A slow but steady evolution in best practice on cost disclosure and reporting is changing the way pension funds think about the asset management industry as well as the way they structure their internal resources.
As our Special Report on fees and costs shows, and as IPE has reported over the years, there has been a material understatement of the true costs of asset management and the impact of implicit costs has been underestimated. Working through this requires co-ordination and common frameworks and templates, preferably across borders.
The West Midlands Pension Fund, part of the UK’s Local Government Pension Scheme reported a jump in costs from around £11m to £87m (€14m to €106m) when it measured its expenditure against a new framework in the 2013-14 financial year. It was not the only investor to record such a jump when seeking greater transparency about costs.
Regulatory and industry initiatives to standardise information and presentation on costs, as well as the way pension funds themselves disclose costs, has helped investors understand where they may be incurring unnecessary cost and where their asset allocation decisions are most effective.
Armed with a truer picture of the costs of their investment services, this slow revolution places pension funds in a better position to negotiate both with internal stakeholders as well as external providers. Greater knowledge and understanding of costs could help them to build a case to take more functions in-house, for example.
Although asset management fees have generally dropped in recent years, pension funds still think fees are still too high overall. Yet there does not seem to be much appetite for a blanket approach that disregards high-fee asset classes, like private equity, solely on cost grounds. Few pension funds want to shut themselves out of potential sources of return.
Thanks to demand for illiquid asset classes, private equity fees have been going up in recent years. Take-up of the Institutional Limited Partners Association’s cost reporting template has not been widespread among general partners, whose services are in demend.
Thanks to growing familiarity with private debt, especially as large investors seek to do deals in-house, awareness is growing of issues like wasted legal and due diligence costs on deals that do not go through. Very large pension funds with an extensive in-house private markets investment programme are also aware that building this resource means justifying higher staff compensation costs, which does not always sit easily with members and other stakeholders.
As the Dutch Financial Markets Authority (AFM) said in a report from May 2015, the costs of pension funds are of great importance for wider society. This remains the case.