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Transparency: four things all fund managers should know in 2018

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Pension funds are under more pressure than ever to be transparent about their costs.

Here are four of the biggest things fund managers need to know to stay up-to-date with transparency guidelines this year.

1. It’s now FCA regulation

As of 3rd January this year, pension fund managers and investment companies have to disclose all the transaction costs on their workplace pensions.

The new rules, set out by the Financial Conduct Authority (FCA), mean the people running DC pensions have to comply with legislation that makes investment companies reveal indirect charges, including transaction costs.
The rules mean they must also publish their total costs, to give members a clearer picture of all of the fees that have been charged.

“Since April 2015, trustees and independent governance committees of workplace pensions have been required to assess and report whether transaction costs and charges offer value for money,” explains Donny Hay, Client Director at PTL.

“But there was no corresponding imperative for asset managers to provide the transaction cost data until the FCA ruled on this,” he says.

In February, as another part of its efforts to boost transparency, the FCA announced it was making it mandatory for Independent Governance Committees to produce annual reports.

2. Transparency has big benefits for schemes

Railpen, the pension fund for railways workers, has 350,000 members, making it one of the biggest funds in the UK. When they hired a forensic accountant to search for costs that were more deeply hidden, they discovered an extra £200m in costs.

These costs included things like commissions, brokerage fees, stamp duty, due diligence fees and legal fees, according to Railpen's director for trustee accounting, Victoria Bell.

Since uncovering them, though, the scheme has been able to make savings of £70m, as they can better judge value for money and negotiate lower charges, says Bell. Similar benefits have been seen within other firm’s schemes, suggesting that saving costs is a compelling reason to focus on transparency.

This is in addition to benefits for members, who are likely to feel more confident that their scheme is doing the right thing by them, and looking out for their best interests, when the fund is fully transparent.

3. The LGPS has its own transparency code

In May 2017, the UK’s local government pension scheme (LGPS) launched a cost transparency code that asset managers should follow.

The pension scheme, which includes 89 pension funds for local authorities in England and Wales, created the code based on templates introduced by the Investment Association, the UK’s asset management trade body.

Fund managers that sign up to the code must agree to supply information using these templates in a timely manner. An independent third party is then responsible for checking and collating the data.

There’s more information about the code here.

4. It is part of the criteria for pooling

The planned pooling of 91 local authority pension funds has picked up the pace. If all goes as expected, eight new investment pools in England and Wales will be formally established by 1 April this year. After that, a phased transition of assets will take place.

The reasons for this pooling are partly to reduce investment costs, but also to reorganise the UK’s vast pension fund resources to become bigger investors in the economy.

These new pools must work hard on bringing all their transaction costs to light though, as transparency is included in the government’s criteria for pooling investments.