Pension scheme trustees are paying high fees to investment managers without necessarily seeing corresponding improvements in fund performance, according to LCP’s latest Investment Management Fees Survey 2011.
Investment management fees paid by trustees increased by around 11%, or £300 million, across the industry in the year up to 30 September 2010. LCP said this is almost exclusively as a result of a recovery in market values. For example, a typical manager with a £50 million emerging markets mandate who failed to beat the market saw an increase in their fees of more than £100,000 over the year.
Mark Nicoll, partner at LCP, said: “There is always a temptation not to worry about fees when markets are rising. But the opposite should be the case. Against the background of continued pension deficits, trustees need to look at the running costs of their pension schemes. Our research demonstrates that when markets rise, investment managers generally get paid higher fees even if they haven’t added any value. In our experience, pension scheme trustees will be better served by negotiating sensibly structured performance-related fees.”
Other key findings of the report include that indirect costs, such as those charged within pooled funds, are particularly high within hedge funds and property funds, while disclosure on these indirect costs by some managers was poor. In some instances the total level of fees charged, including indirect costs, could be more than twice the annual management charge.
LCP also found that increasingly complex investment arrangements have been adopted, in part to manage investment risks more closely. However, these arrangements also result in higher fees, with no obvious improvement in long-term investment performance.
Mark Nicoll added: “Being misaligned with your clients’ interests is one thing. But a lack of transparency is inexcusable because trustees base their investment decisions on what managers tell them. Our role as consultants is to help client’s get maximum transparency. If there is any doubt, we recommend trustees insist on full disclosure of all costs or consider a manager benchmarking exercise. The average £200 million pension scheme pays more than £1 million per annum in investment management fees, so negotiating even a small discount of just 5% represents a saving each year of over £50,000."