Watchdog orders fund managers to give a full breakdown of transaction costs to pension funds
- Asset managers will have to breakdown the transaction costs levied at workplace pension funds
- The FCA says the move will help workplace pensions get value for money
- Critics say the proposals don't go far enough
Fund managers will be required to breakdown the transaction costs incurred by the workplace pension funds that invest with them - revealing how they eat into savers' returns - under new proposals from the Financial Conduct Authority.
At present, fund managers don't have to fully disclose these costs in a standardised way, but the financial watchdog wants that to change.
If the proposals go through, firms will have to provide the breakdown of transaction fees on request, divided into identifiable costs such as taxes and securities lending costs.
This seemingly arcane information will allow people to work out how much fund manager trading is costing their pension fund.
Greater clarity: Funds will have to give a standardised cost breakdown to workplace pensions
The FCA initiative has followed on from an order in the Pensions Act of 2014, which required greater disclosure of information around transaction costs.
The FCA says this move would improve consistency in how disclosure costs are reported, and would help governance bodies make informed choices about where to invest.
Christopher Woolard, executive director of Strategy and Competition at the FCA said: 'The proposals we are announcing today will allow IGCs (independent governance committees) to see fully the transaction costs that their funds pay and enable them to make better decisions about how they get value for money for their members.'
Controversy over transactions costs for funds has raged for many years, critics say that they can dramatically raise the total cost of investing well above the annual management charges investors see.
In contrast, others argue that is the total return that matters not the inherent costs of investing.
Nathan Long, senior pension analyst at Hargreaves Lansdown, says investors care more about their end returns than initial costs.
He said: 'If implemented these rules will promote transparency within workplace pensions and may ultimately act to reduce some costs from fund management.
'Analysing transaction costs alone though is not enough. The costs will differ based on different styles of fund management and types of assets invested in. What really matters to investors is the returns after all costs have been accounted for, fortunately this information is already in the public domain.
'The skill here lies in analysing which strategies offer value for money now, and which may continue to do so into the future. Greater disclosure of transaction costs alone will not solve this.’
Fee focus: The FCA says the move will help pension funds get better value for money
The fund management industry has faced criticism from many quarters for not being transparent enough around charging. While this proposal will help pension funds compare costs on the institutional funds they invest in, it has not been extended to personal retail investors.
Gina Miller leads the True and Fair Campaign, which pushes for openness around fees. She says she was 'pleasantly surprised' by the proposals.
'The FCA document is excellent, with extremely sensible conclusions and methodologies that should bring transparency into the previously hidden world of transaction costs,' she said.
Miller now wants these disclosure requirements to be extended to the investments made by individuals.
She added: 'The much greater question raised by this new found common sense and logic is when the rest of the public, when investing every day, will be similarly treated by the industry with respect and honesty.'
WHAT IS CHANGING WITH TRANSACTION COSTS?
At the moment, fund managers are not obliged to reveal transaction costs in a standardised way, although independent governance committees and trustees are required to request and report on transactions costs as far as they are able.
Under the FCA proposals, asset managers will have to produce a breakdown that takes into account 'slippage costs' - the change in price between the transaction being requested and the moment at which it took place.
This would be achieved by setting up an order management system to identify the price of a pension scheme's assets when it reached the market place.
If an asset manager is unable to provide full transaction cost information to the pension fund it will need to clearly explain to the governance body why this is the case.
The consultation will be open until 4 January next year.