Asset managers should disclose the full transaction costs rather than just the headline annual management charge, the Pensions Institute has urged, to allow investors to assess the value of their investments.
Pensions minister Steve Webb confirmed in March that a 0.75 per cent cap on charges would be brought in from April 2015. However, while the cap will include all member-borne charges it will exclude transaction costs. The government plans to review the issue of transaction costs in 2017.
The Pensions Institute report published this week, titled On the Disclosure of the Costs of Investment Management, takes aim at hidden transaction costs in particular, which include bid-ask spreads and the transactional costs associated with underlying funds.
It suggested hidden charges can match or exceed ‘visible’ charges including taxes, commissions and acquisitional costs, adding that hidden costs can comprise as much as 85 per cent of a fund’s total transaction costs.
In a statement, director at the Pensions Institute David Blake, said “no good reasons” have been given as to why all investor-borne charges should not be disclosed.
“If total investment costs are not ultimately disclosed in full, how can there ever be an effective and meaningful cap on charges,” Blake said, “and how can active investment managers ever assess their true value added?”
The paper is recommending a staggered approach to full disclosure, starting with visible and hidden cash costs and, once the necessary IT systems are in place, including the non-cash variants such as market timing costs and information leakage.
However, Blake told Pensions Expert the implementation of either is “unlikely to be in time for the introduction of the charge cap”.
Too much information
But Brian Henderson, partner at consultancy Mercer, questioned whether an itemised list of charges would better help investors assess whether funds are delivering value.
While a particular mandate may generate seemingly high charges, these might be core to the nature of the mandate and to delivering its overall objectives, he said.
“Frictional costs and charges in managing assets will eat into any managed fund’s performance. A consumer should have some comfort in knowing that the manager responsible for looking after their money will be acutely aware that any leakage as a result of charges and costs will erode their ability to beat benchmark,” Henderson added.
Emma Douglas, head of defined contribution solution at Legal & General Investment Management, said such transparency was “vital” in order to begin to assess value.
Douglas said AMCs and total expense ratios can be “the tip of the iceberg” when it comes to charges, especially in cases where funds use derivatives, are funds of funds or have high turnover.
She added: “These strategies will be used for good reason with the aim of improving performance, but they do come at a cost.”
The report added that the UK currently has no standardised measurement for transaction costs, but the government is looking to formalise the disclosure process to align with new trustee and independent governance committee reporting duties ahead of 2015.
In its March paper, Better Workplace Pensions: Further Measures for Savers, the government said: “The government will introduce new requirements to standardise the disclosure of administration charges and transaction costs, making this the first international example of full transparency in pension schemes.
“The government will start work immediately with regulators, providers, trustees and asset managers on the design and implementation of the relevant standards and products to ensure maximum effectiveness of these transparency measures.”
