The multi-employer charity plan reduced its fund management fees by 6.5% last year, and consultants claim other schemes could save up to 25% through renegotiating management charges
Checklist for reducing fund fees
In LCP’s Investment Management Fees Survey, the consultant outlined a checklist for schemes renegotiating their charges:
Is it more than three years since fees were reviewed?
Has the manager recently underperformed, but the scheme wants to retain them?
Have assets increased beyond the expectations of when the manager was appointed?
Is the manager now running money for another mandate within the same group, such as another pension scheme?
Has the way the manager manages the portfolio changed materially?
If the answer is yes to any of the above questions then schemes should consider the following:
Is the scheme on the standard fee scale?
Is the fee out of line with benchmarked fees?
If on a flat-rate scale, would the scheme rather be on a performance-related scale?
The Pensions Trust has renegotiated fee arrangements with its fund managers and saved £1m.
The £4.2bn scheme began a policy of seeking to better align fund management fees with investment performance two years ago, through regular meetings with its managers.
“There is a lot of talk in the industry about challenging high fees – this is The Pensions Trust doing its bit,” said David Adkins, chief investment officer at the scheme.
Consultants have told pension funds in long-term relationships with managers that they are able to reduce their investment costs by as much as 25% through renegotiation.
Schemes which are able to reduce their investment costs – which compound over time, especially when assets swell – can get better value for their members and retain more of their funds.
The Pensions Trust's £1m saving
Two years ago the investment team at The Pensions Trust began making fee discussions a priority at the regular meetings it had with its fund managers.
Adkins met the managers on a rotating basis, picking one or two a quarter and reporting back on the discussions at the quarterly investment committee meeting.
“We have done this over the past two years, seeing about six managers each year,” Adkins said.
I doubt we will get the same figure this year as the managers have performed better
David Adkins, CIO
“We tend to be more successful with the managers who are doing less well than those who have done well for us.”
Last year the scheme’s overall spend on investment management, administration and custody was £14.5m, which would have been £15.5m without the saving.
Adkins added: “We probably have about six more [managers] to see, but I doubt we will get the same figure this year as the managers have performed better.”
He said other schemes looking to challenge their fund managers over fees should make sure they know the recent performance and pick a lead negotiator with good diplomatic skills.
But the most important tip was to not be afraid to ask for a reduction, as he said in his experience fund managers were often willing to budge.
The amount of time and money fund managers spend on acquiring new business compared to the relatively small ongoing costs of managing investments means they will often reduce fees in order to retain clients.
So far The Pensions Trust has not revisited any managers with whom it has managed to negotiated a drop in fees.
But Adkins said it would be difficult to further push the charges lower unless the manager had underperformed.
Achieving a 25% fee reduction
Schemes have been urged to benchmark their fund management fees against their peers to check whether they are receiving value for money.
In our experience you can save up to 25% if you are a long-term client
Mark Nicoll, LCP
Consultants will have a good idea about what level of fees their other clients pay.
Last year, LCP published its latest report into investment fees which provided detailed information of standard investment management fees by asset class.
Mark Nicoll, partner at LCP and author of the report, advised schemes to compare their fund management fees against the benchmark and look to renegotiate any which were not closely aligned.
“In our experience you can save up to 25% if you are a long-term client,” he said.
“The clients we take on tend to be paying the standard fee scale and no one had even asked whether they should be.”
He added: “One of the first things we look at is whether we can save them money on their fund management fees.”
Fund managers are more likely to be open to reducing fees if one or more of the following criteria are met:
The mandate is large or has grown significantly since it was first negotiated;
The mandate has been in place for a lengthy period of time;
The scheme is an early investor into a new fund;
The fund has a short track record; or
The scheme has a strong reputation.
But fund managers are more reluctant to reduce fees for the following reasons:
There are complex reporting requirements;
There is a high demand on the manager’s time;
There is limited capacity within the fund; or
There is existing high demand for the product.
Nicoll said he was surprised to find passive managers – though starting from a lower fee level – were often more willing to reduce fees than their active counterparts.
He said this was due to them having lower servicing costs than active managers and there being a very competitive passive market.
