In the first instalment of a schemeXpert.com research project into pension fund attitudes to asset management fees, we look at getting value for money
UK schemes are divided when it comes to how much influence they believe consultants should have on fund management fee negotiations, schemeXpert.com research has shown.
Getting more bang for your buck
The 20 pension funds surveyed gave the following tips on handling asset management fees:
Regularly review and renegotiate fund manager contracts. Survey respondents reported holding reviews as regularly as every year.
Use consultants to provide information on their other clients’ charges and their leverage with fund managers to negotiate down costs.
Benchmark fund fees with other schemes. Survey respondents said this was often conducted through consultant surveys or on an ad hoc basis, as and when they met other scheme representatives.
As running costs come under increasing pressure schemeXpert.com undertook a survey of 20 pension funds to discover how their attitudes to investment charges are changing.
The results showed fund fees are a chief preoccupation among many schemes’ management teams but they are not always in agreement over the best way to maximise value.
Schemes that are able to get the best value from their fund management contracts will be best placed to improve the performance of their assets and increase the likelihood of their members getting the highest possible income in retirement.
The schemes – from both the public and private sectors, and made up of defined contribution and defined benefit plans – account for £27.5bn of assets under management and have more than 500,000 members.
The survey follows a report on schemeXpert.com last month over how The Pensions Trust had managed to save £1m a year by renegotiating its fund management fees.
The role of consultants
Investment advisers can hold one of the most important roles when pension schemes are setting and negotiating their fund management fees – but the survey respondents were divided over how much influence they felt their consultants should have.
We see the setting and negotiation of fees as being part of the brief for our investment consultant
Secretary, £1.5bn scheme
It was recognised that consultants were able to provide an industry-wide view of acceptable fund manager fees and benchmark them against their other clients’ rates.
A number of schemes also highlighted the potential for consultants to use collective bargaining power for all their clients’ assets.
For one scheme, it was assumed the amount of business their adviser gave to certain asset managers would act as leverage when renegotiating charges.
“We see the setting and negotiation of fees as being part of the brief for our investment consultant and expect them to benchmark the fees and recommend changes when appropriate,” said the scheme secretary of a £1.5bn hybrid scheme.
But there were other respondents who felt consultants should have only a limited advisory role when it came to setting and negotiating fund fees.
“Consultants should only assist the trustees, with the trustees leading on the negotiations,” said an independent trustee whose multiple schemes have more than £2bn of assets combined.
Fee reviews and caps
When questioned about what other strategies they use to ensure they get value for money from their fund management contracts, the scheme representatives offered a range of pointers.
We review fees on an annual basis and challenge the investment manager at each opportunity
Pension manager, £780m fund
A number used regular reviews of their fund manager contracts, with frequency ranging from every three years to – in the case of the Reckitt Benckiser pension fund – annually.
“We review fees on an annual basis and challenge the investment manager at each opportunity,” said Christopher Little, pension manager at the £780m scheme.
At these reviews the pension schemes would discuss the fund manager’s past performance and how that compared to benchmarks. They would question the manager over their expected future performance.
The scheme manager of a £2.2bn DB fund, whose parent operates another pension scheme in the Netherlands, said: “We negotiate hard at the outset and do analysis of flat-fee versus performance-related structures.
“We also undertake a review every two to three years to ensure fees remain value for money and seek further discount if our Dutch plan also invests.”
Some respondents used other safeguards, such as caps on performance fees, to help them get value for money.
Comparing fees with other schemes
The respondents were evenly split over their attitude to the merits of comparing their fees with other schemes.
We just negotiated as hard as we could on our fees
Pension manager, £2.2bn scheme
Of those who did not see the benefit, the main reason was that they did not feel it was relevant as long as they were satisfied with the fees they had negotiated themselves.
“We just negotiated as hard as we could on our fees,” said the pensions manager at a scheme with 41,000 members.
But there were also a number of schemes who believed it was crucial to compare their fees with other schemes to ensure they got best value for their members.
The principle way of gauging other schemes’ charges among survey respondents was via consultant surveys or through speaking with their peers.
“Generally, the only [way we get fee information is] by chance when we are working on outsourcing projects with our competitors,” said the secretary at a £1.5bn scheme with 17,500 members.
Next week we look at the different approaches schemes have to active and passive fund management fees, and what other transaction costs they consider.
