You have likely seen the recent rules and guidance released by the FCA. How can we improve the disclosure of transaction costs in workplace Defined Contribution (DC) pensions?
Effective from January 2018, providers and asset managers must share information about administration and transaction costs with the governance bodies of those schemes.
At Redington, we welcome these efforts by the FCA. They have set out a consistent process for calculating these costs. This includes details of
a.) implicit costs, such as bid/offer spreads and
b.) explicit costs, such as brokerage, commissions, taxes and stamp duty.
This shows a commitment to improving how consultants, independent governance committees (IGCs) and trustees assess the costs of running a pension scheme.
The FCA is addressing issues that have circled financial services for some time – transparency and value for money. This is a positive effort to improve transparency of costs across the value chain. This push for greater transparency is only likely to continue. It could well drive further calls for cross-industry sharing.
We now know the Department of Works and Pensions (DWP) plans to consult on how to share these costs with members. This will be the start of a journey to help members better understand the value they get from investing in a workplace pension.
The road ahead could be rocky
It will be a challenge for the industry to implement these changes. To ensure data is collected and reported consistently, the FCA has created an institutional disclosure working group. The minutes from their inaugural meeting were encouraging. They also highlighted the breadth of work needed for a January 2018 implementation.
Importantly, there is no representation from the product providers (insurers or master trusts). After all, they will be the main group required to report the cost data to governance bodies. If achieving consistency is a central aim of this process, then it needs to apply across the workplace pension ecosystem.
The inclusion of ‘appropriate contextual information’ is perhaps the most important element. Inundating governance bodies with huge quantities of data is not going to achieve anything. Translating the data into something that is informative, digestible and actionable will be critical to the success of these regulations.
So what should you do now?
- Request data
Inform your investment consultant/provider that you’ll want the data as soon as it’s available.
- Start with the end in mind
Think about how you will be using the data. Will it be in a Chair’s statement, built into a wider value for money assessment etc? This will give you a starting point on how you’d like the data interpreted.
- Stay patient
More information will become available as firms begin gathering data. The process will evolve and institutional understanding will become clearer.
There are tests ahead. The FCA is looking to standardise the disclosure of transaction costs. But governance bodies who plan ahead should be well placed to improve the process for savers and schemes alike in the drive towards creating better member outcomes.
Any questions about how the new FCA ruling may affect you? Get in touch. We’re here to help.