Two thirds of workplace scheme providers don’t know scale of transaction costs – Govt report

Pension providers and trustees do not know the extent of transaction costs being levied on the schemes they oversee because fund managers are refusing or unable to give them the information they need, a major Government probe has found.

The indepth research, published in the Government-commissioned Pension Charges Survey 2016 today, found that data on transaction costs for fund entry and ongoing charges was patchy at best.

Only four out of 14 providers could estimate the level of ongoing transaction costs, with estimates ranging between zero per cent and 0.5 per cent of all members’ total funds invested per annum, although one said that transaction costs could exceptionally increase to above 1 per cent in cases where there are property funds involved in the pension fund investment.

The report says the data that providers were able to give covering transaction costs for fund entry – buying units of the fund – was limited. Two providers were unable to say whether or not transaction costs for fund entry applied at all, while six confirmed that transaction costs for fund entry did apply to members invested in their default arrangements but were unable to provide data on them. The researchers said a few providers indicated that they were investigating these costs and that they expected to be able to provide more information on them in the future, although they pointed out that a number of these providers had also indicated the same thing when the research was conducted a year earlier.

Four providers reported that transaction costs for fund entry do not apply to their default arrangements. Two were able to provide at least indicative data on how the costs apply to their schemes. Transaction costs for fund entry typically led to a reduction of between 0.05 per cent and 0.40 per cent of each contribution

Neither type of transaction cost is currently included within the charge cap.

Providers said they faced several challenges in providing the data, citing the need to aggregate data of different types, from multiple funds, and from different fund managers. Some providers said that in some cases, the fund managers were unable, or refused, to provide the data. Some providers explained that even when different fund managers did report on transaction costs, they would use different reporting periods and formats, making the data hard to reconcile.

For some providers, the FCA’s ongoing consultation provided a disincentive to look into providing these costs until the approach was finally agreed; they intended to wait and see what was agreed before committing any resources to it.From 3 January 2018 new FCA rules will require asset managers to provide information about transaction costs calculated according to the ‘slippage cost’ methodology, information about administration charges and appropriate contextual information.

A significant barrier to collecting data identified in the Pension Charges Survey 2016 was the fact that the providers themselves did not hold the data: it was held by fund managers, most of whom operated externally to the provider. Providers felt that fund managers could not be made to provide the data, although large master trusts appear to have more ‘clout’ in this matter. One master trust said: ‘Fund managers are starting to provide us with an increased volume of information in this space, but there is still an awfully long way to go across the industry in terms of standardising how we might display it, and as such we are not really in a position to provide something that would be meaningful or useful to you at this stage.’

Most trustees also could not report upon transaction costs, and were unclear about how to compile this information. Some trustees admitted they were not clear what transaction costs were. Only a small number of trustees of qualifying schemes were able to clearly indicate that they understood transaction costs. This was most often the result of their internal governance and monitoring of the scheme. Trustees expressed similar concerns as providers about the difficulties they encountered when trying to measure transaction costs, including problems with obtaining information from third parties, and from fund managers in particular.

While around two in five (39 per cent) of qualifying schemes and around one in five (19 per cent) of non-qualifying schemes made an initial estimate of transaction costs for entry when asked, many subsequently conceded that they had confused these with the ongoing

Transaction costs for remaining invested can include:

Commission paid to a broker when a transaction is carried out.
Bid-offer spreads – the difference between the price received when a security is sold (the
bid price) and the price paid when it is bought (the offer price).
Bank transaction charges.
Foreign exchange fees associated with the transaction.
Any local taxes (including UK stamp duty).
Additional costs involved with buying or selling property, if this is to be included in a particular investment fund.