Cutting investment costs should be an overriding focus for schemes, and pooling local authority funds could help this quest, argues SCM Private's Gina Miller in the latest edition of Informed Comment.
They are estimated to manage around £187bn, with around 2.6m public sector workers relying on them to provide an income for their retirement.
As public sector finances come under increasing strain it has been suggested councils should pool pension funds to secure higher returns and seek efficiencies.
I welcome local authorities looking afresh at the returns they gain, but I believe cutting fees and charges has to be the single most important overriding priority.
Pension fund trustees and individual savers frequently do not realise the destructive impact of fund fees and charges.
There is a good reason for this. Many of the fees levied are not revealed upfront in a transparent and open fashion, with a raft of ‘hidden fees’ such as dealing costs, custody and administration charges, performance fees and other costs significantly eroding the returns generated.
Research published recently by Investor Data Services into the amount of money paid in fees and charges by local authority pension funds showed the most expensive quarter of funds paid on average four times more investment fees than the cheapest quarter.
Yet many of these funds saw similar levels of return from similarly-sized funds, so justifying the differential in costs and fees is hard to fathom.
Battling hidden charges
Hidden costs and fees are an issue for all pension funds and workers. They erode the value of funds and threaten the retirement plans for millions. It is a national scandal that has to be addressed.
Fund managers need to heed the warning and act to deliver a better deal
Local government minister Brandon Lewis estimated pension fund fees and costs levied on local authority schemes net a staggering £500m a year for the pensions industry. Yet the returns generated rarely justify the cost – particularly in a flat market.
With £1bn in funds, local authorities should be bold. They can afford to throw their considerable financial weight around and demand better terms and much fairer deals for their members.
The fact they have to act in this way rather than expecting and receiving a fair deal in the first place is a disgrace, and it reflects appallingly on the UK’s financial services industry.
However, unlike the ordinary consumer, local authorities can do something about it, and are waking up to the predicament. Pooling local authority pension funds can help to address this challenge.
While the bulk-buying power of local authorities is huge this power is currently being dissipated, with around 89 local authority pension schemes now operating across the UK.
Larger funds can demand a better deal and also have the whole-of-market oversight to understand what they are being charged and whether this represents fair value when it comes to the real returns they receive.
The risk of inaction
Some commentators have argued that local authorities should exercise caution before pooling pension funds to ensure the objectives of the combined fund continue to reflect the retirement needs, age profile and risk appetite of their members.
While trustees will obviously need to ensure the combined funds deliver, I believe the greatest risk comes from inaction. To date, the industry has been beset with self-interest and resistance to change; and industry bodies, including the National Association of Pension Funds, appear to be missing the opportunity to raise standards and increase consumer protection.
In a flat market showing low growth, where annuity rates have dropped by around 30 per cent since the start of quantitative easing – according to research recently released by provider Axa – there is little justification for charging high fees.
Those pension fund managers who continue to do so risk pricing themselves out of business. The fact local authority pension schemes are waking up to this, together with retail investors and private sector pension scheme trustees, is good news.
The tide of change is in full flow. Pension fund managers need to understand that if they do not change by themselves then change will be imposed upon them.
I fully endorse local authorities pooling their resources and driving down costs, interrogating efficiencies and seeking higher returns for pension scheme members.
They have a duty to do so, and fund managers need to heed the warning and act to deliver a better deal.
Gina Miller, is co-founder SCM Private and the True and Fair Campaign
