FCA confirms 'slippage' pension transaction costs reporting method

The new requirement will help the trustees and independent governance committees (IGCs) of workplace pension schemes to comply with their duty to ensure that the scheme provides value for money to members, the FCA said.

The FCA has set out a standardised transaction costs reporting method in a new policy statement (38-page / 576KB PDF). Fund managers will be required to use the 'slippage cost' methodology, which calculates transaction costs as the difference between the price at which the transaction was actually executed and the price when the order to make that transaction entered the market.

Respondents to an FCA consultation on its proposals were "divided" about the use of this methodology, the regulator said. However, the FCA believes that it is "preferable to alternative approaches" to calculating transaction costs, including measures based on spread; as well as being consistent with the method used to calculate transaction costs under the EU's PRIIPs and MiFID II regimes, according to the policy statement.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, described the new requirement as "another important step in the development of the charges and governance regime for DC [defined contribution] pension schemes".

"The requirement for DC trustees and IGCs to assess the value of transaction costs is over two years old," he said. "However, without a statutory obligation on managers to provide the information, DC trustees and IGCs have found the information hard to come by. Even where the information is available, it's hard to assess without consistent disclosure standards."

"However, it's fair to say that the 'slippage costs' method wasn't universally favoured, with some responses going as far as saying it was flawed. It may also be hard for existing information and reporting systems to cope with the new standardisation. Whatever the case, managers will be required to play by the new rules and deliver transaction cost information in a fairly well standardised form from pretty much the start of the New Year – and those responsible for governance will feel better equipped to deliver on statutory duties," he said.

IGCs and trustees of workplace pension schemes are currently required to request and report on transaction costs as far as they are able. However, until now, fund managers have not been subject to any requirement to fully disclose these costs in a standardised form.

The new rules, which will come into force on 3 January 2018, will require fund managers to provide details of 'slippage' transaction costs to pension schemes on request, along with information about administration charges and appropriate contextual information. If the manager does not have this information it must seek it from the appropriate firm which, if FCA authorised, will also be subject to a requirement to provide the information.

Firms must disclose the transaction costs in response to a request, as well as a breakdown of the "identifiable elements" of those costs, according to the FCA's final rules. Transaction costs, which result from the trading necessary to invest the assets paid into a pension scheme, can incorporate a range of costs including commission paid to brokers, bank transaction charges and stamp duty paid when a fund manager uses a pension pot to buy or sell shares.

The new rules would improve transparency over costs for both pension schemes and their members, the FCA said.

"By setting out a methodology for calculating transaction costs in a consistent way, and by placing obligations on firms to respond to requests for information about costs, we are building the foundations that will enable the governance bodies of these schemes to meet their obligations to review and consider the value for money of transaction costs and administration charges," it said.