Schemes warn managers on investment fee add-ons

Pension schemes are more likely to accept additional costs for investment management if performance is strong, schemeXpert.com’s fee survey has revealed.

But the survey of 20 UK schemes showed they would often push back on “exorbitant” or “hidden” fees and these would be taken into account when considering contract extensions.

The findings come at a time when investment management performance has been mixed due to erratic market conditions and schemes are under pressure to reduce costs.

Schemes that are able to control costs and get better performance from their fund managers will be better placed to maximise their members’ retirement income.

“I look at all fees and drive out all hidden fees and soft commissions,” said an independent trustee who sits on schemes with total assets of £2bn.

The 20 schemes surveyed had total assets under management of £27.5bn and more than 500,000 members.

Investment services fees

Fund management fees are typically displayed as an annual management charge, which is a percentage of the scheme’s invested assets.

There is little transparency of these costs within the annual management charges, although for some managers the fees are more explicit

Secretary, £1.5bn scheme

But there are often several categories of additional costs (listed above) – such as custody and administration charges – that are not included in the AMC.

One of the respondents, the head of pensions and treasury management at a £1.3bn public sector scheme, said these charges were discussed at management presentations as part of the total expense ratio.

But there are also other charges – including performance fees, dealing costs, platform charges, initial charges and exit charges – that are not included in the TER.

These often overlooked fees make comparison between managers harder in absolute terms.

“Our investments are in pooled funds so there is little transparency of these costs within the annual management charges, although for some managers the fees are more explicit,” said the scheme secretary at a £1.5bn scheme.

Meanwhile, a member-nominated trustee at a £550m scheme added: “We are made aware of these costs and get the consultants to negotiate if they are exorbitant.”

Many of the respondents said they monitored the additional fees their schemes were charged and were more likely to accept them if the manager had performed well.

But if the investments had performed badly they would be more likely to challenge the additional costs.

Some even said they would consider switching manager if they felt their additional charges were too high.

Passive vs active fee structure

Of the DB schemes that reported their passive management fee structure, the AMC range was between 0.08% and 0.2%, while the fees for active equities ranged from 0.4% to 0.9% on a flat-fee basis.

In addition to these charges, a number of the respondents were prepared to pay performance fees for alternative asset classes.

The pensions manager at a £2.2bn fund said the fee structure at her scheme was dependent on the asset class but the typical structure had a base fee of between 0.15% and 0.75% with an outperformance fee of between 10% and 22.5%, and a total fee cap in place.

But not all respondents felt they were getting value for the fees they were paying.

One trustee said his scheme was charged on a cost-per-hour rate for trustee meetings, with special rates for other activities such as investment reviews.

He said this meant passive mandates were “definitely not” value for money, while active mandates were only value for money “in terms of participation; but not in terms of investment results”.

Next week we look at the issue of transparency in fund management fees and how schemes keep track of the services they are buying.