SWITZERLAND - The true cost of asset management for pension funds in Switzerland's second pillar is almost four times higher than previously stated, according to an investigation by consultancy c-alm.
The Swiss Social Ministry commissioned c-alm to conduct a survey of asset management costs in the second pillar beyond the fees reported in pension funds' annual accounts.
In its report, the consultancy included fees in collective investment schemes and costs for re-insurance to arrive at a total expense ratio.
According to these calculations, asset management fees in the second pillar for 2009 were, on average, approximately 0.56% of total invested assets, rather than the 0.15% published in previous statistics.
More than 70 Pensionskassen, with CHF230bn (€190bn) in assets under management, took part in the survey, with costs ranging between 0.15% and 1.86%.
The authors of the survey conceded the Swiss second pillar offered a "competitive and price efficient" asset management fee structure compared with other systems in the world, as well as other financial service providers.
But they said more could be done to save on costs, such as applying more pressure on providers in negotiations and reviewing mandates more regularly.
According to c-alm, the sample survey proved a direct correlation between lower costs and higher net returns.
Among its recommendations for cost cutting was the use of effects of scale, but it also noted that larger pension funds did not always enjoy improved cost structures.
For mini-Pensionskassen, the consultancy recommended the use of only one service provider, without using alternatives or active mandates. It also recommended foregoing the use consultants.
The survey found that alternatives accounted for the largest share (33%) of asset management costs, while only making up 6.4% of all invested assets.
However, while a reduction of their share would improve costs, it would also decrease diversification, the consultancy said, adding that this was a decision every Pensionskasse board had to take for its own fund.
Similarly, c-alm noted that a reduction of actively managed mandates would help save costs while also reducing the chance of additional returns.
It added: "The results from our sample cannot contribute to answering the question whether an active investment style has the edge on index styles or vice versa."
For c-alm, the "most important" change that could be made to improve cost efficiency would be to demand more cost transparency. It said costs would always remain high if transparency were not required in all vehicles and structures.
However, Martin Kaiser-Ferrari, deputy director at the Social Ministry and head of the department for old age and survivors insurance, stressed in a foreword to the study that "additional legal provisions are not required" and that "amendments as part of the structural reform process are sufficient".
He added: "Where necessary, the new supervisory committee (Oberaufsichtskommission) could provide methodological specifications to improve transparency."
The Swiss pension fund association ASIP welcomed the in-depth analysis as an additional step toward improving cost transparency.
But it warned that it could lead to the assumption that only Pensionskassen using fund structures were following a best-practice model, as these structures have tax advantages.
ASIP renewed its call for scraping the stamp duty for Pensionskassen to "level the playing field".