Greater intermediary fee transparency needed to assess value, experts urge

There has been greater pressure on both defined benefit and defined contribution schemes to decrease intermediary costs to help reduce deficits and improve member outcomes. 

You have always got to look at what the net performance is and how that meets your requirements in that asset class

Giles Payne

The Office of Fair Trading's report on the DC workplace pension market found an annual management charge of 1 per cent would reduce a member's pension by 21 per cent over their saving lifetime.

Jonathan Lipkin, head of research at the Investment Management Association, said trustee boards and investment governance committees have a responsibility to set clear objectives and ensure they are delivered as cost-effectively as possible. 

“In such a context, value for money cannot simply be measured in terms of headline charge," he said. "If one scheme costs 0.2 per cent, but is invested conservatively, how should that be compared against a strategy that costs 0.3 per cent and is invested in a different manner?”

He added: “Ultimately, overall investment performance is critical and we must not overlook that.”

Schemes should consider how a particular asset class or strategy fits into their overall portfolio, said Giles Payne, director at HR Trustees, and investigate what investment options are available and whether it could be done passively at a lower cost.

But he added there are fewer passive alternatives in assets such as property, where managing and trading can be expensive. “You have always got to look at what the net performance is and how that meets your requirements in that asset class."

Reviewing investment strategy

Simplifying investment strategies could help schemes in reducing costs, but gaining an accurate picture of costs is a battle of wits between savers and the investment management industry, said one professional trustee speaking anonymously.

“For instance, in a fund, how often the shares are being sold and bought and churned, and all the transactions costs,” said the trustee. 

Railway workers industry scheme RPMI plans to reduce its investment costs by taking a more targeted approach to investing, chief executive Chris Hitchen told delegates at the National Association of Pension Funds' annual investment conference earlier this month. 

“Our strategy has been a bit of everything and a bit more of the things that we thought might be slightly better than the others,” said Hitchen.

When polled, around seven in 10 delegates at the session said they did not believe schemes were getting value for money from their agents. Hitchen criticised investment practices such as high-frequency trading.

"It seems to me the profits that come from that must be coming out of the pockets of end investors, for albeit we're getting a more efficient price, whatever that means, as a result," he said.

More needed to be done by the industry to promote the interests of the end investor, Hitchen added.

Reducing fees on DB pension funds by 70 basis points a year could lower deficits, said David Pitt-Watson, executive fellow at the London Business School, also speaking at the conference.  

He added one problem was that the total expense ratio often does not include taxes and duties, foreign exchange costs and spreads on trading, making it difficult to assess what costs are involved.

“I’m not saying that it’s wrong people are making these charges, I’m just saying that if the market’s going to work, we’ve got to know about it,” he said.