UK pension funds overpay fund managers by £1.5bn

According to a new analysis, UK pension plans pay fund managers £1.5bn more than necessary in fees each year. This puts pressure on trustees to negotiate better deals for members.

ClearGlass, a data analytics company, conducted an analysis and shared it with revealing a “extreme” range in charges that asset managers charge defined benefit pension plans. Some pension plans pay up to 14-times more than their competitors for the same product.

Chris Sier said, “Some clients have been treated horribly unfairly.” “Asset Managers appear to offer prices that are extreme, with different clients receiving vastly different rates for the exact same thing.

The result is that some clients subsidise the prices charged to others.

ClearGlass looked at pooled funds that invest in listed assets. These accounts for about 40% of the defined benefit pension fund allocations. A defined benefit pension plan guarantees lifetime pension payments based on salary, length of service and other factors. The sponsoring employer is responsible for any funding shortage.

The study looked at actual prices paid by 688 pension funds, including private and local government pensions, representing £550bn or half of the market. This research included 629 managers, 38,000 fund strategies, and 629 managers.

Fees paid by pension funds, which are usually arranged by investment consultants, are crucial as they affect the payouts made to retirees. The exact charges paid to fund managers by thousands of schemes are typically not revealed. This means that plans may unknowingly pay much more than necessary for a fund.

ClearGlass conducted a separate analysis last year that found pension funds, including defined benefit and defined-contribution funds, would be able to save approximately £2bn in fees they paid to asset management firms across listed and private markets.

One of the most important findings from the new analysis was that a pension fund paid six times more for a fund that tracked a fixed-income government bond index than the lowest market price for the product.

A pension fund paid seven times more for a passive UK equity listed fund than the best deal available on the market. Unnamed asset managers had pension clients who paid three times more for a listed UK passive equity fund than the manager’s lowest deal.

A fixed income absolute fund sold at a price 14 times higher than the market’s lowest.

Mick McAteer is a former member of the Financial Conduct Authority, and co-director at the Financial Inclusion Centre. He said that the analysis showed that pension funds were “ripped off”, and that pension fund consultants “clearly weren’t doing a great job for clients”.

He said: “I hope that [this analysis] will serve as a warning to trustees. . . We know that high fees will have a negative impact. Second, let’s pray that it will speed up the regulation of investment advisors.”

Sier was appointed by FCA to chair a group of working on disclosure of costs for institutional investors in 2017. He estimates that schemes could benefit from PS700mn a yearly if they secured the best deals. This figure would rise to £1.5bn if these findings were applied to a wider DB universe with 5,000 schemes.

Baroness Ros Altermann, former minister for pensions and Conservative peer, said: “The market is not functioning well because of lack of transparency.” “I hope that these figures will lead to change,” said Baroness Ros Altmann, a former pensions minister and now Conservative peer.

The FCA responded to the findings by stating that it has increased transparency in asset management. “For example, through standardised fund cost disclosure to pension trustees with the goal of boosting competitiveness.”

The report added: “We have previously raised the issue that investment consultants are unregulated and in 2017 referred concerns about competition to the Competition and Markets Authority.”

The Investment Association, a trade body that represents fund managers, has said that its members operate in a market which is “highly-competitive” and where strict regulations ensure transparency of fees.

Chris Cummings CEO of IA said, “The industry supported a number of initiatives in the past decade to improve cost disclosure. This has led to the UK becoming one of the most cost-effective countries to invest in.”

He said that trustees of pension schemes had a legal duty to “seek out and follow these professional advisers, who negotiate hard with managers about fees on behalf of their clients.”

The Pensions Regulator spokesperson said: “We expect trustees engage with their advisors to understand costs their scheme incurs, and how the money of savers is invested.” We encourage trustees to review our new general code so they understand their duties.

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