Cost transparency: What Switzerland can learn from the Netherlands
The discussion on asset management costs is not limited to Switzerland. In the Netherlands, similar regulatory requirements have been in place for a couple of years, transparency is completely accepted now, and the discussion has moved to cost levels.
“When I take a look at the situation before 2008, many board members were a bit hesitant to make public what they paid for investment management services, but now most will agree they became more aware of costs and also provided other stakeholders with more transparency,” says Edward Krijgsman, principal at Mercer in the Netherlands. “Board members now take pride that they can report costs.” By law this also includes fees they pay investment consultants.
According to one senior communications specialist, it is important to disclose not only direct management costs but also the less visible costs in underlying funds and transaction costs.
In addition, asset managers in the Dutch pension sector agreed in 2010 a harmonised model to measure and report on total costs, which has improved transparency. Larger pension funds are likely to negotiate lower fees with external managers and administrators.
However, a recent survey by Lane Clarke & Peacock (LCP) on 230 Dutch pension funds showed that the two largest pension plans in the country, the €334bn civil service scheme ABP and the €156bn healthcare scheme PFZW, spent 69bps on average on asset management, whereas the other schemes paid 39bps on average.
While LCP did not establish a direct link between asset management costs and returns, the survey concludes that boards should provide more explanations of cost levels and strive to do more to lower investment fees.
But transparency may have had an effect on asset allocation. “Where appropriate within the asset allocation, the exposure to passively managed funds has been increased, while the allocation to certain complex investments with high cost structures has been lowered,” notes Geert-Jan Troost, senior consultant at Towers Watson in the Netherlands.
“Passively managed products have increasingly provided better insight into implicit and explicit costs,” he continues. “The use of structured products has to be considered also in the context of increased diversification, improving expected return, or a market opportunity”.
Larger funds invest more in private investments, which are more expensive than public investments and therefore the absolute cost level of larger funds can still be higher than smaller funds,” he points out. According to the LCP survey, the larger Dutch industry-wide schemes paid 21bps in performance-related fees last year while company pension funds spent 5bps.
As the sector has consolidated, the larger entities have reduced costs by switching from fund-of-fund vehicles to single fund or direct investments.
“Institutional investors worldwide are less prepared to pay higher fees for hedge funds and private equity,” says Krijgsman. “Not just the level of fees for these categories, but also the fact that performance during the financial crisis and the period right after has been disappointing, was an argument for pension funds to negotiate lower basis fees.”