DC charge cap could result in 'inconsistent' fee disclosure
The Investment Association has cautioned against describing management fees as a charge incurred by members unless discussing the UK’s forthcoming defined contribution (DC) charge cap, as it could lead to an inconsistent approach to the disclosure of costs.
In a paper debating how the investment industry should disclose fees and charges, the association highlighted the use of the ongoing charges figure (OCF) as a metric for unit trusts and other funds over the total expense ratio (TER).
The paper said it accepted pension funds were different from investment funds, and that there was no reason the OCF could not be extended.
It argued that the use of the OCF would allow consumers to compare fund charges, but said it accepted the metric would need to be adapted to incorporate costs related to pension administration when used by trustees.
When used by pension investors, the OCF charged by a fund vehicle would cover management charges, regulatory, audit and depositary fees and the cost of administration, the industry body suggested.
However, it would exclude the cost of performance-related and brokerage fees, while any incurred transaction taxes would also need to be met through a separate payment.
“With respect to the introduction of the charge cap for DC automatic-enrolment default strategies, we note the emergence of a new term, ‘Member Borne Deduction’ (MBD),” the paper said.
“We urge the government, regulators and the pensions industry to use the term MBD only in the context of charge-cap compliance, not consumer disclosure.
“This will help to facilitate the kind of consistent, intuitive messaging on charges that government, regulators and industry agree is necessary.”
The report comes a week after the Department for Work & Pensions (DWP) published the final regulation surrounding the UK’s 0.75% charge cap.
The final guidelines will see DC schemes that offer a guaranteed return exempted, but they also recommended that trustees ensure “low value” promises not be used as a way of avoiding the cap.
The government also recently pledged to explore whether members should have access to information about tendering of asset management contracts, which would potentially include greater transparency on fees.