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Law Commission warns over pension charge cap transaction costs exemption

A Government-backed report has warned 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 that when the charge cap is reviewed in 2017, the Government should consider whether it has encouraged trading by investment intermediaries.

The Commission 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.”

It also proposes the 2017 review include an examination of stock lending by asset managers.

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

The Department for Business Innovation and Skills asked the Law Commission to review the law around fiduciary duties following Kay’s findings.

In addition to its warnings on transaction costs, the Law Commission has clarified that pension fund trustees should take into account ethical and environmental considerations when investing.

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