Transaction cost inquiry launched

A joint FCA/DWP call for evidence launched today on the disclosure of transaction cost information for workplace pension schemes will examine implicit costs such as bid/ask spreads and market impact costs.

The call for evidence is designed to assist independent governance committees (IGCs) and pension scheme trustees who will be required to report annually on the costs and charges involved in managing and investing the pension pots of scheme members.

The FCA and DWP are seeking views on how information about transaction costs should be reported in a standardised, comparable format. 

Evidence is being sought on what costs should be included in the transaction cost reporting, how such costs should be captured and reported and whether information about other factors that impact on investment return should also be provided.

It also asks how IGCs and trustees should receive costs information and whether additional disclosure requirements on other parties are necessary to enable this, as well as when, how and in what format members and/or other prescribed persons should receive transaction cost information.

The report seeks views on implicit costs as well as explicit costs, asking whether bid/ask spreads should be captured to contribute to transaction cost reporting data. It also asks for details about the advantages and disadvantages of reporting market impact data, where the market goes against a manager where an order that is too large to execute in a single transaction is executed in sections. Further implicit costs to be examined are missed trade opportunity costs, where the price moves against the manager before the order was completed, and delay costs, although the consultation admits that opportunity costs are unlikely to fall within the definition of a transaction cost as no transaction has taken place.

However, the consultation makes no specific reference to separating bundled research costs from the costs of execution.

The move marks a significant escalation of the ‘under the bonnet charges’ issue, which pensions minister Steve Webb had originally wanted excluded from the auto-enrolment charge cap.

Minister for Pensions Steve Webb says: “It’s important we understand all the charges that are placed directly and indirectly on pensions – and that pension schemes and trustees can present them to members in a clear and transparent way.

“There is a fear that the dark corners of the investment and pensions industry hold some nasty surprises. We have a duty to throw light for the first time on potential hidden charges – and restore faith and fairness in British pensions.”

FCA director of strategy and competition Christopher Woolard says: “Transaction costs and charges associated with workplace pension schemes have a direct impact on the value of people’s pension pots.

Trustees and IGCs of workplace pension schemes need to have clear and transparent information as part of assessing value for money offered by pension schemes. We want clarity and consistency across the market and that is why we are asking for views on how costs and charges information should be disclosed.

“Transaction costs and charges associated with workplace pension schemes have a direct impact on the value of people’s pension pots.

“Trustees and IGCs of workplace pension schemes need to have clear and transparent information as part of assessing value for money offered by pension schemes. We want clarity and consistency across the market and that is why we are asking for views on how costs and charges information should be disclosed.

Investment Association chief executive Daniel Godfrey says: “We are pleased that the areas of focus, and the findings of the supporting research, are aligned with the principles that we set out in our recent discussion paper on good disclosure. The call for evidence provides an opportunity for all parties, most importantly scheme decision-makers, to help shape the disclosure regime at a critical time for the UK pensions environment.
“We look forward to working further with UK and European regulators, and other stakeholders, as new requirements are developed in the coming months.”

Now: Pensions CEO Morten Nilsson says: ”Full transparency of costs and charges is essential in order to rebuild confidence in pension saving. Getting to the point where transaction costs can be published in a standardised and comparable format isn’t going to be easy but, despite what many in the industry claim, it can be done.

“It would have been preferable if this work had been completed sooner to help trustees and IGCs who are expected to gather information from April.”