Industry figures have called for more transparency around charges from asset managers after Railpen Investments said upfront fees were as little as a fifth of its total fees paid.
The Financial Times reported this week that the £70m paid by Railpen Investments – which manages the investments of the Railways Pension Trustee Company – in ‘headline’ annual fees may be dwarfed by the amount siphoned off in additional charges. The company’s private equity and venture capital funds were said to be particularly affected.
Professor David Blake, director of the Pensions Institute, whose academic papers have concluded up to 85 per cent of schemes’ investment charges could be hidden, said Railpen’s findings highlighted wider industry practice.
Blake said: “In the days when the fund managers were generating 15 per cent returns each year with a crash every five or six years and almost immediately a recovery, you could live with those costs.
“Now with the more volatile returns that investors are going to have to live with going forward, we have to shine a light on all these costs.”
Gina Miller, founder of the investment management group SCM Private and the True and Fair Campaign, said that in every case they take on, the client is “completely ignorant of all the other hidden fees and charges which can be anywhere from eight to 11 different layers.”
She added: “It’s not the exception, it’s actually what’s common across the industry. And that’s from clients that come to us from major trade unions to charities to SIPP accounts to retail.”
Karen Shackleton, senior adviser at consultancy AllenbridgeEpic Investment Solutions, said investors need to monitor extra fees.
“The trustees of a pension fund have a duty to their members to try and get the best investments for the money that’s being invested. They have a fiduciary responsibility to explore these concerns,” she said.
Shackleton added that one way additional costs are incurred is through additional expense caps that are removed after a year without the scheme manager being notified.
Michael Johnson, research fellow at the Centre for Policy Studies, said that for private equity funds, carried interest (see box) is a big challenge and may have been why Railpen was charged so much on its private equity schemes.
“The reality is that it’s only the asset manager that can do it because effectively this is stuff that’s going on [during] the asset manager’s watch, so you are reliant on them,” said Johnson.
What is carried interest?
Carried interest gives the manager the right to a share of the fund’s profits, above the management charge. It is common in alternative investments such as hedge funds and private equity schemes.
The Centre for Policy Studies’ Michael Johnson said it is a “crazy arrangement because what it ends up meaning over a long period of time is that they [the managers] keep the majority of the return on capital”.
“The benefit of that, if they did do that, would be that they might actually be a little bit more aware of the effect of that and hopefully look for inefficiencies.”
Trustees put the complexity and extra costs down to the layers of charges built into the set-up of funds. Richard Butcher, managing director of professional trustee company PTL, said: “The delivery of investment return is multi-layered… and it is almost impossible for anyone on the outer layers to be completely familiar with what’s going on in the inner layers.”
Jonathan Reynolds, client director at trustee company Capital Cranfield, said: “It’s always been thus, down to the little bit of brokerage on every single share purchase and share sale.”
Foreign exchange dealing costs, custodian fees and soft commissions are examples of surplus charges, as well as paying for research and consultancy fees. Experts agreed that enhanced in-house monitoring is a good way to identify additional fees.
Shackleton said: “There is definitely an increasing interest from pension funds to enter into an investor club-type arrangement so that they can collectively access some of these asset classes directly rather than via funds.”
