How DC fund charges will become more transparent

Transaction costs are high on the agenda, with a number of different bodies discussing what the right framework should be for disclosure.

Nevertheless, firms looking after defined contribution (DC) scheme assets will need to be a step ahead of this, with new requirements coming in mandating disclosure.

From 3 January next year, these firms - where they are regulated by the Financial Conduct Authority (FCA) - will be required to provide a breakdown of administration and transaction costs when requested by workplace DC governance bodies.

The new rules will hit all regulated firms handling DC funds, including asset managers, investment banks, and custodians.

Slippage costs

Under the rules, announced on 20 September, regulated firms will need to supply information about transaction costs using the ‘slippage cost' methodology, as well as information about administration charges and any other appropriate contextual data.

Where a firm does not have this information, it will be required to seek it from other firms, and if those are FCA-regulated they will also be mandated to provide it, the watchdog said in a policy statement.

The slippage cost methodology, first mooted last October, calculates fees by comparing the price at which a transaction was actually executed with the price when the order to transact entered the market.

Despite this method having previously been criticised, the watchdog said the calculation uses "actual transaction data" to identify "the loss of value from the consumer's perspective", and "reduces the risk that some costs remain hidden".

It said it would also allow trustees and independent governance committees (IGCs) to meet duties regarding considering whether these charges delivered value for money.

The regulator said it had considered requiring firms to provide the data "as a matter of course" but concluded this would lead to confusion as to when the rules would apply, particularly if a firm did not know it was handling pension investments.

The FCA said enforcing this approach would align UK regulation with the European Union's Packaged Retail and Insurance-based Investments (PRIIPs) regulation, which comes into force at the start of next year.

‘Spot on'

The move has been roundly welcomed, despite some residual reservations about the method of calculating the costs. Transparency Task Force founding chair Andy Agathangelou believes the move is "spot on".

"I am very pleased to see that the FCA have moved forward with an approach that will enable IGCs to properly scrutinise costs for the benefit of scheme members," he states.

"Nobody should underestimate the vital part that systematic cost control can have in driving better outcomes for pension 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 policy will be of benefit to both members and trustees, and will build trust in the system, others add. JLT Employee Benefits head of DC investment consulting Maria Nazarova-Doyle argues the proposal will allow trustees to fulfil their legal obligations.

"Savers will be clear beneficiaries as it will be easier to compare the real costs of different investments, which will ultimately drive costs down across the investment providers," she says.

"In addition, this move will help to resolve the absurd challenges facing trustees of DC 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."

And even though the method has been criticised, Aegon pensions director Steven Cameron says it will allow the industry to get on with disclosure.

"After many, many months the FCA has decided to implement its proposals largely unchanged," he states. "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 IGCs.

"We expect a number of technical questions will arise and hope the FCA will ensure these are answered in a way that ensures consistency."

Disclosure framework

The announcement comes after the financial watchdog consulted with the industry, receiving 43 responses, and last month appointed Dr Chris Sier to chair an independent working group to consider a template for transaction cost disclosure.

This group, which met for the first time on 7 September, is deliberating on how to best encourage the template's adoption, how it will be something that is easily complied with, and what mechanism will satisfy both the provider and user.

It will also comprise sub-working groups, which will consider how the template will work with specific asset classes, including long equity, fixed income, foreign exchange, and private equity.

For this reason, the FCA said it would also consult on how costs and charges should be disclosed and published to schemes members in the second quarter of the next year, with an attempt to echo a DWP consultation anticipated later this year.

The rules do not define a standardised format for disclosing the information; the regulator said "we do not see a need to make rules to specify how information should be presented" to DC governance bodies. However, it saw the "value of more consistent and standardised" disclosure to institutional investors, and said its working group would address this.

The People's Pension head of policy and government relations Andy Tarrant welcomes the FCA's steps, but says it is now more important to ensure a standardised disclosure code is developed.

"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," he states.

Affected firms will now need to ensure they understand the methodology and get their processes in place to comply ahead of the deadline, with any DC governance body able to request their information from day one.

B&CE has published a full breakdown of transaction costs for The People's Pension - revealing both the explicit and implicit costs for its default fund.