Does Scale Really Make Investing Cheaper?

Large UK pension funds are not achieving lower investment costs despite the widely-held belief that scale brings negotiating power, according to a survey by Barnett Waddingham.

The actuarial firm reported that, on average, UK pension funds over £1 billion ($1.5 billion) incurred investment costs equal to 0.2% of assets. Investments were the largest single cost to a pension “by a substantial margin”.

“Beyond £1 billion of assets there is no evidence that extra scale reduces investment fees as a percentage of assets.”Barnett Waddingham’s report said it “would expect the costs to be lower” as a percentage of assets for the largest funds, despite absolute costs potentially being higher due to the use of segregated mandates and greater use of alternative and complex investments.

“Between the schemes included in our survey, though, weighting the average investment fees by scheme assets has no impact, so beyond £1 billion of assets there is no evidence that extra scale reduces investment fees as a percentage of assets,” the report said.

While the average cost of investment for the 170 pensions covered by the survey was 0.2%, the actual cost to each fund varied hugely from little more than 0.01% to as much as 0.8%.

Returns for the pensions in the survey averaged 5.5% for the 12-month period to the end of March 2014. Over five years the average return was 9.5%.

Three-quarters of pensions were running a deficit, Barnett Waddingham found, while the average deficit reduction contribution from sponsors averaged £94 million, but ranged from £7 million to £400 million.

UK supermarket giant Tesco has this year agreed a £270 million-a-year deficit reduction plan in an effort to address a £3.9 billion shortfall in its defined benefit pension.

Barnett Waddingham’s full report is available on its website.

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