The FCA has published a consultation on proposed new rules surrounding disclosure of costs of workplace pension schemes and has moved to address the challenge of negative transaction costs caused by anti-dilution methodology.
Workplace pension scheme governance bodies will be required to set out information about the transaction costs and the administration charges, as defined at COBS 19.8.1, for each default arrangement and each alternative fund option that the member is able to select, in the Chair’s report. It will also be required to include an illustration of the compounding effect of the aggregated costs and charges.
The regulator also wants to introduce new rules to stop the occurrence of negative transaction costs caused by anti-dilution. An open-ended fund may incur transaction costs when the fund buys or sells investments in response to flows into or out of the fund. Anti-dilution is the practice whereby the fund passes on those costs to the relevant incoming or outgoing investors., without which, ongoing investors would bear the costs of these transactions.
The COBS 19.8 rules require firms to calculate the costs of all the transactions done by a fund. They permit, but do not require, firms to subtract from this total cost any benefit that the fund gets from anti-dilution. But this has created situations where the benefit to a fund from anti-dilution is more than all the transaction costs that it has incurred over the same period, leading it to report negative transaction costs.
The FCA says that where the amount of anti-dilution benefit is more than all the transaction costs incurred, this should not be taken into account in the reported transaction costs. It proposes rule amendments to ensure that firms using an anti-dilution mechanism disclose anti-dilution benefit separately, and that the anti-dilution benefit must not be taken into account if and to the extent that the benefit would take the total transaction costs below zero.
The regulator also expressed concerns over different interpretations of how the COBS 19.8 rules work for transactions relating to bonds, and about a lack of availability of realistic prices. Many bonds trade infrequently, and so the prices available from data providers may not reflect the most recent market movements.
The FCAproposes to require firms to check the fairness of the pricebefore transacting. It considers that the best evidence that will be available for the market mid-price of the bond will be the average of the best bid and best offer obtained when seeking quotes from multiple counterparties.
It will also introduce rules into COBS that will require firms to ensure that scheme governance bodies ensure that all scheme members are provided with an annual communication which includes a brief description of the most recent costs and charges information available and how it can be accessed.
The FCA will publish a Policy Statement later this year, setting out final rules, which are planned to come into force from April 2020.
Aegon pensions director Steven Cameron says:“The FCA’s consultation on giving workplace pension members access to more information on costs and charges, including fund transaction costs, follows on from rules already set by the DWP for members of trust-based schemes. In future, more individuals will access this information, making it essential that it is calculated in a consistent and meaningful way and presented carefully in a context that allows those individual to make an informed decision.
“As other FCA findings show, there are still challenges around consistency. And while FCA is consulting on changes to avoid distortions created when funds apply anti-dilution mechanisms, there are other aspects of the prescribed ‘slippage cost’ methodology than can produce odd results including negative transaction costs.
“As well as making sure the calculation methodology is robust, it is essential that the information is presented in context. Making information available that could be misinterpreted and prompt unwise behaviour is dangerous. For example, individuals need to be helped to understand that transaction costs are an essential part of investing. Higher transaction costs are not necessarily something to avoid – if they produce better returns, that can be in the individual’s interest.”
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