HR professionals lack knowledge of key MiFID II pension changes, say experts

3 Jan 2018 By Marianne Calnan

New rules may raise costs and affect investment decisions, as well as increasing obligations on investors

Organisations may still need to boost pension and HR professionals' knowledge of the Markets in Financial Instruments Directive (MiFID) II regulations introduced today (3 January), experts have warned.

Fewer than half of around 1,100 executives from around the globe described themselves as 'knowledgeable' about MiFID II, and more than a third revealed that they felt their organisation was not fully prepared, according to recent research.

The MiFID II regulations are the framework of EU legislation for investment intermediaries that provide services including shares, bonds, pensions, units in collective investment schemes and derivatives, collectively known as financial instruments, and the organised trading of these instruments.

MiFID II's predecessor, MiFID, was implemented in November 2007 and the revised rules were designed to improve the functioning of financial markets in light of the financial crisis and strengthen investor protection.

The rules will affect how pension schemes use and pay for fund management services, and offer greater protection for investors while improving transparency in the pension investment process, including involving costs, experts told People Management.

The rules may also raise the overall cost of pensions, as fund managers will be obliged to pay investment banks and brokers directly for the costs of analyst research, whereas, previously, banks and brokers were able to incorporate this cost into their trading commissions, said Andrew Campbell, head of pensions at Doyle Clayton.

"This raises the possibility that some fund managers will pass this cost on to the pension scheme investors who use their services," he said. "So financial directors and pension scheme trustees should check where they may incur higher costs going forward, and use this increased transparency to benchmark the cost of different services and ensure they are getting best value for their schemes."

Alongside this, investment firms now have an increased obligation to do everything possible to obtain the best result when executing client orders, and new duties regarding disclosure of costs on orders. Certain bodies – primarily local authorities – will also be classed as retail rather than professional clients going forward.

"This is important from a pensions perspective, because retail clients are subject to limits on accessing fund classes and products. For example, they are not allowed to invest in infrastructure funds," said Campbell. "This may have consequences for a particular pension scheme's investment strategies.

"However, in the longer term, any future personnel changes within a business may affect their 'opt up' status as professional investors, so the pension fund should have processes in place to notify their fund manager of any such developments."

MiFID II provides an additional layer of information and protection that "builds on an already robust regime of generally well-managed workplace pension schemes", according to Nathan Long, senior pensions analyst at Hargreaves Lansdown.

He told People Management that HR professionals should "take comfort in the fact that either pension scheme trustees or independent governance committees will now be scrutinising this additional data to assess whether pensions are delivering value for money".

He also said that costs incurred under the rules depend on the type of pension saving strategy used, which is decided by financial directors or pensions directors. Pension savers, meanwhile, will now be able to see the cost of investing in certain funds clearly in pounds and pence.

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