Merseyside uses FX rate benchmark to cut fees
Merseyside Pension Fund has used foreign exchange rate benchmarking to hold its banks to account and secure cost reductions, as local authority schemes put increasing fee pressure on their investment counterparties.
The fund has confronted the risks of overcharging and a lack of cost transparency by employing an independent benchmark against which to measure transactions.
This has enabled Merseyside to compare FX trades with average market rates. As a result, the scheme’s providers have slashed transaction costs by up to 50 per cent.
The fund’s head, Peter Wallach, said benchmarking allows the scheme to understand the value of a provider’s services.
“It means we can look at the FX transactions they undertake for us and we can see precisely how well they have done against the market in that particular point in time,” he said.
“The early indications are that we have probably halved the cost to us of FX transactions that we undertake for the fund.”
The scheme’s data provider estimated in a report last year that UK schemes were being overcharged for FX services by as much as £4bn each year.
Other local authority funds that have made efforts to confront their FX charges include the shared service pension funds of Cambridgeshire and Northamptonshire, which recently announced annual savings of £300,000.
Klaus Paesler, head of currency for EMEA at the fund’s provider Russell Investments, said traditionally schemes have not done enough to investigate their FX costs.
“Over the last 10 to 15 years there has been a general lack of acknowledgement and understanding about what foreign exchange trading costs have been for various pension schemes,” he said.
Paesler said he would encourage schemes to do what they can to understand what their FX transactions are, and to make decisions about providers based on that information.
“We would encourage pension schemes to do transaction-cost analysis on their FX. If you don’t know what you’re paying it is difficult to manage that process and look for alternatives,” said Paesler.
“Always ask for time-stamping and price transparency. It is critical to get transparency into what costs actually are. Either go to a provider that you know can provide transparency or speak to your current providers about what they can do about costs.”
Director at PiRho Investment Consulting Phil Irvine said that while independent reference rates are a useful tool, schemes concerned about the cost of FX transactions should speak to their provider first.
“On any one day you might be paying above the average, but if it persists on a very consistent basis over a long period of time then that is clearly an area of very serious concern that should be raised with the individual manager or custodian bank,” he said.