Advisers know that transaction costs can eat away at members’ pots and it’s one of the factors they should consider when assessing the value for money of schemes.
What’s less well-known is exactly what schemes’ transaction costs are. In this article, we provide some guidance for advisers on where to find information on scheme transaction costs and how they can interrogate whether these costs represent value for money.
The Occupational Pension Schemes (Charges and Governance) Regulations 2015 introduced a requirement that occupational pension schemes need to report on their transactions costs. Some schemes, including NEST, now include transaction costs in their scheme annual report and accounts . Transaction costs for NEST Retirement Date Funds are between 0.000 and 0.083 per cent.
Costs for our range of fund choices are between 0.000 and 0.098 per cent. You can find out more in our latest scheme accounts.
Schemes might also include their costs in their Value for money statements . These follow a Pensions Regulator model process to weigh up the benefits of being a member of a pension scheme with the costs of being a member. This includes portfolio transaction costs and may well also provide some narrative around the extent to which the scheme is confident these costs represent value for money.
Advisers comparing schemes could consider looking at costs against:
- the suitability of the investment strategy for workers
- whether the governance framework reduces the potential drag on performance of transaction costs, for example, close monitoring of the transaction costs incurred by fund managers.
For NEST’s part, our investment approach and governance structure works to reduce transaction costs by a number of means including:
- using our strong positive cashflow to implement asset allocation changes and rebalance portfolios wherever possible
- creating an internal market between NEST Retirement Date Funds. This means funds with reducing exposure to certain asset classes will transfer those investments to funds still adding to them, avoiding trading spreads and brokerage fees
- using this ‘internal market’ to either maintain the target asset allocation or re-balance funds
- keeping costs down for members leaving the scheme and those just joining. New member contributions can be used to balance allocations and for paying cash lump sums to members taking their money out.
Last year the DWP and FCA published a call for evidence around improving transparency in workplace pensions. The outcome of this may drive some standardisation in the reporting of transaction costs over time.
As this journey continues, NEST wants to see the debate on transaction costs avoid becoming about a race to the bottom. It would not be in the interest of savers if investment decisions are driven by producing the lowest transaction costs figure.
In line with our beliefs on diversification and risk-based allocation, NEST invests in a diverse range of asset classes including property. Property involves legal, survey and valuation fees plus stamp duty. These costs don’t alter our rationale for including property to grow our members’ pots over the long term. This illustrates why NEST is among those eager to see questions on transaction costs viewed in the overall assessment of quality investment management and governance.