Teething problems to delay transaction cost reporting for DC schemes
Trustees of UK defined contribution (DC) schemes are unlikely to receive complete transaction cost information from their managers and providers in time for March 2018 year-end statements, according to a survey.
Consultancy LCP surveyed 20 DC asset managers and five of the largest DC pension providers, and found that 56% of respondents were unlikely to be able to provide a full year of transaction costs in time for the information to be included in the next round of scheme statements.
The situation would improve with time, LCP said, with over half of those surveyed indicating that they would be in a position to provide members with transaction costs for the whole year by the time required chair statements for the June year-end were due.
In January regulation came into effect that, for the first time, required all asset managers to provide transaction costs in a standardised format to UK DC scheme trustees on request.
The legislation was introduced by the Financial Conduct Authority (FCA) at short notice, and LCP noted that fund managers were experiencing initial problems in reporting as some data elements that were now required had not previously been monitored. In some cases managers had been forced to rebuild internal systems inside a year, LCP said.
The consultancy said investment managers’ first priority was to provide transaction costs covering the first quarter of this year, and that prorating the costs would allow schemes to provide members with a proxy annual cost figure.
“Longer term, the news is more positive,” said Laura Myers, LCP partner and head of DC, “with managers and providers seemingly confident that transaction cost information will be available and in a format that can be understood by all involved in running and saving into DC pensions”.
“In light of the intentions of the FCA’s regulation in the first place, that appears to be a productive step forward,” she added.
Illiquid assets, DGFs proving problematic
However, the consultancy noted there could be a “major stumbling block” in providing DC scheme members with a comprehensive comparison of fund transaction costs.
Almost half of survey respondents indicated envisaging problems in reporting transaction costs for some asset classes in a timely fashion, with illiquid asset classes such as property – and consequently some diversified growth funds (DGFs) – being the most problematic.
Although the majority of DC savers are in default investment strategies, the requirement of managers to disclose transaction cost data also applies to asset classes traditionally offered as self-select options.
The consultancy also noted that DGFs were a “fundamentally important asset class” for DC, and that it would be key for many schemes to have complete cost data for them.
Any problems in providing transaction cost data for the broad range of illiquid assets, meanwhile, could affect their further adoption by DC schemes, LCP said.
The consultancy’s survey found that four-fifths of providers have, or would shortly have, internal checks for reasonableness of transaction costs in place.
“This is encouraging for trustees who rely on their providers as an aggregator and checker of this information,” said LCP.