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Law Commission warns on charge cap transaction costs exemption

A Government-backed report warns exempting transaction costs from the pension charge cap risks encouraging trading over long-term investing.

The Law Commission, an independent body that sits within the Ministry of Justice, warns that by leaving transaction costs out of the charge cap for auto-enrolment default schemes the Government may have created “inappropriate incentives to trade”.

It recommends when the charge cap is reviewed in 2017, the Government should consider whether it has encouraged trading. It also proposes the  review include an examination of stock lending by asset managers.

The report says: “The Government is introducing a charge cap for default funds in schemes used for auto-enrolment in April 2015. This cap will not apply to transaction costs. 

“We think that there is a possibility that this may create inappropriate incentives to trade.”

In 2012 the Kay Review criticised short-termism in pension fund investment decisions.

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