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Groundbreaking research suggests that UK pension schemes could save approximately £2 billion in fees paid to asset managers without compromising returns. This study brings to light the lack of price competition among institutional investors, which fails to drive down costs.
Asset managers often provide fee discounts to key clients, including pension schemes, in order to secure their business. However, details of these deals have traditionally remained secret.
According to ClearGlass Analytics, a consultancy that has developed a database of costs and performance based on 35,000 investment portfolios, the opaqueness of the market has resulted in significant variations in fees paid by pension schemes even when purchasing identical or very similar funds. In fact, the higher fees amount to over £2 billion per year paid by scheme trustees, as revealed by ClearGlass data.
These findings raise concerns about whether pension schemes are obtaining the best deals and if the market is functioning properly. They come after the introduction of new UK regulations, known as the consumer duty, which require asset managers to demonstrate that they provide excellent value for money to clients.
ClearGlass CEO Chris Sier commented, “Competition is not working. Almost every deal between a fund manager and a pension scheme is different. Each scheme receives its own ‘special’ price, and the understanding of ‘don’t tell anyone else about the deal you have or else’ has existed forever.”
ClearGlass estimates that only 25% of investors are receiving good value for money when comparing their fees with ongoing charges and median net returns over five years.
For actively managed global equity funds, ClearGlass found a discrepancy of 0.71 percentage points in annual fees between the best and worst deals. This gap increases to 0.91 percentage points for active emerging market funds and up to 1.16 percentage points for multi-asset targeted absolute return funds.
Furthermore, even fees for passive index-tracking funds and strategies exhibit significant discrepancies that can impact the overall costs paid by a pension scheme.
ClearGlass identified one manager who runs a passive equity fund and has a 0.17 percentage point gap in ongoing charges between their best and worst deal in one of the most competitive fee sectors.
The Investment Association, which represents the UK’s asset management industry, asserts that institutional investors actively seek out deals that best suit their needs. They argue that some strategies may appear more expensive than similar alternatives, but investors might choose them because they align better with their requirements.
Peter Sleep, overseeing multiple multi-manager strategies at UK wealth management firm 7IM, suggests that negotiating fee discounts is easier for newly launched funds and for investors making significant commitments.
Sleep adds, “Some wealth managers and small pension funds may lack the influence to negotiate fee discounts. However, it’s important to ask and negotiate because there are deals to be made.”
This month, the Financial Conduct Authority warned asset managers that justifying fees based on comparisons with peer funds does not meet the requirements of the new rules.
While data on fund factsheets indicates a decrease in fees over the past three years, the actual fees paid by large investors may complicate asset managers’ claims of delivering excellent value for money to all clients.
Considering that asset managers offer different rates to different clients, Sier states, “To claim that all customers received the same value for money would be misleading.”
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