fund management houses must pay back money to stakeholders who purchased tracker units
The IMA has written to its members warning them that they urgently need to calculate how much they need to pay back to investors if a stakeholder pension is linked to a tracker fund.
Investment groups offering UK tracker funds via a stakeholder face the difficult task of paying out money to investors if they are to comply with the 1% charge cap.
This affects all unit trusts which invest in investment trusts available via stakeholder, but trackers are likely to be the most affected, as investment trusts make up 2.95% of the FTSE All-Share.
The stakeholder cap on charges is calculated as 1/365th of 1% of the fund per day. This does not include stamp duty and stockbrokers' commissions on trading in securities. Stakeholder regulations specifically exclude investment trusts from the definition of securities.
This means that the 0.5% stamp duty charge and other dealing costs must be included as part of the capped charges, making it extremely difficult for stakeholder-compliant funds to buy investment trusts. David Broadway, senior technical adviser at the trade body, said: 'The amounts involved are very small, but the administrative problems are significant. Companies will have to decide how much to pay people back, on the basis of information which is not there, as well as how to pay people back.'
He believes that for a £3,600 lump sum, investors would probably be entitled to less than £1.50 and said that a typical fund would only cost 0.035% more than the 1% cap.
Broadway explained that it would be impossible to calculate the exact amount because, while investment trusts charge on a daily basis, it is only an annual charge that is disclosed on the report and accounts. As the information should be provided on 5 April this year, Broadway said it was crucial that fund providers quickly agree a formula to establish a reasonable estimate on what should be paid back to unit holders .
The IMA is in discussion with the Department For Work And Pensions on how to deal with the situation.
It is calling for funds to be allowed to make an assessment on payments to investors based on a calculation using a total expense ratio and the weighting of investment trusts in the fund. It argues this will remove the need for 'extensive investigative work or numerous individual calculations.'
Broadway said the IMA was still waiting to hear back from the DWP.
He believes that the DWP interpretation of the rules, which prevents both underlying and top-level funds from charging more than 1/365 of 1% on any one day, could be open to challenge in the courts. He said that while the IMA is calling for changes to be made to regulations to allow funds to invest in trackers, failure to make headway meant that groups needed to take action now.
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