New DC charge transparency rules unveiled

Workplace DC pension schemes and FCA-regulated entities they contract with will be required to give detailed information on transaction costs from the beginning of next year, under new rules published today.

An FCA policy statement issued today says that from 3 January 2018 pension schemes must supply responses to requests from their governance body for information about transaction costs calculated according to the ‘slippage cost’ methodology, information about administration charges and other ‘appropriate contextual information’. The FCA says the requirements will enable governance bodies to perform their obligations with regard to ensuring schemes offer value for money.

The methodology for calculating transaction costs matches that required for products subject to the Packaged Retail and Insurance-based Investments (PRIIPs) Regulation, aligning the FCA’s final rules with work firms will already be required to do and ensuring consistency with firms’ European obligations says the FCA.

The slippage cost methodology calculates transaction costs as the difference between the price at which a transaction was executed, and the price when the order to transact was transmitted to a third-party – the arrival price. This approach was developed by academics in the 1980s to assess transaction costs and it has been widely used in the investment industry for over 20 years. It identifies the loss of value, from the consumer’s perspective, that happens when a transaction takes place. The FCA argues it includes a comprehensive measure of implicit costs, providing an overall picture of the costs incurred and reducing the risk that some costs remain hidden.

The FCA rejected representations from some asset managers that transaction costs should be calculated based on spreads as it says there is no standardised way of calculating a spread, and it is concerned that transparency and scrutiny of funds that are not dual-priced authorised funds is not guaranteed.

The DWP is planning to consult on proposals as to how costs and charges relating to occupational pension schemes should be published and disclosed to scheme members. The FCA says it will consult in the second quarter of 2018 on proposals to achieve similar outcomes for the workplace personal pension schemes it regulates.

Two new pieces of European Union (EU) legislation will come in effect at the start of 2018. MiFID II will require those providing investment services, including advisers and fund supermarkets, to disclose information about all costs and charges to consumers, both prior to sale and annually on an ongoing basis. PRIIPs will require investment product manufacturers to disclose information about indirect costs such as transaction costs. Neither MiFID II nor PRIIPs directly applies to workplace DC pensions, although some firms providing services to workplace pension schemes will fall within the scope of MiFID II.

Transparency Task Force founding chair Andy Agathangelou says: “Valiant volunteers within the TTF’s Costs & Charges Team actively engaged with the FCA’s consultation team on this important issue and I am very pleased to see that the FCA have moved forward with an approach that will enable IGC’s to properly scrutinise costs for the benefit of scheme members. Nobody should under-estimate the vital part that systematic cost control can have in driving better outcomes for pensions savers so this is another important step forward by the FCA, embracing the transformational power of transparency once again. The general direction of travel is spot-on.”

The People’s Pension head of policy and government relations Andy Tarrant says: “We look forward to the FCA working group agreeing on a template for disclosure as this will make it easier for fund managers to produce comparable information and for trustees and governance bodies to compare between them.”

JLT Employee Benefits head of DC investment consulting Maria Nazarova-Doyle says: “While it may not be a straightforward undertaking for the asset managers, it should be seen as a positive development in the longer term. Those managers who diligently apply best practice and offer better value for money will be recognised for their efforts. Greater transparency will not only improve trust in asset management, but also drive greater competition and a better functioning market.

“In addition, this move will help to resolve the absurd challenges facing trustees of defined contribution pension schemes who have to disclose scheme funds’ transaction costs to their members whilst being unable to obtain this information from investment managers because they were not legally required to provide them. Overall, a very welcome development that we have been eagerly awaiting.”

Aegon pensions director Steven Cameron says: “After many, many months the FCA has decided to implement its proposals largely unchanged. There will always be controversy over the best way to calculate transaction costs but the fund management industry now needs to move forward and provide this information to independent governance committees. We expect a number of technical questions will arise and hope the FCA will ensure these are answered in a way that ensures consistency.”