18 January 2018
From 3 January 2018 all asset managers are, for the first time, required to provide transaction costs in a standardised format to trustees on request.
However, most managers have indicated that they will not be able to provide back-dated transaction costs as they have not previously recorded the necessary data. So, for example, for a scheme year ending 31 March 2018, just 3 months’ data would be available in the standardised format.
We therefore advocate that those Trustees preparing chair’s statements for scheme years ending in 2018 should annualise the figures provided to ensure a consistent methodology is used across different asset classes and managers.
That aside, consistent disclosure of transaction costs is something that we have called for repeatedly in our investment manager fee surveys and we welcome the greater focus on manager costs that this requirement will bring.
Separately, the DWP has issued a consultation on guidance for Trustees on how costs should be communicated to members within the chair’s statement to comply with regulations which require statements to show the projected cumulative growth of member pension pots over time and the associated charges on the value of these benefits.
DWP proposes a format for this disclosure as illustrated below:
By presenting figures in this way and, in particular, showing figures on a £ basis, members will be able to compare different strategies. However, I have a number of reservations about the example format:
- The inclusion of a “before charges” column in the disclosures is misleading because it implies that members can access a pension pot with no charges or transaction costs. In reality, many of the charges included in the “after all costs” column are impossible to avoid – even the cheapest passive solution incurs transaction costs and manager fees.
- Although costs are an important factor in choosing a fund, we need to be careful that by showing numbers in £ format we aren’t encouraging members to focus on absolute values and opting for the fund with the lowest cost figure.
- The proposed approach does not highlight any of the benefits of risk management by using diversification (or the pitfalls of not doing so).
What should you do next?
Although this template is given as an example, with schemes free to choose their own format, past experience suggests that the example will become the standard. Accordingly, we suggest that trustees:
- Work closely with their consultants to provide clear relevant actionable communication to members to enable them to make sound fund choices.
- Seek specialist advice in drafting chair’s statements, particularly where your fund managers have only provided a part-year’s data on transaction costs.
At LCP, we are speaking to our clients and fund managers alike to identify more practical solutions to help communicate the impact of charges to members. Please get in touch your usual LCP consultant to find out how we can help.
You can read more about this and other DC topics in our quarterly DC Update.