The total investment management and transaction costs of the 10 largest Dutch pension funds increased from €6.3bn to €7.4bn in 2020.
The main reasons for the cost increase were a steep rise in performance fee payments at ABP, Bouw and PMT and an increase in transaction costs due to the COVID-19 crisis, according to a study by consultancy LCP.
The other seven funds included in the study were PFZW, PME, PGB and transport fund Vervoer, as well as the company schemes of Philips, Rabobank and Shell. Together, they manage two thirds of Dutch pension assets covering 62% of pension fund membership.
Total investment management costs rose by 16% to €5.7bn while transaction costs increased by a whopping 36% to €900m.
Because the assets under management (AUM) of pension funds also rose by a combined 12.5%, the cost rise as a percentage of AUM was much less spectacular. Investment management costs only rose by 1 percentage point to 0.52%, while transaction costs increased from 0.09% to 0.11%.
The increase in investment management fees is almost entirely due to higher performance fee payments, according to LCP. Of the €763m increase in costs, €716m can be attributed to performance fees.
The bulk of the increase in performance fees took place at three funds: ABP (€482m), Bouw (€145m) and PMT (€112m) (see box).
The increase in transaction costs can partly be explained by market volatility in the first half of 2020 due to the outbreak of the coronavirus pandemic. This led to a higher transaction frequency as some funds decided to rebalance their portfolios or took advantage of cheaper equity market valuations by increasing their equity exposure.
Costs per transaction also increased, however, because of higher spreads. Some funds also adapted their strategic asset allocation, leading to higher than usual transaction costs.
The increase in administrative costs was much more limited at 1.5%. Admin costs are relatively small compared to investment management costs at €461m in 2020.
This amounts to €79 per active and retired member, a number unchanged from 2019. LCP expects admin costs to rise at a higher rate in the coming years as pension funds are preparing for the change to a new, defined contribution-based pension system.
Dollar effect leads to higher performance fees
At ABP, Bouw and PMT performance fee payments did not only rise in euro terms, but also as a percentage of assets under management.
At ABP the figure increased from 0.24% to 0.34%, at Bouw it went from 0.17% to 0.37% and at PMT it rose from 0.19% to 0.30%.
The performance fees at the first two funds, that both have APG as their asset manager, were paid to private equity and hedge funds managers. PMT only paid performance fees to private equity as it doesn’t invest in hedge funds.
At ABP and Bouw, returns on private equity and hedge funds decreased compared to 2019, but performance fees rose regardless. The two pension funds said this is due to a “dollar effect”.
Returns of external managers tend to be measured in dollars. Because the dollar fell in 2020, returns measured in dollars were much higher than those measured in euros.
This explains why performance fees were paid to hedge fund managers even though their returns measured in euros were negative.