The Danish Competition and Consumer Authority said the prices the country’s providers charge for asset management vary widely – but there is no link between higher charges and higher risk-adjusted returns.
In a new report on the pensions industry, building on a major investigative study it produced on the sector in 2019, the competition watchdog said: “There are large price differences in asset management between pension companies. However, one cannot expect the higher investment rates that some companies charge to give the money back again in the form of correspondingly higher returns.”
For commercial companies, the agency said in the report entitled “Pension firms’ prices and returns”, much of the difference in the prices customers paid for asset management could be attributed to the profit the firms made.
It also concluded that historical returns were typically not a good indicator of future performance.
“So it is hardly possible to identify companies that will make a relatively high risk-adjusted return in the future,” the competition authority said.
The price Danish pension savers paid for their savings to be invested amounted to approximately 0.6% of the pension companies’ overall assets in 2017, or around DKK14bn, it said, adding that this corresponded to just over 60% of the total charge for pensions management and administration.
There were also big differences in the investment prices savers paid at the various companies, the agency said.
“There may be several reasons for the variation in prices, including the companies’ investment strategy as well as a varying focus on efficient operations,” it said.
“For the commercial companies, there is a strong covariation between the prices paid by the customers and the profit that the companies obtain on the activities relating to the investment of the assets,” it said in the report.
The watchdog also said that between 2005 and 2017 no Danish pension company had achieved a significantly higher return than the average, when taking into account the risk taken – and that this applied regardless of whether the return was measured gross or net of investment costs.
The competition authority said its conclusions meant decision makers – such as firms signing pension agreements on behalf of employees – should be reluctant to base the choice of pension company on historical returns.
“It is more relevant to take care that the price a saver pays to have their pension savings invested is not too high,” it said in the report.
In its recommendations, the competition authority called for more and better information on pensions to be made available to customers.
Responding to the report and its published findings, industry association Insurance & Pension Denmark (IPD) said pension customers did get value for their investment costs, which it said varied between providers because of different assets and different strategies.
IPD said in a statement: “At the same time, data clearly show that the return on costs – ie what customers receive – does not vary systematically between the companies.”
A recent competition analysis it had done itself showed competition in the pensions market to be extremely effective, including the management of pension savings, the lobby group said.
Jan Hansen, deputy director of IPD, said: “The pension companies’ strategies and costs vary, but the bottom line is that pension customers get value for their investment costs.
“We can’t recognise the picture painted in the latest memorandum from the Danish Competition and Consumer Authority about inefficient competition,” he said.
In its main report published at the end of 2019 – based on work it had been doing since June 2017 – the competition authority said there was little competition for the management of non-statutory pension savings in Denmark, and there were big gains to be made from improving it, since it involved some DKK2.9trn of savings.
The watchdog proved to have teeth earlier this summer when the Danish FSA issued draft regulations to stop pension providers making long-term losses on health and accident insurance – a product often sweetening bulk pension deals – in response to the competition authority’s work.