Call to press fund managers over fees paid by pension trustees

June 3, 2013 11:34 pm

Call to press fund managers over fees paid by pension trustees

By Norma Cohen, Demography Correspondent

Fees collected by fund managers add up to a rising proportion of the returns they generate for pension trustees, with a vast divergence between what different investment groups charge for similar services, according to a report.

The fees paid by pension trustees have stayed flat while their returns have been subdued compared with past decades, adding to concern about the relative cost of fund managers’ services, says Lane Clark & Peacock, the actuarial consultants.Mark Nicoll, partner at LCP, said that, because investment returns were likely to be low compared with those of recent decades, pension trustees needed to press fund managers harder on costs.

“If returns are 5 per cent, then paying 0.5 percentage points on funds under management is 10 per cent of your total return,” he said. “If you once had expectations of a 10 to 12 per cent return, you now have 3 to 5 per cent.”

The report, which looked at the fees and expenses charged by fund managers found big gaps between what some investment groups charge for managing similar portfolios.

A pension scheme with a £100m high-performance global equities mandate could pay between £598,000 and £672,000 for fund management services.

The findings come amid growing concern about disparities between what local authorities pay for effectively the same services.

Moreover, while most fund managers disclose the annual management charge for running pooled funds, this understates what investors have to pay because it leaves out two other categories of costs. These extra costs often exceed the annual management charge by a substantial margin.

Some extra costs stem from services such as custody, administration and legal services. Another category, which only a third of fund managers disclose, consists of fees paid to brokers, taxes and “market impact”, the actual transaction cost including how asset prices move against investors when large blocks are bought or sold.

LCP noted that managers of funds of hedge funds were particularly unwilling to disclose these extra costs. It said: “It seems that such providers would rather keep investors in the dark about the true cost incurred to manage assets.”

While some managers said splitting the costs out would be too difficult, others defended the lack of transparency by saying they considered “transaction costs to be confidential to them”. For a portfolio of high-yield corporate bonds, adding management and administration costs to­gether produces a charge that is about 40 per cent above the basic management fee.

The LCP report comes amid growing political concern about fees and charges for pension investments as employers roll out auto-enrolment savings schemes intended to help people pay for their own retirement.

Negotiating performance fees for managers is no panacea, the report notes, because even mediocre performance is rewarded when the markets rise in a marked way. In a period like the three years to December 31 2012, when markets rose about 22 per cent, even a manager underperforming by 2 per cent annually would still be entitled to an annual fee increase of about £35,000 on a £50m mandate, despite poor relative performance.