On the go: Small UK pension schemes are to be offered free collection and analysis of their asset management costs, under corporate social responsibility plans revealed by ClearGlass.
The business, founded by Financial Conduct Authority cost transparency tsar Chris Sier, has informed the Department for Work and Pensions of its intentions to offer its services for free to defined benefit schemes with less than £20m in assets.
The decision follows the emergence of damning evidence that small schemes are at risk of hugely overpaying for asset management services.
ClearGlass analysis found that schemes of all sizes are capable of securing competitive basis point charges, with similar mean levels of cost across the universe. But some plans with less than £100m paid as much as 263 basis points for asset management mandates, highlighting what ClearGlass labelled a clear governance gap.
Sier said: “The data we have collected over the past 12 months tells a story. While the mean cost was similar at 65bp almost regardless of scheme size, the potential for a significantly higher cost emerged as scheme size fell.
“To me, this smacks of a governance shortfall within small schemes rather than an ‘economy-of-scale’ issue. I am currently further analysing the data to see what the expected optimum price might be for a small scheme if it procured at the scale of a larger scheme.”
Average small scheme returns worryingly stagnant
ClearGlass’s findings that management costs are swamping some small schemes had an unsurprising impact on performance. Indeed, the data suggest that the average small scheme mandate is crawling forwards at just 0.1 per cent a year.
Among those performances, the best-run schemes were again capable of matching larger peers, with the range stretching as high as 15 per cent.
But the worst performances dipped as low as losing 12 per cent — likely to provide a significant drag on member returns, even if part of a diversified portfolio.
Sier added: “Small schemes also seem to suffer the risk of poor performance outcomes in a way that larger schemes don’t. A double whammy of potential high costs coupled with poor performance if you are small — which led the team here to think about how we could help.
“When coupled with an appetite to build our own CSR agenda, this meant playing to our strengths, so we’ve decided to offer small schemes what we do for free. I started at DB schemes less than £20m [in assets under management], which is an invisible segment of the market, but we may expand this if it works and larger schemes need similar assistance.”
He continued: “We would never turn someone away if they needed us. If you are a DB scheme with less than £20m AUM, please get in contact.”
Many schemes are now waking up to the extent of their asset management costs, after participating in the Cost Transparency Initiative.
But the results of a Pensions and Lifetime Savings Association survey suggested that while awareness is good in general, it may not be uniform. Seventy-four per cent of respondents had a good level of awareness of the CTI, and the majority have already requested cost information using the templates.
The CTI announced additional resources and a new set of tools aimed at encouraging take-up in June 2020.
