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

A study based on fund managers overseeing 80% of UK pension scheme assets shows that in the year to September 30, market performance alone accounted for an 11% increase in management fees.

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.

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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.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(February 22, 2011) — New research by Chant West shows the median growth superannuation fund gained 1% return in the month of January, bringing the total returns for the financial year-to-date up to 8.4% since July, 1 2010.

“The strong performance in overseas share markets during January was largely fueled by stronger than anticipated economic data in the US, together with some company profit results that exceeded expectations,” said director Warren Chant of Chant West, a superannuation research consultancy firm. “While sovereign debt issues are still an underlying concern in Europe, markets there have also had a strong start to the year.” Chant further indicated that in Australia investors have yet to see the full impact of the recent floods and cyclone on shorter term growth, inflation and interest rates. However, he said he doesn’t expect there to be a major impact on longer term growth.

For the financial year-to-date which started on July 1, 2010, the median growth fund is now expected to post gains of 10% or more in 2010-11, having grown 8.4% since July 1. In January, the median growth fund posted a 1% return.

The gain with Australian growth funds came from strong overseas share markets, with particular strength in the US, according to Chant West. As a result of the depreciating Australian dollar, international shares gained just 2% in hedged terms, compared with 5.3% in unhedged terms.

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Chant West tracked about 60 growth funds, including many of the nation’s biggest industry superannuation funds and not-for-profit funds.

Earlier this month,AustralianSuper, Australias largest pension fund, agreed to merge with Westscheme to form a $40.2 billion fund with 1.7 million members.

This merger is all about putting members first,” Westscheme CEO, Howard Rosario, said in a statement. “Members will continue to receive locally based services and stand to gain significantly from low long-term costs, access to a wider range of benefits and products and strong long-term investment performance.

According to independent research group SuperRatings, about 50% of funds in the not-for-profit sector will consolidate over the next three to five years, spurred by the long-running Cooper Review of Australias retirement savings industry. The Cooper Review, chaired by Jeremy Cooper, is designed to overhaul the governance, efficiency, structure and operation of Australias Superannuation System. The review has called for fewer, larger funds to enhance stability, making it harder for small funds to compete, unless they find a larger partner.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742