Large pension funds in the United States determined in the 1980's to monitor transaction costs incurred by their investment managers and, working in conjunction with those managers tried to reduce those costs. They regarded this as a part of their fiduciary responsibility, since fund assets were affected by these charges. The monitoring process must be regarded as a success. Managers have, as a result of being measured, focused more resources on determining how they should consider trading and execution in the context of their overall investment process. It has also helped rationalise and optimise broker relationships and played a role in reducing commission levels generally.

It appears that, primarily as a result of the Myners Report and subsequent FSA actions in the U.K. and MiFID in Europe, pension funds more generally are embarking down the same path. Managers have responded to this nascent interest on the part of their clients with an approach that endeavours to make transaction costs more transparent as well as making clear that they are actually being monitored and managed within the overall investment framework.

GSCS services are designed to facilitate pension fund completion of their responsibilities whether they are framed as “best practice” guidelines or regulatory requirements. Services for pension funds are structured in such a way that they closely follow the recommendations of the original Myners report, subsequent updated guidance from regulators and industry bodies such as the FSA and AIMR, and evolving directives such as MiFID. Part of the success is the ability of the GSCS technology infrastructure to respond very flexibly to changes that result from the various consultation processes that inevitably precede any changes.

However, while fully supporting the efforts of pension funds to reduce costs, GSCS recognises that the results achieved, in terms of actual cost reduction, are not as great as some might suggest and are heavily dependent on the establishment of a constructive dialogue between pension funds and their managers. As such it is essential that funds keep both their direct costs, in terms of fees paid for transaction cost management services and the indirect costs, in terms of internal administration, to a minimum.

In the context of relations with managers, GSCS promotes a positive approach. This involves

a) focusing its analysis on areas where performance appears to consistently fall short of reasonable objectives (one-off elements will always impact performance from time to time)
b) ensuring that issues are identified only where the financial implications are consequential for the fund (i.e. avoiding spending time and effort on small items of little financial consequence)
c) engaging directly in a dialogue with managers where appropriate to resolve issues of fact or perspective on the overall process of measurement

GSCS uses its superior technological architecture to enable it to deliver services at a cost that is materially lower than that of its competitors without a reduction in the quality and completeness of the service that it offers.

GSCS also offers pension funds services that take account of the special cost and risk factors that impact on transition trading (caused when a pension fund changes managers and/or asset allocation). In these circumstances a somewhat more sophisticated approach may be both necessary and justified in view of the financial costs that should be incurred through poor management of the process.

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