Home ListingJanuary 7, 2014

Local Government Funds Get Help on FX Fees

<em>UK government pensions could save thousands in excess FX fees, Russell Investments has claimed.</em>

Reported by Featured Author

(January 7, 2014) — Foreign exchange (FX) costs could be reduced by hundreds of thousands of pounds for local authority pension funds, thanks to an FX execution platform launched by Russell Investments.

The consulting firm and asset manager has long been arguing that pension funds need to challenge FX fees more rigorously. In 2012, FX trades performed by asset managers averaged a cost of 10 basis points (bps), according to Russell’s paper “Still Overpaying for FX?”. Pension funds which passed FX execution to their custodian paid even higher costs.

By contrast, Russell Investments’ clients paid less than 1bp, excluding fees. The reduction was created in part from competitive execution, and partly from the matching of trades to reduce the flow that needs to go to market.

Now it has created a platform to help local government pension funds achieve just that, and signed up the Cambridgeshire and Northamptonshire local authority pension funds for the launch.

Russell Investments estimates the platform will provide £300,000 worth of saving for the LGSS, the collective name for the Northamptonshire and Cambridgeshire pension funds.

Tolu Osekita, who has responsibility for managing the investments of the funds, said there was potential for further cost savings across the Local Government Pension Schemes (LGPS) sector if other funds joined up to the FX platform in the future.

“Smart solutions that deliver efficiencies in the way our investment strategies are implemented are a critical consideration for LGSS Pensions services and representative of the way we think across all our service offerings,” Osekita continued.

The LGSS was established in October 2010 to enable the two funds to share their resources and expertise whilst driving down operating costs, resulting in more time and money being spent on delivering the highest quality service.

It has more than 100,000 members and 372 employers, and manages a diversified portfolio of assets amounting to £3 billion.

Klaus Paesler, head of currency and overlay strategy EMEA for Russell Investments, told aiCIO a similar platform was already being used in Australia, and the firm was considering looking for potential similar schemes in the US.

“The estimated savings were for the two mentioned schemes only. For the greater LGPS, the savings will be much bigger but are dependent on the amount of trading and their current trading costs,” said Paesler.

There are governance benefits to the new platform too as it provides greater transparency in terms of a time stamp and cost of execution for every transaction, as well as helping pension funds to manage their counterparty risk.

2011 saw a stream of legal proceedings issued against fund managers for overcharging their FX fees. BNY Mellon faced writes by both the State of New York and the US government over claims it had defrauded the state and other pension funds on FX fees over the previous decade.

Florida’s state pension fund also filed against BNY Mellon, alleging it had been overcharged by $30 million (£18.8 million) between 2001 and 2010.

And in 2009, the Californian Public Employees’ Retirement System and the California State Teachers’ Retirement System alleged they had been overcharged by more than $56 million (£35 million) over an eight-year period by their custodian State Street.