expert at Pinsent Masons, said that the prospect of a future charge cap meant that it was important for the FCA to get the design of its proposed disclosure rules right first time.

"The introduction of a standard form of disclosure of transaction costs will help trustees and IGCs to make a more complete assessment of value for money," he said.

"There is likely to be some debate around whether the calculation of the costs is appropriate, or at least appropriate to a wide range of asset classes. It's important to get this right, since the disclosure could determine buying and investment decisions, and even form the basis of a cap on transaction costs," he said.

According to the FCA, disclosure should not require "complicated calculations" or estimates of asset managers. The consultation paper sets out how its proposals would apply to various asset classes including currencies, derivatives and illiquid assets, based on "data that are widely available for most assets and can be independently verified".

Firms that are unable to provide information about transaction costs for all of the assets in a scheme would be required to clearly disclose this to the IGC or trustees, along with an explanation of why it has not been possible to provide this information, the FCA said.

"IGCs are already seeking to make pension schemes work better for their members," said Christopher Woolard, the FCA's executive director of strategy and competition; who added that the proposals would "allow IGCs to see fully the transaction costs that their funds pay and enable them to make better decisions about how they get value for money for their members".