The end to the uniform collection of direct expenses in pension funds? The Capital Market Authority this week published the new regulations on direct expenses, the same expenses that institutional bodies charge for the use of external companies, and for which they charge up to 0.25% in addition to the “regular” management fees paid by members.
According to the regulations, the final wording of which will be published after addressing public comments, savers will be given two routes in which the institutional bodies (pension funds, provident funds and study funds) will charge a lower rate than hitherto charged for direct expenses, 0.25%. At the same time, entities will be able to offer routes with greater exposure to non-marketable assets, where management fees may be higher than allowed so far, as investing in non-marketable assets usually results in direct expenses at higher rates.
The new regulations were made following the recommendations of a beautiful committee set up by the Commissioner of the Capital Market, Dr. Moshe Barkat, in February 2020. The committee recommended the establishment of three different pension tracks, which differ from each other in management fees and investment instruments. Private funds.The second will be performance-based management fees.The third track will define pre-determined management fees, which include direct expenses, a model designed to incentivize the reduction of direct expenses – from the very competition in management fees.
The first cluster is for savers who want the track investments to be invested directly in marketable assets (rather than non-marketable assets such as non-marketable investment funds, which are paid external management fees). Therefore, in favor of this route, direct expenses were allowed only for certain types that are typical of tradable investments.
The second cluster has tracks designed for savers who want track investments to mimic indices. As these are public indices, the intention is that the track investments will be invested in common and well-known instruments to imitate indices and therefore even in this case direct expenses of certain types were allowed with regard to external management fees.
The Capital Market Authority explained that collecting direct expenses in these routes, depending on the types of direct expenses proposed to allow them to be collected, is expected to improve the risk-adjusted return expectation for savers in these routes.
In any case, the Capital Market Authority stipulates that in tracks characterized by the collection of variable management fees, it will not be possible to collect direct expenses of any kind, since these are tracks in which the institutional body’s remuneration is also derived from the institutional investor’s investment decisions. . This is in contrast to routes for which the institutional body charges a fixed management fee, in which the prohibition of establishing direct expenses may lead the institutional body to choose not to make certain investments due to the desire to avoid absorbing the expenses involved in making these investments.