UK pension plans overpay £1.5bn in fees to fund managers

UK pension plans are paying £1.5bn a year more in fees to fund managers than they need to, according to an analysis that increases the pressure on trustees and consultants to get better deals for scheme members.

Analysis conducted by data analytics company ClearGlass and shared with the Financial Times reveals an “extreme” range of charges by asset managers to defined benefit pension plans. Some plans are paying up to 14 times more for the same fund product than rivals.

“Some clients are being treated bloody unfairly,” said Chris Sier, chief executive of ClearGlass. “Asset managers appear to price in an extreme range, and offer different clients vastly different prices for the exactly the same thing.

“The result is some clients are effectively subsidising the prices offered to others.”

ClearGlass examined pooled fund strategies investing in listed assets, which account for about 40 per cent of defined benefit pension funds’ allocations. A defined benefit plan promises guaranteed pension payments for life, based on salary and length of service, with the sponsoring employer on the hook for any funding shortfall.

The research looked at the actual prices paid by 688 private and local government pension funds representing £550bn in assets, or about half the market, across 629 managers and 38,000 fund strategies.

The fees paid by pension funds — which are typically brokered by investment consultants — are important as they can affect the eventual payouts to savers in retirement. However, the precise charges paid by thousands of schemes to fund managers are not typically revealed, meaning that plans can unknowingly end up paying much more for a fund product than they need to.

Last year, separate analysis by ClearGlass found that pension funds — including both defined benefit and defined contribution funds — could save about £2bn in fees paid to asset managers across a wide range of listed and private markets.

Among the findings of the new analysis, one pension fund was found to be paying six times as much for a fund tracking a fixed-income government bond index as the cheapest market price for the same product.

Another pension fund was paying seven times as much for a listed passive UK equity fund as the most competitive deal on the market. One asset manager, which was not named, had some pension clients that were paying three times as much for a listed passive UK equity fund as the manager’s cheapest deal.

The research also found that one pension fund was paying 14 times more than the lowest price on the market for a fixed-income absolute return fund.

Mick McAteer, a former board member of the Financial Conduct Authority and now co-director of think-tank the Financial Inclusion Centre, said the analysis revealed that some pensions funds were being “ripped off” and that some pension fund consultants were “clearly not doing a good job on behalf of clients”.

He added: “I would hope [this analysis] would serve as a wake-up call for trustees . . . We know high charges will have a detrimental impact. Secondly, let’s hope it helps speed up the much needed regulation of investment consultants.”

Sier, who was appointed by the FCA in 2017 to chair a working group on disclosure of costs and charges for institutional investors, estimates schemes could be £700mn a year better off if they all secured the best deals, rising to £1.5bn if the findings were scaled up to the wider DB universe of 5,000 schemes.

“The market does not function well due to lack of transparency,” Baroness Ros Altmann, a former pensions minister and now Conservative peer, told the FT. “I would hope that the fact that these figures are being revealed will bring about change.”

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In response to the findings, the FCA said it had increased price transparency in asset management, “for example, through standardised fund costs disclosure to pension trustees, with the aim of boosting competition. 

“We’ve previously raised the issue of investment consultants being unregulated and, in 2017, referred competition concerns to the Competition and Markets Authority,” it added.

Industry body the Investment Association, which represents fund managers, said its members operated in a “highly competitive” market where strict regulation ensured transparency of fees and underlying costs.

“The industry has supported a range of initiatives over the last decade to enhance cost disclosure and these have led to the UK being one of the lowest cost countries in the world to invest,” said Chris Cummings, chief executive of the IA.

He added that pension scheme trustees had a legal obligation to “seek out and follow the advice of these professional advisers who drive hard negotiations with managers on fees on their clients’ behalf”.

A spokesperson for The Pensions Regulator said: “We expect trustees to engage with their advisers to understand the costs their scheme incurs and how savers’ money is being invested. We urge trustees to read our new general code to ensure they are clear about their duties.”

Additional reporting Alan Livsey