Pension funds could make significant savings by paying more attention to the rates they are charged on foreign currency transactions, says Mercer Investment Consulting.
The consultancy has worked with Record Currency Management to unveil what everybody knows: foreign currency is often traded at uncompetitive rates. Today, Mercer and Record formally launched a joint agreement to market a currency audit service enabling pension scheme trustees to gain precise information about the foreign exchange rates they currently pay.
“Pension funds often pay little attention to foreign currency transaction costs, and better management of these transactions can enhance returns,” says Mark Walker, Head of the European Custody Group at Mercer Investment Consulting. “Plan sponsors are often unaware of the surprisingly high volume of foreign currency trading, which compounds the problem of uncompetitive rates.”
Neil Record, chairman and chief executive of Record Currency Management added: “Excess costs reduce the fund’s value unnecessarily. Pension funds can often obtain significant savings by simply opting to monitor the foreign currency transactions made on their behalf.”
The Myners Report identified the issue of transaction costs as being one to which pension schemes should pay more attention, Mercer points out. Foreign currency transactions (where there is no direct commission) can easily be overlooked.
Mercer and Record have worked with a range of UK pension funds to collect data on their investment managers and custodians’ foreign exchange transactions. They found that typical foreign exchange turnover – that is, the volume of deals in foreign currency which a pension fund undertakes each year – ranges from 50% to 100% of international asset allocations. In one case, they found that only half the fund managers engaged by a particular pension scheme were trading foreign exchange on a competitive basis. The other half cost the fund 43 basis points of turnover, compared to less than 8 basis points for the competitive managers.
The practical experience of Mercer and Record has shown that, by carrying out a currency audit and then monitoring transactions to improve the performance of fund managers or custodians, pension schemes can substantially reduce their foreign currency costs.
“It is possible for pension schemes to make annual savings of 20 basis points or more by paying careful attention to foreign currency management,” concludes Walker. “For a scheme with 500 million in international assets, a saving of 20 basis points is equivalent to more than 1 million.”