The Securities and Exchange Commission of Pakistan (SECP) is seeking to reduce the overall fee structure for investments in mutual funds and pension schemes, with the aim to attract more retail investors to these financial offerings in both the conventional and Shariah arenas.
This proposal was made as annual statistics since 2021, as released by the SECP, show that individual investors are hit with front-end fee loads while corporates are spared – “presumably on the basis of negotiating power with higher ticket size”.
The SECP also noted current regulatory caps on various fees for both mutual funds and pension schemes within Pakistan are generally higher compared to other jurisdictions. As such, the SECP is seeking to reduce the total expense ratio (TER) without burdening fund operators.
Analyzing actual total fees imposed over the past three years, the SECP concluded: “Market competition caused the asset management companies to keep the overall TER below the allowable caps.”
The TER is the sum of all daily expenses borne by the fund, then divided by the average daily asset value that gets transferred to unitholders – proportionate to their respective investments in the fund. The TER encompasses various fees like those for fund management, trustee and regulatory compliance, plus additional expenses, taxes and other government charges incurred.
Further, the SECP noted the industry share of equity funds dropped significantly from 40% in 2019 to only 10% in 2023. Despite charging among the highest selling and marketing expenses, which are passed on to unitholders, the SECP said mutual funds could not attract new investors.
The SECP hence proposes to abolish the TER and cut other imposed costs by referencing the Morningstar Global Investor Experience Study Report 2022 – where the global average funds’ TER is 0.66% for fixed income, 1.25% for asset allocation and 1.41% for equity schemes.
Table 1: Proposed list of chargeable expenses including regulatory fee
| Category of mutual funds proposed | Management fee caps |
| Money market | 0.5% per year |
| Income, aggressive income, capital protected, index and commodity schemes (cash settled) | 1% per year |
| Balanced, capital protected (dynamic asset allocation – director exposure) and commodity schemes (deliverable) | 1.5% per year |
| Equity schemes, asset allocation | 2% per year |
| Fixed rate/return scheme | 0.5% per year |
| Exchange- traded fund (ETF) | 0.5% per year |
| Fund of fund | 0.5% per year |
Source: Securities and Exchange Commission of Pakistan
Further, the SECP will disallow passing on various fund operational costs – like expenses related to registrar services, accounting, operation and valuation services, printing and distribution of quarterly, half-yearly and annual reports, plus selling, marketing, advertising and publicity expenses or development of alternate delivery and distribution channels.
Extending the fees’ review to pension funds, the SECP said selling and marketing expenses are no longer allowed to be charged to these investors as of February 2024 – stating there is no need for pension funds to attract clients, unlike retail investment products.
The SECP also noted a disparity where investors’ long-term savings are subjected to considerably higher charges. “Pension funds, being long-term passive investments are not exposed to liquidity risk and these pension funds do not require the active management by pension fund managers.”
In view of this rationale, the SECP is revising down the TER cap on pension funds to between 1% and 2%, depending on the investment asset class.
To further boost access to these funds, the SECP proposed several changes aimed at making distributor compensation more attractive and transparent – including proposing that distributors get a percentage of the relevant fund’s management fee.
The SECP is also eliminating sales loads, such as front-end fees, and introducing a more practical concept of “one-time onboarding charges from the new investors of mutual fund and participants of pension fund at a rate of PKR150 (US$0.54) for each new investor”.
A further PKR100 (US$36) can be charged to existing investors on all new investments higher than PKR25,000 (US$89.50) in mutual funds – but not for pension fund transactions.
Fund managers can implement another transaction charge on new investments – thus providing extra commissions for distributors outside leading urban clusters (in tier-2 cities) – and introduce a trailing commission accrual.
This accrual is calculated “on a daily basis on behalf of the distributors, an additional 0.25% in case of equity, asset allocation and balanced schemes and 0.1% in all other schemes excluding ETF and fund of fund”. This trailing commission for distributors is in the form of new units issued for both mutual and pension funds.
To address potential fraud, retagging clients from one distributor to another must be confirmed in writing by the respective investors. Trailing commissions for the former distributor stop on the retagging date – but the new distributor is entitled to this commission only after a 90-day cooling-off period.
