Transaction costs make up 24% of DB pension investment costs

Transaction costs comprise of an average 24 per cent of total DB pension fund investment costs, according to new data from CEM Benchmarking.

The study, which took data from 19 pension funds around the globe with combined assets of over £2trn, found that transaction fees make up a significant part of DB pension fund costs.

Organisations have previously called for the full disclosure of all hidden transition costs to create better transparency in the industry.

CEM Benchmarking UK principal, John Simmonds commented: “Transaction costs are a material component of investing assets. Broadly and based on the experience of this peer group, those transaction costs represent about a quarter of total costs of investing the assets. But there is a range, and that range is quite substantial and very much depends on a number of things, not least asset mix.”

The study found that the range of hidden costs was quite large between funds, with some as low as 15 basis points (bps) and some as high as 26 bps. Asset mix was identified as the key factor that influences total transaction costs, followed by assumptions, volumes and how much funds pay for similar transactions.

Different asset classes and their trading volumes impact the transaction costs. CEM Benchmarking director, Tej Dosanjh explained: “Certain asset classes drive transaction costs more than others, and the link to that is volume.

“Take something like equities, on average its 6 bps. If you take private equity, it’s 48 bps, but you might not trade private equity that often you would trade public stock. That’s where volume comes in.”

CEM Benchmarking found that the total transaction costs made up an average of 20 bps, which equates to around $100m for a $50bn pension fund.

It also discovered that funds were “reluctant” to share their cost data and are not seeing an appetite for change from them. Simmonds added: “It’s still quite difficult to see any tangible evidence, based on the data so far, in funds actively managing their transaction costs.

“We are not being asked by the pension funds we work with on a day-to-day basis to come up with a solution surrounding their transaction costs. It seems to be on their agenda because the industry are putting it on their agenda.”

One reason touted as to why funds are disinterested is that if there is a problem with a DB scheme’s funding, the costs are a very small part of that funding problem and they are more focussed on closing the funding gap.

CEM Benchmarking Canada principal, Chris Flynn concluded: “I genuinely believe it’s in the interest of all the stakeholders in the pension industry that ultimately we get toward total disclosure of all costs.”

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