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UK pension schemes could save about £2bn from fees paid to asset managers without sacrificing returns, according to research that suggests price competition among institutional investors is failing to drive down costs.
Asset managers often offer fee discounts to key clients such as pension schemes to win their business but details of these deals have historically been a closely guarded secret.
The opacity of the market has led to wide variations in fees paid by pension schemes even when they are buying identical or very similar funds, according to ClearGlass Analytics, a consultancy that has built a database of costs and performance based on 35,000 investment portfolios. The higher fees amounted to more than £2bn a year paid by scheme trustees, the ClearGlass data showed.
The findings could raise questions over whether pension schemes are getting the best deals and the market is functioning properly. They came after new UK rules, known as the consumer duty, were introduced at the start of the month requiring asset managers to demonstrate they are providing good value for money to clients.
“Competition is not working,” said Chris Sier, chief executive of ClearGlass. “Almost every deal between a fund manager and a pension scheme is different. Each scheme gets its own ‘special’ price and the omertà of ‘don’t tell anyone else about the deal you have or else’ has existed forever.”
ClearGlass estimated that only a quarter of investors were receiving good value for money when they compared their fees with both ongoing charges and median net returns over five years.
ClearGlass found the gap between the best and worst deals was 0.071 percentage points in annual fees for actively managed global equity funds. That rose to 0.091 percentage points for active emerging markets and up to 0.116 percentage points for multi-asset targeted absolute return funds.
Fees for passive index-tracking funds and strategies also had big discrepancies that could affect the overall costs paid by a pension scheme.
ClearGlass identified one manager running a passive equity fund that had a 0.017 percentage point gap in ongoing charges between its best and worst deal in one of the most highly competitive sectors for fees.
Imran Razi, a pensions policy specialist at the Investment Association, the trade body representing the UK’s asset management industry, said there was clear evidence that institutional investors were shopping around for deals that best suited their needs.
“Some ESG strategies, for example, can carry higher fees than similar-looking rivals but an investor might choose a [particular] fund as it has characteristics that fit better with their requirements,” said Razi.
Fee discounts are easier to negotiate for newly launched funds and if an investor wants to make a significant commitment, according to Peter Sleep, who oversees several multi-manager strategies at 7IM, a UK wealth management firm.
“Some wealth managers and tiny pension funds might not have the clout to get a fee discount. But you have to ask and haggle as there are deals to be done,” he said.
The Financial Conduct Authority warned asset managers this month that “justifying fees solely based on a comparison with peer funds did not amount to meaningful compliance” with the new rules.
Data on fund factsheets suggests fees have fallen over the past three years. But variations in the actual fees paid by big investors could complicate asset managers’ claims that they are delivering good value for money to all their clients.
Given that asset managers offer different rates to different customers, “to say [all customers] received the same value for money would be misleading”, said Sier.