Transaction costs- what Pension PlayPen has to say to the FCA

The FCA’s consultation paper on Transaction Costs and Charges is important and timely. It enables those who are governing our workplace pensions to do their job and makes sure that those who invest our money- do their’s.

Here’s the response of the Pension PlayPen to the FCA’s consultation on this document

Q1: Do you agree that our proposed rules will enable information on transaction costs to reach governance bodies? If not, what alternative(s) would you propose?

We agree these rules will reach IGCs and Trustee chairs to understand the transaction costs within the funds they oversee. The disclosures are designed to be easy for asset managers to make and easy for fiduciaries to analyse. The information will come without a benchmark for what is considered good practice. We do not suggest that transaction costs are managed to such a benchmark yet, but we think that the FCA will have to continue to oversee the development of benchmarking if the cost number is to be relative to estimating value for money

Q2: Do you agree with the approach set out for calculating transaction costs? If not, what alternative(s) would you propose?

We have looked at the proposals to define costs as “slippage”. We cannot comment on whether there is a better method, but we think this method is good enough. We are interested in outcomes, not the apportionment of costs to various parts of the cost chain.

Q3:Do you agree with the proposals in this chapter? If not, what alternative(s) would you propose?

To date, calls for standardisation of cost disclosure have been met with responses that in summary say “too difficult”. We do not think it is too difficult to tell people what they are paying, if a number cannot be arrived at, then there is something wrong with the underlying governance of the fund or fund of funds. Failure to be able to disclose costs should not be considered a sign there is a fundamental flaw in the governance of the assets and should prompt a recommendation for change. The capacity of a fiduciary to act on either a failure to report or a report that shows that costs are not being managed is a separate matter. We are extremely concerned that there is currently no way for the DWP to establish what can or cannot be included in a charge cap, because of a failure in standardised reporting. The obvious role of an IGC or Trustee Board is to ensure that whatever the cap is set at, it is a cap on costs and charges and is aimed at ensuring that the outcomes of saving are protected.

Q4: Do you agree that our proposed rules will enable pension arrangements and funds that invest in other funds to amalgamate the total transaction costs from underlying funds?

We do, where this cannot be done, we consider there is a fundamental failure to govern. A failure to be able to consolidate total costs from underlying funds suggests that the fund structure is broken and should be replaced by something which can provide a total transaction cost.

Q5: Do you agree that transaction costs should be amalgamated on the assumption that underlying funds incur them evenly over a reporting period? If not, what alternative solution(s) would you propose?

Clearly transaction costs are not incurred evenly and managers cannot force square pegs into round holes. The asset management industry does not want to be tied down by quotas of costs that can be incurred in a quarter but – as with any business, unless costs are scrutinised and managed, costs will escalate. Managing to a budget is no different in asset management than in any other business. Where cost over runs occur, they can be tolerated provided that cumulatively the overruns are balanced against periods where costs are less than expected.

The imposition of cost budgets on an asset manager may be unwelcome to the manager but will be welcomed by consumers when they see the positive impact on outcomes.

Amalgamating costs from several sources to give a total cost figure, should benefit cost efficient managers to the detriment of those with consistent cost over runs. Managing a fund of funds to an overall budget is the proper business of the fund of fund manager. Again, if this is not possible, one has to question why a fund of funds approach is in place.

Q6: Do you agree that the approach set out in this chapter is adequate to provide governance bodies with sufficient information to assess transaction costs? If not, what alternative(s) would you propose?

We do agree with the methodology in this chapter. For governance bodies to assess “value for money”, they must understand “money”. The method outlined does this, albeit with less attribution of cost than might be needed by the asset manager. It is not the business of the governance committee to help the asset manager reduce costs, it is it’s business to make sure this happens. As regards the other side of the equation, it will be argued by asset managers that the total costs of a contract based personal pension or of a member’s participation in a master trust are beyond the asset manager’s control. This is true, but it is much easier to manage costs outside the fund management wrapper since those costs are transparent.

It is a matter of commercial prudence for these costs to be managed down by a provider as they are very obvious to members, the only part of the cost equation which is not evident to members are the costs to the net asset value of the fund created by asset management.

The arguments that transaction costs cannot be measured is tantamount to saying that they cannot be governed, as we say elsewhere in this response, if fiduciaries accept defeat in getting this information , their efforts in ensuring cost reductions elsewhere will be diluted and we will see overall governance degenerate again into busying with soft factors such as “engagement”. This strays into marketing and is why so many DC governance bodies shift from holding provider’s feet to the fire to becoming part of their marketing arm. We see clear evidence that governance bodies, deprived of a way of assessing value for money within the fund, are reverting to this soft-factor collusion with the marketing departments of the providers. Consequently governance will lose the respect of members and will need to be reformed by Government again.

Q7: Do you have any comments on our analysis of the costs and benefits of introducing rules on transaction cost disclosure?

In the final analysis, this information is only as important as its impact on member outcomes (since members take the risk). If proper scrutiny and remedy is in the hands of the IGC or trustee, then nothing more than the production of the information should be enough. However, we do not think that IGCs and trustees have sufficient will or power to impose changes on providers and therefore strongly believe that transaction costs should be included in the cap on costs and charges for the default funds of workplace pensions.

Such a cap has no meaning unless the costs that are included within the cap are properly defined. The proposals in this paper are sufficient for the DWP , in their work on this subject which is forming part of the Auto-Enrolment review, to formulate a new and stronger cap.

We know that this will be strongly contested by asset managers who will see such a cap as restricting their capacity to offer higher costs within funds, but we point to research in the FCA’s interim Asset Management Study to demonstrate the correlation between low-cost and high return. The one element of risk that can be taken off the table (and not transferred) is unnecessary cost.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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