UK pension plans waste billions of pounds each year paying fees to underperforming asset managers, research shows that shows poor value for money for retirement savings.
Asset managers in the UK have been required to disclose detailed information about their fees and charges since 2019 after the Financial Conduct Authority, the city’s regulator, found that poor data transparency standards prevented institutional investors to make accurate value-for-money comparisons.
Large variations in the costs and performance of 11,500 funds and mandates sold by 420 asset managers to defined benefit pension plans were identified by ClearGlass, a specialist data provider.
Chris Sier, founder and managing director of ClearGlass, said savings of around £ 6bn per year could be achieved if UK defined benefit pension plans halved the 0.65% total fees paid in average each year to asset managers.
“The room for improvement is significant,” said Sier, a former police officer who was hired as an unpaid advisor with a mandate to strengthen FCA disclosure standards in 2017.
UK DB pension plans manage around £ 1.7 billion in assets on behalf of 9.9 million members, according to the Pension Protection Fund, the lifeboat of collapsed pension schemes.
The total cost of purchasing asset management services for defined benefit pension plans ranged from 0.09% per annum to 2.63%, ClearGlass found.
Smaller pension plans with less than £ 100million in assets paid the widest range of fees but generated lower returns on average than their larger peers. Smaller pension plans also provided a wider range of performance results.
“The risk of a worse outcome is much greater for small pension plans. They can’t afford to hire investment consultants to provide advice and they don’t have good governance over larger pension plans, ”Sier said.
A defined benefit pension plan could save 0.61 percentage point per year by moving from a diversified growth manager ranked in the bottom quartile on costs to a rival in the top quartile, while also achieving a marked improvement in performance. yields. This would translate into an annual saving of £ 613,000 for a diversified growth mandate of £ 100million and also lead to an 8.5 percentage point increase in performance.
Asset managers in the UK have been required to publish annual value-for-money reports since 2019 after years of investor complaints about high fees and low returns. But the reports have raised concerns that investment firms are “marking their own homework” in an attempt to present themselves in a flattering light.
According to ClearGlass, only 15 of the 420 asset managers ClearGlass analyzed provided funds or mandates with a combination of best-in-class returns and fees, with both measures in the top quartile.
BlackRock was ranked in the top quartile for cost and performance in four of 22 fund categories analyzed by ClearGlass. Legal & General Investment Management was in the top quartile for costs and performance in three fund categories.
ClearGlass intends to broaden the analysis to include the costs and performance of hedge funds, private equity and infrastructure and to deploy the service to pension plans in Europe.
Iain Clacher, professor of retirement and finance at the University of Leeds, said creating common disclosure standards for investment costs was a “game changer” that would allow better decision-making by pension plans. retirement.
“Achieving cost savings can translate into improved performance of defined benefit pension plans. This can lead to lower financial contributions for employers and employees, greater security for the pension plan and better outcomes for members, ”said Clacher.