Investment Transaction Costs: Your duty to ask

I started my career at a time when the only paper emerging from a computer’s printer had pale green lines across it and perforations down the side, it folded at A3 intervals to form neat orderly piles that would gradually brown as they sat on the edge of your desk.

It’s the mental image of this stuff that comes to mind every time I think about investment transaction costs. Line after line of computer generated data detailing the up to, we think, 46 costs that could be incurred on each and every trade your fund manager makes. Terabytes of data – albeit more probably shared electronically these days.  
I’ve blogged about these things before (most recently here).

So, given the volumes of data and then the need to do something with it if you have it, why bother about it?

There are two reasons.

The first is that you if you are a trustee you are required to do so by law. If you are a member of an IGC you are required to by your terms of reference.

Regulation 17 of the Occupational Pension Schemes (Charges and Governance) Regulations 2015 inserted a new requirement into the 1996 Scheme Administration Regulations. This requires the trustees or managers of DC schemes to produce an annual statement setting out, amongst other things, “the level of … transaction costs” applicable to the default investment strategy, “the range of … transaction costs” of other investment strategies and to “assess the extent to which the … transaction costs represent good value for members”. Every time you fail to do this you are breaking the law. Full stop.

The second but more important reason is because transaction costs reduce the amount of money in your members’ pension pots. Each pound taken to cover the costs, or line the pocket, of a fund manager or their service providers is a pound less to provide retirement benefits and, while they can’t be avoided they can be optimised. At the moment, unless we ask for and get the data, we can’t even quantify these costs much less optimise them. For trustees and IGCs, entrusted to look after other peoples’ money, this is an uncomfortable position to be in.

The fact this isn’t easy is not an excuse not to do it. Trustees need to request information on transaction costs (“that huge green pile of paper”) and assess, possibly with input from the asset managers, whether it offers  good value.

Share this post

About Us

PTL is an award-winning provider of independent trustee and governance services, serving clients across the UK. Our specialist team of professional trustees deliver a pragmatic, personable and professional service to help you effectively manage your scheme.