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UK roundup: The Pensions Regulator, Aon Hewitt, F&C Investments

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  • City of London

The Pensions Regulator has published research showing small defined benefit schemes endure charges per member almost six times higher than the largest schemes.

Its research, conducted among 316 funds last Autumn, showed small schemes (12-99 members) faced average per member charges of £1,054 (€1,262) compared to £182 for schemes with over 5,000 members.

There was also a notable reduction in average fees compared to small schemes and medium schemes (100-999 members), which paid £505 per member on average – half the charges paid by small schemes.

The plurality of small scheme charges came from administration, accounting for 41%. Investment management accounted for 20% of costs.

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This compares to large schemes where 43% of the fees came from investment management, and 35% administration.

Stephen Soper, the regulator’s interim chief executive said: “Our aim is to put the information out there in order to start a dialogue on costs and help trustees and employers assess whether they are receiving value for money.”

Jon Hatchett, partner at Hymans Robertson added: “These costs act as a drag on scheme performance and need ultimately to be met by scheme sponsors.”

“Even shaving total annual running costs by just 0.1% of assets would reduce the total liabilities to be met by FTSE 350 companies by around £10bn over the life of the schemes.”

Elsewhere, consultancy Aon Hewitt has revealed research showing almost three quarters of defined contribution (DC) schemes will look to change their investment strategy in reaction to last month’s Budget.

Some 73% said they would amend their investment strategy to offer a combination of cash and income at-retirement. This is to match the expected move away from annuitisation with some members drawing down their entire pot.

A tenth said they would redesign their strategy to offer only a cash payment at retirement, and 17% to generate an income in retirement, however, not in the form of an annuity.

“DC schemes should be prepared to offer their members more choices if they are really going to embrace the flexibility heralded by the Budget,” said Jan Burke, head of DC consulting at the firm.

Finally, asset manager F&C Investments’ quarterly liability driven investment (LDI) survey has shown pension schemes increased hedging in the final quarter of 2013, as they moved inflation hedging to real rate hedging.

The final quarter saw £20.5bn of liabilities hedged against inflation, and £20.6bn against interest rates. This represented a fall on the record levels of £30bn and £23.4bn respectively in Q3 2013, but still higher than all other quarters since 2009.

The manager’s survey of investment bank derivative trades showed more outright nominal and real rate hedging, in contrast with switching between instruments. Hedge extensions during the quarter were executed using swaps rather than bonds.

Alex Soulsby, head of LDI at F&C, said: “The decrease in hedging activity in the final quarter of 2013 was not surprising given the unusually high levels of index-linked gilt issuance in Q3 2013, which led to an explosion in hedging activity.

“Some schemes had specifically targeted the large syndications in the prior quarter, causing both interest rate and inflation hedging activity to drop quarter on quarter.”

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