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USS cuts costs through commission recapture

UK - The Universities Superannuation Scheme (USS) pension fund expects to reduce its administration costs by around £750,000 (€1.07bn) a year by applying a commission recapture programme to its trading.

Europe's eighth-largest pension fund, with £30bn in assets under management, has appointed Russell Investments to help it claw back some of the costs of trading its global portfolios through brokers signed up to a recapture scheme.

Although the actual amount a pension fund can reclaim on each trade may appear minimal on a daily basis, it eventually amounts to approximately 2-3 basis points of trading commission over a year depending on the asset class, according to Russell.

Sarah Culpeper, spokeswoman for Russell, notes commission recapture is possible on very liquid assets such as equities where there are likely to be many broker firm effectively offering trades at the same price.

In such circumstances, it has possible to set up a recapture programme and sign deals with 15-20 broker firms who are willing to give back some of the commission they earn to the pension fund, as a reward for giving them the business.

"Trading generates commissions which are distributed through a variety of brokers. This is a way of recouping a portion of those commissions, and repaying them back into the [pension] fund. A high volume of [trading] flow is the bread and butter of brokers, so in a these circumstances it makes sense to recoup a little of these savings back to the fund," said Culpeper.

The practice of commission recapture is not especially new and is mainly the larger pension funds which have so far deployed the concept to their administration processes, added Culpeper.

That said, Paul Myners earlier suggested in his 2001 report on institutional investment "an important cost for institutions, namely broking commission, is subject to insufficient scrutiny".

Peter Moon, chief invetment officer at USS, points out funds are increasingly applying commission recapture as part of their fiduciary responsibility.

"Although we believe there is an indirect benefit to our scheme from the research and services our managers are able to obtain through their use of our commissions, we have made the decision that a portion of our commissions should be used for our direct benefit with a commission recapture programme. From a governance perspective, commission recapture is part of our armoury to ensure commission costs are managed," added Moon.

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