LCP DC FEES SURVEY 12 By providing more transparency on fees, our survey can help management, members and trustees improve DC fund growth, resulting in larger pensions for members.
2 This first edition of the Lane Clark & Peacock LLP (LCP) Fees Survey for defined contribution (DC) schemes provides a unique, in-depth analysis of the fees charged by investment managers, DC platform providers and insurance companies for the various DC arrangements available (for a breakdown of scheme structures see page 6). It also analyses the fees charged for different asset classes. The survey covers over 3 funds and provides the latest information available to the market, showing the range of fees charged. LCP is a leading investment consultancy, at the forefront of advising companies and trustees on investment strategy, the selection of investment managers and related issues. For further information about fees for DC schemes and LCP s investment management research please contact Mark Nicoll, Heather Brown or Louise Bullivant, or the LCP partner that normally advises you. This report can be downloaded directly from the LCP website at www.lcp.uk.com. Further printed copies are available from Nelly Geudin on +44()7 439 2266 or email enquiries@lcp.uk.com. This report, and the information it contains, should not be relied upon as advice from LCP. Specific professional advice should be sought to reflect an individual pension scheme s circumstances. This report may be reproduced in whole or in part, without permission provided prominent acknowledgement of the source is given. Although every effort is made to ensure that the information in this report is accurate, LCP accepts no responsibility whatsoever for any errors or omissions, or for the actions of third parties. LCP conducted this survey in the final quarter of 11 and the fees data submitted is effective as at 3 September 11. Unless otherwise stated, all analysis is for the period to 3 September 11. We would like to thank all of the respondents to our survey. We believe that this is the most comprehensive survey of UK DC investment management fees. We have provided a full list of the names of the organisations that participated in this survey on page 18. We would like to thank the following people from LCP who have made this survey possible: Paul Black, Heather Brown, Louise Bullivant, Andrew Cheseldine, Jeremy Dell, Cathy Farrand, Grant Hood, Mark Jackson, Jo Munson, Mark Nicoll, Rebeccah Robinson, Claire Rothwell, Kate Sinclair, Mary Spencer, Helen Stokes, Katie Wrigley. View a full list of our services at www.lcp.uk.com Lane Clark & Peacock LLP August 12
3 LCP DC Fees Survey 12 p4 1. p6 2. Introduction and key findings Analysis of fees p6 2.1 Types of DC schemes covered by this survey p7 2.2 Understanding costs for different types of DC arrangement p9 2.3 Default strategies p1 2.4 Annual management charge by asset class p18 Appendix: List of respondents
4 LCP DC Fees Survey 12 1. Introduction and key findings 1. Introduction and key findings The introduction of mandatory autoenrolment of employees into a pension scheme from October 12 is expected to generate rapid and significant growth in the number and size of DC pension arrangements, raising some challenging issues for management. This survey can help you to negotiate fee savings for your members. Mark Nicoll Partner LCP Failing to disclose the true level of costs is damaging the reputation of investment managers and fund providers. These changes are the crucial backdrop to LCP s DC Fees Survey. The survey is the first industry-wide, in-depth analysis of fees for DC schemes. As the majority of DC scheme members invest in the default option, fees are particularly important for the default. The impact of fees is compounded over the life of the fund and can significantly affect the final pot of money available to members. By providing more transparency on fees, this survey can help management, members and trustees improve DC fund growth, resulting in enhanced returns and ultimately larger pensions for members. Key finding Transparency of fees remains a major concern There has been extensive press coverage of late regarding the lack of transparency of fees, with for example Steve Webb, the Pensions Minister, being one of a number of key figures demanding greater transparency on fees and charges. The lack of transparency was also a major theme of Professor John Kay s recent review of UK equity markets and long term decision making. It is therefore disappointing to report that there was a relatively high number (around 3%) of DC investment providers that were unwilling to provide details of the indirect costs associated with their funds. Costs can be substantial, for example for diversified growth funds, which are often used as the default option for DC schemes, total costs can be as much as 5% higher than the headline direct annual management charge, often because fees charged by external holdings in these funds are not disclosed. Taking into account trading costs as well, which has not been a particular focus of this survey, these additional costs combined can be over 1% higher than the quoted annual management charge, in some instances. Trustees and company management should demand that investment providers openly declare the total level of costs that are being incurred for investing in their funds.
LCP DC Fees Survey 12 1. Introduction and key findings 5 Other key findings Wide variation in fees The survey showed that investment management fees vary by asset classes and by types of mandate (eg active versus passive) and also display significant variations from provider to provider within each category. This means that scheme trustees and employers need to decide whether relatively higher costs can be justified either through the probability of greater returns or through significantly reduced risk. In practice, bundled services can be more cost effective than unbundled For trust based schemes the survey found that member administration bundled together with investment management services, on average costs around 15 basis points per annum (bps pa). The possibility remains, however, that bundling could enable a provider to hide additional costs, so close scrutiny is required. Providers will negotiate fee levels for growing schemes We believe that the more bespoke pricing nature of DC schemes means that it is harder to undertake fee comparisons without approaching providers on a case-by-case basis. However, supported by the information gathered for this survey, there appears to be significant scope to negotiate DC investment fees, both for new and existing arrangements. This is particularly the case where the scheme s assets have seen significant growth, or, for example, there has been a significant influx of new members. Fees for default options need particular scrutiny With the highest percentage of contributions going to the default option in DC schemes, fees charged for this option need to be looked at closely in the light of both expected returns and the risk associated with particular asset classes. charges are generally lower than Stakeholder charges The survey highlights the fact that s generally charge a lower Annual Management Charge (AMC) than equivalent Stakeholder schemes. This finding will surprise many, given that Stakeholder schemes were supposed to be a low cost option. Basis point Investment management fees are often expressed as a percentage of assets, converted to basis points (bps). One basis point is one hundredth of one per cent (.1%), so a fee of.5 per cent per annum (pa) equals 5 bps pa. Defined Contribution (DC) scheme A pension scheme that provides retirement benefits based on the pot of money, which has accumulated through the investment of contributions, with no promise that the pot will bear any percentage relationship to the employee s final salary. Default option The structure and range of funds used if a member does not engage in the investment process and make their own investment choices. The investment choices that constitute the default option are defined by the scheme provider. Experience with DC schemes shows that by far the bulk of member contributions go to the default option. Introduction and key findings Paul Black Partner LCP As schemes move towards more complex default strategies, trustees and company management need to ensure that the fees that members pay for these funds represent good value for money.
6 LCP DC Fees Survey 12 Louise Bullivant Investment Consultant LCP Bundled services appear to offer good value for money, but there is significantly less flexibility to address poor levels of client service from such providers. 2.1 Types of DC schemes covered by this survey There are a number of possible structures for DC schemes and our survey covers all of these structures. It is important to note that investment management services and the provision of DC member administration both attract fees. Fees for these two services can be provided as a single, bundled fee from a single provider, or separate providers can be used (within trust based schemes) and each service is charged separately. Bundling does not always mean that the scheme gets a better deal, and it is often worth evaluating whether unbundling is possible and how the unbundled fees would compare, particularly for larger schemes. Schemes divide broadly into trust based and contract based schemes: Trust based DC scheme In a trust based scheme a board of trustees is set up to implement the scheme and is accountable for making decisions about the way the scheme is run. Contract based DC scheme In a contract based scheme an employer appoints an insurance company to run the scheme. There is no trust board and the members have a direct relationship with the insurance company. Trust based DC schemes These comprise: where the only service is investment management with one manager s funds. Investment only DC platforms (platforms) trustees have access to a large number of underlying funds from multiple investment managers with a single investment management agreement and platform providers can create custom funds for members. For both of the above there is a clear distinction between investment management services and administration services, with the latter provided and charged for separately. Contracted in Money Purchase Plans (s) these are typically provided by an insurance company and bundle together investment management and member administration. -- Master Trusts are a subset of s where the trustee responsibilities are also subcontracted to the provider. Contract based schemes These comprise: Group personal pension plans (s) a collection of individual personal pension plans provided by an employer for its employees. Group stakeholder plans (Stakeholder) a type of that meets maximum cost limits. As for s, the investment and member administration are bundled together for contract based arrangements and offered by a single provider, typically an insurance company. Group Self Invested Personal Pensions (GSIPPs) are not considered in this report as the main reason for their implementation is to offer members as much investment flexibility as possible and investment charges are, therefore, typically based on retail funds and much higher.
LCP DC Fees Survey 12 7 2.2 Understanding costs for different types of DC arrangement Fees for direct investment management services are charged by the provider applying an AMC to the amount of assets managed in each fund: these are usually quoted in basis point terms eg 5 bps pa. DC platform providers charge their fees by applying an AMC to the amount of assets managed in each fund and will often raise an additional charge for creating custom funds: either as a separate charge or by increasing the AMC. In each of these cases, the scheme will have to contract separately with an administration services provider for administration services. Fees charged for s, and Stakeholder arrangements include the cost of member administration as well as investment management fees. Providers of such arrangements will generally charge a scheme level fee in the AMC quoted in percentage terms, which will apply to a core range of funds (typically those managed by the provider) and will charge an additional amount for non-core funds, often those funds provided by external investment managers. Standard fee scales For all but direct arrangements, non-standard fee scales tend to apply, as providers consider a number of factors when setting the level of fees charged to a particular scheme. The absence of a pre-set scale opens the way to either side to bargain fees up in the case of the provider, and down in the case of those representing the scheme. By way of contrast, most direct arrangements are charged for by applying a standard fee scale for the AMC which can be viewed by prospective users. This provides a reasonable basis to compare fees across providers, though fees are not always set in stone, and some bargaining is often possible. What do the costs include? Investment fees The AMC covers the cost of investment management and general reporting. However, a more comprehensive measure of the costs is reflected in the Total Expense Ratio (TER), which includes both the AMC and many of the other indirect costs of running the fund. TER In addition to the AMC, this includes the costs for other services paid for by the fund, such as the fees paid to custodians, auditors, administrators and trustees of the fund. TER is widely under-reported by providers across both DC and final salary schemes. As these extra costs can be material, trustees and company management should demand greater disclosure of the TER. Heather Brown Partner LCP Savings to investment fee scales apply each year, so while the savings made in the first year may be relatively small, savings will continue to compound in future years: over a member s working lifetime, this will have a significant impact on the final value of the member s pension. Analysis of fees
8 LCP DC Fees Survey 12 Administration fees (for s, and Stakeholder schemes) For these types of arrangements, the AMC also includes the actual administration of the scheme eg maintaining member records, and may cover some or all of: reporting to members; audit work; member communication; member helpdesk; employer payroll helpdesk; and TPR General Levy. When comparing the fees for different types of arrangement, it is important to understand which of the administrative services are included in that fee. White labelling A fund which is more simply named by the trustees or employer and does not name the underlying fund manager eg ABC UK Equity Fund, allowing an underperforming manager to be replaced with reduced administration. Blended funds A fund which is designed by the trustees or employer and invests in a series of underlying funds, possibly from different investment managers. For administration purposes it is a single fund eg ABC Growth Fund may be a blend of UK equity, overseas equity and diversified growth funds. As with a white labelled fund it allows an underperforming manager to be replaced with reduced administration. Costs for white labelling and blended funds For platforms and insurance companies there are typically additional costs for creating white labelled and blended funds. However, there is no standard method of charging for providing these services and the cost is assessed on a case by case basis. In our survey the following approaches for charging were given: no explicit charge for white labelled or blended funds, but the provider will take these requirements into account when setting the overall terms; an additional AMC for each white labelled and blended fund, which would generally be met by the member; and a specific annual fixed charge for each white labelled and blended fund, which would be charged separately. Where an additional charge was quoted for a blended fund this varied from 3 bps pa up to 1 bps pa, or for a fund of m from 6, pa to, pa. This compares to the fixed annual charge for blended funds varying from 1,5 pa to 6, pa. So, for a m blended fund, the difference between the highest and lowest charge is around 18,5 pa. Other investment costs Notwithstanding concerns about the poor level of transparency for the TER, recent media focus has moved to the level of transaction costs being incurred in the management of funds. Whilst not straight-forward, transaction costs can consist of up to three elements: commission; market impact; and taxes (eg stamp duty).
LCP DC Fees Survey 12 9 Transaction costs are affected by the level of activity in the fund: some active managers buy and sell shares frequently, in an attempt to make profits, whereas, passive managers tend to buy and then hold stocks. Whilst transaction costs tend to be higher for more actively managed funds, the level will in part depend on the ability of the investment manager to negotiate good terms with the other parties that they trade with. We have not collected transaction cost details as part of this survey, primarily because these costs are already reflected in the investment performance of funds and do not directly increase revenues for investment providers. However, trustees and company management should ensure that investment managers are disclosing the level of activity and transaction costs that are being incurred in their management of funds. 2.3 Default strategies Getting the default fund right for DC schemes has never been more important. According to data from the National Association of Pension Funds (NAPF), over 8% of members are invested in the default fund, and auto-enrolment requires a default option, so that members are not required to make an active investment choice. Analysis of fees The majority of default options are based on a lifestyle strategy. Traditionally, the growth phase of a lifestyle is invested in equities, often passive global equities. One of the Pensions Regulator s six key principles for DC schemes states that decision makers should ensure that investment fees/costs are reasonable given the performance expectations of the strategy. So close scrutiny of fees in this area is of paramount importance as well as being of benefit to scheme performance. A typical lifestyle strategy is shown in the chart below. One of the Pensions Regulator s six key principles for DC schemes states that decision makers should ensure that investment fees/ costs are reasonable given the performance expectations of the strategy. Typical lifestyle strategy % Allocation 1% 9% 8% 7% 6% 5% % 3% % 1% % Global equities Bonds Cash 15 1 5 Years to retirement
1 LCP DC Fees Survey 12 Note: Fees for, s and Stakeholder arrangements in this section include member administration services. 2.4 Annual management charge by asset class In this section we set out details of the median AMC, including an indication of how such charges vary across different ways of accessing the mandates, for each asset class. We have not included AMC details for Stakeholder arrangements for some asset classes due to insufficient data. Equities Company equity gives the owner a share in that company, and hence a share of its profits, typically received through the payment of dividends. An equity portfolio is managed actively if the manager has discretion over what is included in the portfolio relative to some reference portfolio or index. This is in contrast to passive management where there is no, or very limited, discretion. Active management Active managers have discretion over what is included in the portfolio relative to some reference portfolio or index. The manager will generally aim to outperform by selecting securities that they believe will outperform the market as a whole. Global equity (active) 1 Median AMC (basis points per annum) 1 8 6 38 75 15 375 43 83 16 48 95 19 475 52 11 493 A trust based scheme could invest m in an active global equity fund in a number of ways, for example: via a platform for 8 bps pa (equivalent to 16, pa) and pay administration costs separately; or via a bundled arrangement for example a for 95 bps pa (equivalent to 19, pa). So if the scheme invested all its assets in the global equity fund, a platform route would be more cost efficient if the scheme is paying less than 3, pa on administration costs.
LCP DC Fees Survey 12 11 UK equity (active) 1 Median AMC (basis points per annum) 1 8 6 38 75 15 375 48 9 17 425 51 1 6 58 51 1 493 Analysis of fees Global equity (passive) Median AMC (basis points per annum) 35 3 25 15 1 5 Passive management Passive managers construct a portfolio with the aim of replicating, rather than outperforming, the performance of an appropriate index. Stakeholder 8 15 29 68 11 15 28 7 18 35 7 1 17 34 66 1 18 36 71 175
12 LCP DC Fees Survey 12 UK equity (passive) Median AMC (basis points per annum) 35 3 25 15 1 5 Stakeholder 6 11 21 52 11 17 3 68 18 32 62 143 17 34 66 1 19 37 72 175 Responsible investment - Global equity (active) Mandates invest in global equities taking into account social, ethical and/or environmental factors in the investment process being followed. Responsible investment - global equity (active) Median AMC (basis points per annum) 1 9 8 7 6 5 3 1 38 75 15 375 39 78 148 364 43 84 166 8 48 87 172 425
LCP DC Fees Survey 12 13 Diversified growth (active) Mandates that provide exposure to a broad range of traditional and non traditional asset classes in one fund. These funds target either absolute returns or returns relative to an inflation benchmark and aim to deliver performance with significantly less volatility than equities. As such, diversified growth funds are used as a low governance approach to diversifying a pension scheme s equity assets. Diversified growth (active) 1 Median AMC (basis points per annum) 1 8 6 Analysis of fees Stakeholder 35 7 1 35 44 85 17 425 53 99 195 485 52 98 194 48 55 11 218 5
14 LCP DC Fees Survey 12 UK property (active) Investments in buildings and land and can involve developments and/or the ongoing management of property in the UK. For pension scheme investors, property normally refers to commercial property such as offices, shops and factories, rather than residential. Returns come from rental income and capital appreciation. Property - UK (active) Median AMC (basis points per annum) 1 9 8 7 6 5 3 1 35 69 138 345 39 76 146 358 41 8 159 392 44 84 166 9
LCP DC Fees Survey 12 15 Bonds Bonds comprise securities issued by companies (corporate bonds), governments (eg gilts) and other organisations that pay a series of regular payments and, at maturity, a final lump sum payment. The payments are either fixed in nature or can be increased by reference to some index, such as the Retail Prices Index. Corporate bonds (active) 9 Medain AMC (basis points per annum) 8 7 6 5 3 1 Analysis of fees 18 35 7 175 23 45 8 185 43 85 166 413 37 73 144 355
16 LCP DC Fees Survey 12 Cash (active) 45 Median AMC (basis points per annum) 35 3 25 15 1 5 Stakeholder 1 1 13 25 41 1 19 35 68 158 19 35 68 155 22 42 81 183 UK fixed interest gilts (passive) Median AMC (basis points per annum) 35 3 25 15 1 5 Stakeholder 5 11 22 54 11 19 32 74 17 3 6 142 18 35 66 158 19 36 69 163
LCP DC Fees Survey 12 17 UK index-linked gilts (passive) Median AMC (basis points per annum) 35 3 25 15 1 5 Stakeholder 6 11 22 55 1 18 3 69 15 28 54 13 17 33 62 1 18 33 64 156 Analysis of fees
18 LCP DC Fees Survey 12 Appendix Appendix: List of respondents The following is a list of respondents in our survey. Aberdeen Asset Management Ltd AEGON Alliance Bernstein LP Artemis Investment Management LLP Aviva Life & Pensions UK Limited AXA Wealth Corporate BlackRock Baillie Gifford & Co Baring Asset Management Credit Suisse Asset Management F&C Asset Management Ltd Fidelity Worldwide Investment Franklin Templeton Investments Friends Life Henderson Global Investors HSBC Global Asset Management (UK) Ltd Insight Investment Invesco UK Ltd J O Hambro Capital Management Ltd J P Morgan Asset Management Jupiter Asset Management Lazard Asset Management Ltd Legal & General Majedie Asset Management Ltd Martin Currie Investment Management Ltd MFS Investment Management M&G Investments Mirabaud Investment Management Ltd Neptune Investment Management Newton Investment Management Ltd PIMCO RCM (UK) Ltd Royal London Asset Management Schroders Investment Management Ltd Scottish Life Scottish Widows Standard Life State Street Global Advisors Ltd T. Rowe Price International Ltd Taube Hodson Stonex Partners LLP Trilogy Global Advisors UBS Global Asset Management (UK) Ltd Zürich Corporate Savings
LCP DC Fees Survey 12 19 Analysis of fees
LCP DC Fees Survey 12 Mark Nicoll Partner mark.nicoll@lcp.uk.com +44 () 7432 661 Heather Brown Partner heather.brown@lcp.uk.com +44 () 7432 6666 Louise Bullivant Investment Consultant louise.bullivant@lcp.uk.com +44 ()1962 873371 LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics. Lane Clark & Peacock LLP London, UK Tel: +44 () 7439 2266 enquiries@lcp.uk.com Lane Clark & Peacock LLP Winchester, UK Tel: +44 ()1962 876 enquiries@lcp.uk.com Lane Clark & Peacock Belgium CVBA Brussels, Belgium Tel: +32 ()2 761 45 45 info@lcpbe.com Lane Clark & Peacock Ireland Limited Dublin, Ireland Tel: +353 ()1 614 43 93 enquiries@lcpireland.com Lane Clark & Peacock Netherlands B.V. Utrecht, Netherlands Tel: +31 ()3 256 76 3 info@lcpnl.com LCP Libera AG LCP Libera AG LCP Asalis AG Lane Clark & Peacock UAE Zürich, Switzerland Basel, Switzerland Zürich, Switzerland Abu Dhabi, UAE Tel: +41 ()43 817 73 Tel: +41 ()61 5 74 Tel: +41 ()43 344 42 1 Tel: +971 ()2 658 7671 info@libera.ch info@libera.ch info@asalis.ch info@lcpgcc.com All rights to this document are reserved to Lane Clark & Peacock LLP ( LCP ). This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given. LCP is part of the Alexander Forbes Group, a leading independent provider of financial and risk services. Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC31436. LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 2935583). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 3 Old Burlington Street W1S 3NN, the firm s principal place of business and registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. The firm is not authorised under the Financial Services and Markets Act but we are able in certain circumstances to offer a limited range of investment services to clients because we are licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Lane Clark & Peacock UAE operates under legal name Lane Clark & Peacock Belgium Abu Dhabi, Foreign Branch of Belgium. Lane Clark & Peacock LLP. UK c812/812