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U.K. Regulator to Rule on Pension Costs

The forthcoming decision is the result of a year of consultation with industry and consumer groups over how asset managers charge workplace pension schemes for transactions.

  • Joe McGrath

The U.K.’s financial markets regulator will announce on Wednesday whether it has decided to cap transaction charges that fund firms levy on workplace pension schemes.

The Financial Conduct Authority has been researching how fund firms charge pension schemes for trading, withdrawing cash, or switching funds for the past year after the regulator published a consultation paper on the issue in 2016. It will unveil its policy statement on September 20.

While the investigation has been broadly applauded by investor groups as a step toward transparency, some senior investment industry figures have raised concerns that a proposed breakdown of specific transaction costs may lead trustees to assess value by looking only at costs.

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Johan Cras, managing director at Dutch asset manager Kempen Capital Management, says a similar investigation conducted by the Dutch regulator in 2011 led to criticism of some pension funds because performance levels and asset classes were not being considered alongside the costs.

“This is about relativity,” he tells Institutional Investor. “If you search for [a return profile of] gilts +3 percent, your investment fees will be higher than gilts plus 0.5 percent. What is the impact of using active or passive and what is the impact of your investment horizon on your cost?”

Cras urges the FCA to consider a broader conclusion where it acknowledges that fees might be higher in certain circumstances, warning of the consequences of focusing on cost alone.

“We have gone through this experience for the past six years in the Netherlands,” he says. “If the industry doesn’t take care, the communication might be detrimental to the investment management industry and the pension industry as a whole.”

Cras also urges an approach that looks beyond trading fees to include other charges for administration, custody, accountancy, governance and investment management.

Caroline Escott, the policy lead for investment and defined benefit at the Pensions and Lifetime Savings Association, agrees that a “proportionate” approach to interpretation was important.

“We were particularly concerned that sometimes a pension scheme needs to undertake an investment strategy that requires a lot of turnover in a portfolio which incurs a lot of transaction costs,” she says. “If there is a cap introduced, that could limit the investment strategies that schemes undertake. While it is important that costs remain as low as possible, it needs to be done in a proportionate manner.”