Industry experts have welcomed proposals on charges and transaction costs from the Investment Association, but warned trustees should not make fees their only focus.
Disclosure of costs has come under increasing focus as schemes prepare for the introduction of the charge cap and the accompanying guidance requirements for auto-enrolment default funds.
The IA's disclosure principles
Charges paid to a client's agent should be calculated in a consistent manner.
The charges figure should be distinguishable from transaction costs.
Transaction costs should be disclosed to help clients understand "the economic experience of monies invested".
Forward-looking and historic disclosures should be distinguished.
It is also important to distinguish between "quantifiable explicit" costs and "indicative implicit" costs.
Disclosure should only deal with "tangible costs" due to actual events.
Different forms of quantitative assessment may be needed.
Data cannot stand alone, but need accompanying narrative.
Source: IA consultation
The paper outlines measures to improve transparency around cost, such as the difference between product charges and transaction costs, as well as implicit and explicit costs (see box).
Jonathan Lipkin, director of public policy at the IA, said: “We’ve tried to set out a paper that will inform the debate in the UK. We’re not claiming to have come up with a wholly innovative approach. We’re trying to lay out principles and turn them into a framework that can work for any investment fund.”
He added disclosed information should be presented in a way that is meaningful as well as outlining components of the charges.
The paper is part of the association’s contribution to cost-disclosure regulation being formulated by the Financial Conduct Authority and Department for Work and Pensions. A spokesperson for the FCA said regulation was expected towards the end of Q1 or the beginning of Q2.
Ian Cowell, investment director at the National Association of Pension Funds, said a joint consultation between the FCA and DWP was due in the spring, but added: “There’s a general election on the way and there’s a lot going on in government.”
Neil Davies, associate at consultancy Barnett Waddingham, welcomed the IA paper. “The principles feel clearly sensible,” he said. “You can’t argue with that unless you’re trying to hide something.”
But Davies added there was a risk of defined contribution schemes focusing on transaction costs above other, possibly more important measures. “You should be looking at the net-of-fees performance,” he said.
“One of the frustrations I find when comparing two managers [is that] the implicit and explicit charges can be difficult to get your head around. You might have one fund which is purchasing assets directly… another fund which has lower annual management charges but then goes and invests in third parties.”
Cowell gave the example of a cash fund, which may offer low annual management charges but also low returns. Ian D’Costa, associate director at Sackers, said public disclosure of costs could lead to less competition on price.
“Perhaps there wouldn’t be as much competition,” he said. “Everyone would be able to benchmark themselves on the public data [leading to] less opportunity to negotiate on fees. However, he added: “I can see where smaller schemes might benefit from it.”
D’Costa said trustees should not focus too heavily on charges. “Trustees are in there to act in the best interests,” he said. “Charges are going to be one part of that but they won’t be the whole picture.”
