The hidden costs of transparency

Jonathan Stapleton
clock • 2 min read

The FCA has taken a further step towards DC cost disclosure but, as Jonathan Stapleton says, such transparency will have its own hidden costs.

In the latest step towards cost transparency, The Financial Conduct Authority has moved to require the regulated firms looking after defined contribution (DC) scheme assets to supply information about both transaction and administration charges when requested to by DC governing bodies.

Such transparency will not be easy to achieve.

This week, B&CE published a full breakdown of transaction costs for The People's Pension (TPP) - revealing both the explicit and implicit costs for its default fund.

The provider said moving beyond the basic level of transaction costs had taken "considerable effort and time", not least because asset managers' systems are not yet geared up for such a complete level of disclosure.

And TPP is a more straightforward example - having just one main asset manager (State Street Global Advisors) and a default that invests in passive funds.

Imagine how complicated (and costly) such disclosure will be for active, multi-asset and ethical funds - or, indeed, those defaults that blend together more than one fund.

There will be other costs involved in such transparency - with some being more subtle than others.

Take total transaction costs as an example. B&CE said TPP's total transaction costs were 0.04% - broken down into 0.01% of explicit costs such as brokerage fees, stamp duty and custodian fees, and 0.03% of implicit costs, the difference between the mid-market price and the actual price of share purchases.

These costs are very low - given the passive nature of TPP's default.

But, how much higher will these be for those DC schemes with active, ethical or more complicated defaults?

Such transparency will reignite the debate over cost versus value.

The risk is that those running such schemes will run shy of such numbers, preferring instead to choose less expensive passive defaults - shifting away further from more expensive active schemes, which could well offer better value for members.

Cost transparency is a good thing for both trustees and scheme members. But, have no doubt, it will come at a price - hidden costs we will all have to pay.

Jonathan Stapleton is editor of Professional Pensions

Email him at: [email protected]

Follow Jonathan on Twitter at: https://twitter.com/jonstapleton

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