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UK pension funds “hit by soft commission changes”

UK – The asset management trade body says proposed changes to rules on soft commissions will result in higher costs for pension funds – though pension consultants welcomed the moves.

The UK’s financial regulator, the Financial Services Authority, proposed changes to soft commissions in a document called CP 176 April in a bid to make fund managers “more accountable to investors”.

Fund managers would no longer be able to “incur costs for services additional to dealing without the customer’s express agreement”. The consultation period on the proposals ends tomorrow.

Investment Management Association chief executive Richard Saunders said that the maximum possible benefit was around two or three basis points. “But the costs to pension fund and other clients are many times this. And that is without considering the cost to the economy if business goes offshore.”

But Mercer Investment Consulting said it welcomed the FSA’s proposals. Piers Bertlin, European Partner at Mercer, said: "Managers who use soft commission have little incentive to drive down brokerage rates.

"Even when managers abandon soft commission for one investor group, they often retain the practice for others - even increasing it in order to compensate. This then blunts their ability to negotiate lower commission rates across their client base," said Bertlin.

"The FSA’s proposals will help to protect investors across the board."

The IMA has commissioned research from Charles River Associates, which found that the change to soft commissions - along with changes to bundled brokerage services - could increase costs for pension funds by 100 million pounds in the worst-case scenario.

Saunders said: “We believe a combination of market solutions and improved transparency will offer a more flexible and dynamic way of dealing with the issues highlighted in CP 176, rather than the introduction of a series of new and detailed regulations with unknown consequences.”

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