Custodians Criticised By UK Pension Fund Which Claims To Have Halved Forex Transaction Costs

Chris Angell, fund secretary of the LRT Pension Fund which is ranked around 30th in size in the UK and has assets approaching 3 billion announced today that the fund has halved its foreign exchange (forex) transaction costs. It has

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Chris Angell, fund secretary of the LRT Pension Fund – which is ranked around 30th in size in the UK and has assets approaching 3 billion – announced today that the fund has halved its foreign exchange (forex) transaction costs. It has achieved this by applying a methodology developed by Windsor-based foreign currency specialist, Record Currency Management (‘Record’).

The announcement comes at a crucial time for pension funds, when pressure on investment returns and funding requirements has placed a particular premium on savings in transaction costs. Transaction costs were highlighted in March 2001 in the highly influential Myners report as a priority area where pension schemes should seek to obtain better value for money.

“The savings are extremely important to us both financially and as an indicator of the success of our policy of winning maximum control over the key cost and operational factors that affect the fund,” says Angell. “Record Currency Management has helped us shine a light into a darkened corner; the darkened corner in question being our exposure to foreign exchange transaction costs of which we were hitherto unaware. We now have clear and unequivocal evidence of what has been going on in this area. Record’s intervention has transformed an important aspect of our activities, as well as greatly increasing our negotiating power with key suppliers. We are also now in a position to give our trustees the clearest possible indication of what we consider ‘best execution’ to mean as far as foreign currency is concerned. I think there is often too much ambiguity in this area. This, not surprisingly perhaps, can be difficult for trustees to understand or respect. They are frequently unclear whether best execution means that the fund enjoys the best rates available anywhere, all the time; whether it means that the fund enjoys a fair price within the ranges available on the day; or whether it means that the custodian or fund manager will use its best endeavours to provide the returns acceptable to trustees. ‘

He also said: ‘I think trustees are entitled to wonder, under the circumstances, whether a custodian or fund manager is really going to be motivated to give funds the very best deal they can on a consistent basis. Whether funds ask their custodians or their managers to execute their currency transactions, I believe pension schemes have a clear duty to their trustees to be absolutely certain about the forex transaction costs they are paying.’

LRT Pension Fund has been working with Record for the past two years after initially bringing to Record’s attention its requirement for a better understanding of the fund’s forex exposures and exchange rates. Record responded to this conversation by developing its ‘Currency Audit’ product to meet the stated needs of the LRT Pension Fund.

The Currency Audit service offered by Record Currency Management is an on-going monitoring service enabling major institutional investors – particularly pension funds – to make highly insightful assessments of the competitiveness of the foreign exchange transactions conducted on their behalf by their custodians or investment managers. It focuses on comparing the rates actually achieved and delivered to the pension fund with historic exchange rate data from Record’s comprehensive proprietary database. In other words, pension funds get to see whether their custodians and investment managers are giving them a good deal on foreign currency rates. Record has conducted numerous currency audits for clients such as the BBC, Railpen, and Aberdeen City Council. Overall, more than 40,000 forex trades relating to pension fund investments in excess of 20bn have now been audited. Many audits have achieved significant cost savings for clients.

Chris Angell says that when his fund started working with Record the initiative to ascertain the true nature of forex transaction costs was hampered by the difficulty of obtaining time-stamped data relating to specific transactions. As a result, it was impossible for Record to assess how the rates offered compared with those prevailing in the market place at the precise time when the transaction took place. As Chris Angell explains:

‘We worked with Record to carry out a distributive analysis of our rates. This was designed to allow us to assess the rates without needing the precise time of each transaction. The result of the distribution suggested that the fund was not always receiving the best deal it could have been receiving. I suspect I speak for many funds when I say that I would rather pay a transparent fee for handling foreign exchange deals and giving us the best rate possible, than having this service provided for nothing at rates that are unfavourable for us.”

Chris Angell believes that the days when pension funds could afford to be complacent about foreign exchange costs are over. He entirely supports the recommendations of the Myners Report. This urged greater awareness and better awareness of transaction costs. As Chris Angell puts it:

‘Some pension funds might be inclined to say that paying, for example, a couple of hundred thousand pounds in unnecessary forex transaction costs is only small change and hardly worth bothering about. However, speaking for my own fund I know that many of our members and particularly trustees from the trade unions would not at all see the matter in that light. Frankly, I can understand their attitude, which is that these are enormous sums of money, and need proper management.’

Record Currency Management was founded in 1983 by Neil Record, a former economist with the Bank of England. Record Currency Management offers a variety of services to help its clients track, manage and hedge their foreign currency exposure and monitor forex transaction costs.

Neil Record, chairman and CEO of Record Currency Management, says: ‘Our work with the LRT Pension Fund shows that proper attention to managing forex transaction costs can result in very significant cost savings for institutional investors. Record Currency Management is founded on the fundamental credo that it is possible to take successful and decisive action to make money from foreign currency. We achieve this for our clients either by actively managing the inevitable foreign currency risk that accompanies any cross-border investment from the UK, or by identifying forex transaction costs and helping clients to reduce these, often very significantly.’

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