If you think you know your costs, you could be wrong

This is the third of Dr Chris Sier’s insights into cost transparency and it gets right to the heart of the issue: just how much of a pension schemes total costs were previously unknown?


‘You can’t manage what you don’t measure’ is a phrase much quoted by those, including myself, who believe in getting into the detail of cost data.

But if you have never really made a concerted effort to collect such data in the past, just how much have you been missing?

If you add performance fees, which historically have been routinely stated by managers (excluding carried interest), most pension funds will have known almost two thirds of their total costs

Discovering that the actual total costs for your scheme are, as one commentator recently suggested, three times larger than expected is understandably unnerving and embarrassing. It might even put you off starting the process of cost collection.

However, trustees should not be deterred – for one thing, neither hard data collected under the Cost Transparency Initiative nor my own experience over the past decade support these levels of undiagnosed total cost.

Costs vary greatly by asset class

Dependent on strategy and asset class, it is possible for up to two-thirds of the total costs of asset management to be attributed to things you might not routinely have collected, such as transaction costs, additional fund expenses, carried interest and property expenses.

In private debt and private equity, for example, annual management charges only account for 33 per cent and 38 per cent of total costs, respectively. But allocation to these asset classes is generally low.


For more ubiquitous strategies, such as active equity, passive equity and vanilla fixed income, the proportion of total costs that are management fee-related is above 75 per cent.

Overall, and on average for all the pension funds that were analysed for this study and across all strategies, AMCs represented 61 per cent of total costs.

If you add performance fees, which historically have been routinely stated by managers (excluding carried interest), most pension funds will have known almost two thirds of their total costs. The missing third would come from additional fund expenses, carried interest, transaction costs and property expenses.

The thesis is that the larger the percentage of cost by strategy that is AMC, the more likely it is that you know most of the cost. For example, trustees with significant allocations to alternatives are likely to have a high proportion of undiagnosed cost, assuming they have not made a
concerted effort to obtain that data.

The good news is that smaller schemes use far less alternatives than large ones (on an asset allocation basis), and big schemes seem to have tackled transparency early – the mean AUM of our clients is approximately £1bn.


Data based on a sample of ~2,500 mandates of data collected in 2019 from ~200 ClearGlass DB pension clients. Additional fund expenses include administration and other costs relating to pooled fund management, and additional costs relating to Infrastructure and private equity fund management. Performance fees include carried interest charges for private equity. Property expenses are the additional property costs incurred by funds that hold real estate products.

As always, there are some subtleties to consider: one is that 17 per cent of the total costs of passive fund management came from transaction costs, which is very similar to the 21 per cent figure for active fund management.

However, the quantum of these costs tells a different story. For passive funds, annualised transaction costs were about 5 basis points on average, with (infrequent) larger values more than 20bp. Active fund management transaction costs generally started at around 20bp, but with an upper limit tending towards 60bp.

Performance fees not widespread

Another consideration is the absence of appreciable performance fees in 2018 for any strategies save private equity, private debt, infrastructure, hedge funds and credit. Perhaps this is because other strategies did not include a performance fee in their fee structure, but may also be because performance was generally poor in these other strategies for 2018.

Keeping track of all your costs is therefore extremely important, but perhaps not as scary a prospect as you may believe. It does become increasingly important the higher the proportion of assets invested in, for example, alternatives or illiquid strategies, and it may be that you have some difficult, and possibly awkward, things to learn.

But if you do not uncover these things you will never be able to manage them, and you are also likely to be in breach of some form of regulation. Therefore it is better to start early to save both money and face. Just do not be the last to start.

Dr Chris Sier is a founder of AgeWage,  chair of ClearGlass Analytics and led the FCA’s Institutional Disclosure Working Group

You can read the original in Pension Expert here (this is published with its kind permission.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to If you think you know your costs, you could be wrong

  1. George Kirrin says:

    As we’re now three into this series of ten, yet no one seems to be commenting, Henry, may I offer these few thoughts.

    1. Many smaller schemes do not have the time to spend on such issues, possibly because they may feel almost powerless to negotiate lower costs. If they even have consultants alongside – and I’ve heard Chris Sier say that many do not have consultants – their agency issues mean they will be unlikely to offer support to schemes in negotiating lower charges.

    2. Many larger schemes – who tend to have followed their herd into alternative assets – should also take a hard look at their own agents, whether external consultants or in-house officers, who put them into these onerous (cost) contracts apparently without realising the full ongoing costs of their contractual commitments.

    3. The Railways Pension Scheme now appears at conferences alongside Chris Sier and others and almost boasts of how they went from underestimating their full costs of management and transactions by a factor of five or six times, I think, to now having costs under better control. If I were a member of that scheme – I’m not, but I know a few who are – I think I’d want to know first of all how the well paid executives of their scheme got them into such onerous contracts in the first place through ignorance or negligence or both. And I’m sure there are similar tales to be told about other very large UK schemes, the ones which win all the awards but seem unable to own up to their shortcomings on cost control.

    • henry tapper says:

      George, there seems to be a high charge paying culture in the investment world. I notice it particularly at conferences where illiquids, alternatives and other esoterics are being discussed as beneficial to the DC saver. What would be interesting to know is the internal rate of return achieved by DC savers on their tiny pots relative to the billion pound funds. As the very sensible Ben Pigott says, value is only real if you can eat it.

      • George Kirrin says:

        I don’t think they’ve really sorted out investing in alternatives like private equity for DC investors yet, Henry. The lack of daily pricing is one issue. The total charges will be hard to bring in under a 75 basis points wrapper maximum too. Maybe that’s no bad thing?

  2. George Kirrin says:

    As Henry’s chosen to give my earlier comment a repeat airing, I hope he won’t mind if I offer a second rejoinder.

    Out of many received wisdoms “what gets measured gets managed” or Chris’s version that “you can’t manage what you don’t measure” must be one of the more widely accepted as obvious. After all, how could we ever manage something if it isn’t being measured?

    The quote is usually attributed to Peter Drucker, the late management theorist.

    A bit of research reveals, however, two surprising things.

    One, Drucker — according to The Drucker Institute even — never said it. The usual source given by others is Drucker’s 1954 book, The Practice of Management, but I’ve got a Kindle edition and searches for the term (and Chris’s version) both came up blank. I tend to be skeptical of all quotes attributed to great people unless I can find a written source. There are helpful websites out there like quoteinvestigator.com which should be used more often.

    Let that penny drop. Various Harvard Business Review articles attributing the quote to him? Wrong..

    Two, the fact that something is wrong with “what gets measured gets managed” has been argued for a long time.

    VF Ridgway published a paper in 1956 criticising the measurement mantra.

    Simon Caulkin, a Guardian columnist, neatly summarised Ridgway’s argument as:
    “What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the purpose of the organisation to do so”.

    https://www.theguardian.com/business/2008/feb/10/businesscomment1 goes further and asserts that “What gets measured gets managed – so be sure you have the right measures, because the wrong ones kill.”

    Ridgway’s 8-page paper is entitled “Dysfunctional Consequences of Performance Measurements”.

    It’s common sense that not everything that matters can be measured. It also follows that not everything we can measure matters.

    The tendency to report against certain metrics may even distort our priorities.

    Pensions consultatnts tend to measure pension deficits using metrics which Jon Spain, Iain Clacher, Con Keating and others have shown up to be flawed. Other metrics are available, but for some reasons many pensions consultants choose not to show them.

    To summarise: Drucker never said the infamous sentence, and since 1956, if not earlier, we’ve been warned that a “what gets measured gets managed” mantra is deeply flawed, Chris.

    • henry tapper says:

      Not so much a comment but a blog (and a good one too). What is becoming increasingly clear, from this set of articles from Chris is that you don’t have all the answers because you’ve got all the money. What get’s measured can be mis-managed.

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