UK pension schemes are wasting billions of pounds each year paying fees to underperforming asset managers, according to a study that highlights the weak value for money delivered to retirement savers.
Asset managers in the UK have been required to make detailed disclosures about their fees and charges since 2019 after the Financial Conduct Authority, the City regulator, found that poor data transparency standards were preventing institutional investors from making accurate value for money comparisons.
Wide variations in the costs and performance of 11,500 funds and mandates sold by 420 asset managers to defined benefit pension schemes were identified by ClearGlass, a specialist data provider.
Chris Sier, founder and chief executive of ClearGlass, said cost savings of about £6bn a year could be achieved if UK defined benefit pension schemes halved the total fees of 0.65 per cent paid on average each year to asset managers.
“The scope for improvement is significant,” said Sier, a former policeman who was hired as an unpaid adviser with a brief to strengthen disclosure standards by the FCA in 2017.
UK DB pension schemes look after about £1.7tn in assets on behalf of 9.9m members, according to the Pension Protection Fund, the lifeboat for collapsed retirement schemes.
The total cost of buying asset management services for DB pension schemes varied between just 0.09 per cent a year up to 2.63 per cent, ClearGlass found.
The smallest pension schemes with less than £100m in assets paid the widest range of fees but delivered weaker returns on average than their larger peers. Smaller pension schemes also provided a wider range of performance outcomes.
“The risk of a worse outcome is much greater for smaller pension schemes. They can’t afford to hire investment consultants to provide advice and they don’t have good governance compared with larger pension schemes,” said Sier.
A defined benefit pension scheme could save 0.61 percentage points a year by switching from a diversified growth manager ranked in the bottom quartile for costs to a rival in the top quartile, while also achieving a marked improvement in returns. This would translate into an annual saving of £613,000 for a £100m diversified growth mandate and also bring an 8.5 percentage point increase in performance.
Asset managers in the UK have been required to publish yearly value for money reports since 2019 following years of complaints by investors about high fees and poor returns. But the reports have triggered concerns that investment companies are “marking their own homework” in an effort to portray themselves in a flattering light.
Just 15 asset managers of the 420 analysed by ClearGlass provided any funds or mandates with a combination of best in class returns and fees with both measures in the top quartile, according to ClearGlass.
BlackRock was ranked in the top quartile for both costs and performance in four of the 22 fund categories, analysed by ClearGlass. Legal & General Investment Management appeared in the top quartile for costs and performance in three fund categories.
ClearGlass intends to broaden the analysis to include costs and performance for hedge funds, private equity and infrastructure and to roll out the service to pension schemes in Europe.
Iain Clacher, professor of pensions and finance at Leeds university, said the creation of common disclosure standards for investment costs was a “game-changer” that would empower better decision making by pension schemes.
“Achieving cost savings can translate into performance improvements for DB pension schemes. This can result in lower financial contributions for employers and employees, greater security for the pension scheme and better outcomes for members,” said Clacher.