A four-fold increase in performance fee payments to private equity managers doubled the asset management costs of the Netherlands’ second-largest pension fund to 0.75% of assets under management in 2021, exceeding the fund’s self-imposed cost ceiling of 0.5%.
The €277.5bn pension scheme for care workers paid €1.26bn in performance fees to private equity managers, it said in its annual report published on Thursday. These performance fee payments accounted for almost two thirds of the pension scheme’s total costs.
Private equity fees were so high because of the exceptional return of 52.8% that the fund made on the asset class. After deduction of fees, a net return of 44% remained for the fund.
PFZW’s investments in private equity total €22bn, about 8% of its assets under management. Private equity managers tend to receive about 20% of returns above a certain hurdle rate as a performance fee, in addition to their regular management fees which totalled an additional €264m in 2021.
This is “a terrible amount of money”, according to ABP president Harmen van Wijnen. In a blog on ABP’s website, he called for a discussion in the pension sector about the “extreme levels” of management fees paid to private equity. Among Dutch pension funds, ABP and PFZW have by far the largest exposure to the asset class.
As a result of the increase in performance fee payments, asset management costs at PFZW doubled from 0.38% to 0.75%, exceeding the pension fund’s self-imposed cost limit of 0.5% (excluding transaction costs). This is the average asset management cost level of the Dutch pension sector.
PFZW’s admin costs also rose, but by much less from €58.66 to €60.54 per member. The fund aims to push costs back below €60 this year, but acknowledges this will be “challenging”.
In addition to the high performance fees, PFZW also struggles with private equity funds’ propensity to use fiscal constructions in tax havens to optimise and reduce their tax burden.
This is at odds with the pension fund’s stated policy to avoid using tax havens and promote fiscal transparency.
Stimulating fiscally responsible behaviour has been successful when it comes to investments structures set up by PFZW’s asset manager PGGM, but is more difficult for external managers.
PFZW tends to only have a minor interest in these funds and as such has little sway over the management of these funds, the pension fund noted.