Transaction costs on workplace pension schemes are to be reviewed following a call for evidence from the Financial Conduct Authority and the Department for Work and Pensions, as the pensions minister Steve Webb cited fears of “nasty surprises”.
Final rules published last month by the FCA will require all contract-based occupational pension schemes from April this year to have in place an independent governance committees, which will be required to report annually on all costs and charges.
The FCA and DWP are seeking views to feed into the next phase of this work, looking for evidence on how costs should be included in reporting; how costs should be captured; whether information about other factors that impact investment return should be provided; additional disclosure requirements on other parties; and how members should receive cost information.
Christopher Woolard, director of strategy and competition at the FCA, reiterated points made in an earlier communication to pension providers, stating that pension schemes need to have clear and transparent information as part of assessing value for money.
“We want clarity and consistency across the market and that is why we are asking for views on how costs and charges information should be disclosed.”
Pensions minister Steve Webb, added: “There is a fear that the dark corners of the investment and pensions industry hold some nasty surprises. We have a duty to throw light for the first time on potential hidden charges - and restore faith and fairness in British pensions.”
The move comes in the wake of the charge cap being introduced for all qualifying auto-enrolment pension schemes, which typically fall under the remit of the Pensions Regulator and will be required to limit total administration charges to 0.75 per cent.
Transaction costs have been left outside the cap, but the government has left the door open to potentially including these in a revised cap in the future.
The discussion paper published alongside the call for evidence, details some of the ways transaction cost reporting might actually be done in practice.
It referenced work done by consultancy Novarca, which suggested that an asset class approach would enable governance bodies to oversee the costs incurred for each fund manager, condensing the level of information while allowing some comparison of data across schemes.
This could be relatively easily adopted by providers, with assistance from fund managers, without significant investment in new IT systems, it added.
However, the disadvantage is that there would not be direct oversight of the transaction cost experience for an individual fund, which means that in many or most cases it would not be possible to determine the level of transaction costs paid by members or employers.
There was an argument for presenting data which is broken down to individual fund level, instead of by asset class.
“Feedback from workplace personal pension providers suggests that the structure of a workplace pension scheme can be quite complex, and there may be quite a large number of individual funds and investment approaches available to members, making disclosure at an individual fund level potentially rather complex.”
It also proposes alternatives such as breaking down transaction costs to a more granular level of detail - for example by fund, or by asset class when it is already broken down by fund - when the total funds under management are above a certain threshold.
Finally, a more granular set of asset classes and reporting by investment type was suggested, to provide more meaningful information. For example, equities could be split into developed and emerging markets, and bonds into government, investment grade and high yield.
Comments should be made via the online response form by 4 May.
peter.walker@ft.com
