Pensions pay too much for FX

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UK pension schemes are still paying too much for foreign exchange transacting, despite high-profile US schemes filing lawsuits against their custodians.

A fund of £1bn could save £330,000 in fees for FX transactions by negotiating better rates, according to Russell Investments.

David Rae, head of investment solutions, said the average cost for FX trades in 2012 was 10 basis points, but it should be as low as 1bp.

He said the main reasons for higher fees were a lack of market structure, as there was no central exchange, regular trading hours or global regulator, and a lack of expertise. Also, “the bundling of FX trade fees in with other custodian services can lead to a lack of transparency on the costs of execution”.

Conflicts of interest were another factor: “If your custodian bank is acting for both sides of the transaction they are not necessarily in a position to push for a competitive price,” Mr Rae said.

Stephen Collins, global head of dealing at London & Capital, said many institutional investors still relied on a middle man to execute – leading to the execution, transaction and clearing costs being bundled under the spread price.

“Investors should hunt around, use several providers, negotiate spreads and know where rates are trading,” said Mr Collins. “Retail can be forgiven. But institutional investors should know better.”

The report’s findings are based on an analysis of more than 173,000 FX trades conducted on institutional assets over 2010/2011, with a value of about £48bn.

Last year a lawsuit was filed against BNY Mellon by the State of New York and the US government over claims it had defrauded the state and other funds through FX fees over the previous decade. Florida’s state pension fund also filed against BNY Mellon, alleging it had been overcharged by $30m from 2001 to 2010.

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

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