Transaction cost disclosure in workplace pension schemes
FCA Policy Statement 17/20 introduces new rules that require FCA-regulated firms that manage pension scheme money to disclose charges and transaction costs to trustees and independent governance committees (IGCs) using a standard approach. These new rules come into effect from 3 January 2018.
The background to this is enabling scheme trustees and IGCs (who are responsible for governance of insured arrangements and personal pensions supplied by providers) to comply with their reporting obligations in respect of costs and value for money in respect of defined contribution pension schemes.
Firms must provide:
Transaction cost information using the ‘slippage cost method’
Information about administration charges
Relevant additional information.
Slippage cost method
This is the difference between the price of the transaction when executed and the price when it was first placed with a third party. This difference is the actual cost to the scheme and members. It is a true test of loss of value and has been used in the investment industry for over 20 years. It is also in line with the costs methodology expected to be used under MiFID II.
Because of the emphasis on actual costs this method is designed to give trustees the opportunity to properly assess transaction costs and therefore the value for money that they are being offered by investment managers.
The downside of this approach is that market movements and other costs can be included in the cost figure for a transaction which does not represent direct fees or charges. For example, transaction taxes are a cost of undertaking a transaction, but they are not normally within the control of the investment manager. However, the true cost to the scheme is shown and this is why the FCA has chosen to adopt this approach.
Information on request
It is up to trustees and IGCs to request this information. If the asset manager does not have all the relevant information then other FCA-regulated firms in the supply chain (for example investment banks or custody banks) may have to provide data to the trustees or IGC. This information will be vital for completing the chair’s statement which trustees must produce each year for nearly all defined contribution (DC) arrangements. The requirement for asset managers to supply this information extends to requests from almost all DC schemes or insured products.
Other relevant activity
The FCA also carried out the Asset Management Market Study which has started a number of other initiatives to enable trustees and IGCs to better assess the service investment managers are providing them. It has also instigated a Market Investigation into Investment Consultancy Services and Fiduciary Management Services. This investigation will also focus on the open disclosure of costs and will take a special interest in vertically integrated investment vehicles where layers of services are charged in aggregate and the true charges may be hard to identify.
Action for trustees
Trustee boards of defined contribution schemes that are used to meet the employer duties must produce a chair’s statement. To do this the information available from 3 January 2018 will be vital and these trustee boards are responsible for ensuring that they are accessing this information.
Your usual Capita contact will be able to provide help and assistance in making use of this new source of information.
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