Report Shows UK Pension Managers Charge 11% Increase in Fees, Often Without Adding Value

February 22, 2011) — UK fund managers have charged their pension scheme clients $485.1 million, or an increase of 11%, in additional fees last year for returns, a new report shows, asserting that these funds were “let down” by investment managers. 

The report by consultant Lane Clark & Peacock (LCP) said the returns were largely fueled by strong markets as opposed to superior skills, reflecting a misalignment over fees. 

“Because assets grew as markets went up, managers have made a lot more in fees, even if actually they did not perform very well for their clients,’ said report author Mark Nicoll, who is also a partner at Lane Clark and Peacock. “Our research demonstrates that when markets rise, investment managers generally get paid higher fees even if they haven’t added any value. In our experience, pension scheme trustees will be better served by negotiating sensibly structured performance-related fees.”

Furthermore, the consultant report revealed “poor” level of disclosure of indirect management costs, which are particularly high among hedge funds and property funds. The firm indicated that fund managers typically charge a management fee that is dependent on market performance and on investment decisions made by pension trustees.

Nicoll asserted that being misaligned with your clients’ interests is a fault in itself. But, “a lack of transparency is inexcusable because trustees base their investment decisions on what managers tell them,” he said, estimating that an average of $323 million (£200 million) pension scheme pays more than $1.6 million (£1 million) a year in investment management fees.

Nacoli warned that while it may be tempting for schemes not to worry about fees when markets are on the upswing, it is imperative that trustees examine the running costs of their pension schemes in the face of behemoth funding deficits.