Chris Sier and Ritesh Singhania have published research conducted by Clear Glass that shows that UK DB pension plans waste billions on underperforming asset managers.
The research, published in today’s FT, is concerning. Why are there such weak controls in place amongst those making corporate purchasing decisions in the DB sector and how does poor purchasing continue to this day?
Chris Sier, founder and chief executive of ClearGlass, said cost savings of about £6bn a year could be achieved if UK defined benefit pension schemes halved the total fees of 0.65 per cent paid on average each year to asset managers.
The report shows that this could be done by focusing on managers that offer services at a low cost and deliver high value for the money they are paid.
Just 15 asset managers of the 420 analysed by ClearGlass provided any funds or mandates with a combination of best in class returns and fees with both measures in the top quartile, according to ClearGlass. BlackRock was ranked in the top quartile for both costs and performance in four of the 22 fund categories, analysed by ClearGlass. Legal & General Investment Management appeared in the top quartile for costs and performance in three fund categories.
How is this reflected in the new world of DC?
Those familiar with my blogs on value for money will be familiar with the hegemony of BlackRock , LGIM and State Street within the defaults of our workplace pensions.
The reasons they are used heavily is not just that they use little of the revenue brought in by the Annual Management Charge, but they deliver returns well in excess of more expensive rivals. The IGC and master trust chair reports that I read, show that formerly hidden costs and charges are now out in the open, value for money is a concept that DC fiduciaries have had to get used to and the ongoing process of maximizing member outcomes will see more benchmarking, more competition and more scrutiny in months and years to come
The “no-frills” passive approach these managers adopt is allied to a highly efficient investment administration service that offers platform managers the benefits of lifestyling within target dated funds. BlackRock’s lifepath range of TDFs dominate the upper echelons of AgeWage’s scoring universe for the same reasons as ClearGlass identified. These large passive managers get the job done with minimum friction and it is the member who wins.
And here is the thing. The price you pay as a platform manager for these funds is tiered and if you are purchasing with less than £100m in your default fund you may not get the price you want , you may not even get an offer.
DC is consolidating fast because of the scrutiny of Government on weak practice, pressure from employers to get a good deal for staff and competition between workplace pension managers for your money. This high level of scrutiny and competition is in marked contrast to the world of DB.
My worry is that poor purchasing by DB schemes is unaccountable. Trustees are not held to account for weak decision making , poor negotiations and feeble monitoring. The reason is simple, the employer has no levers over the trustee who is accountable to no-one.
By comparison, decision making in the world of DC is very accountable indeed. Because most DC workplace pensions are set up on a commercial basis, it is the plan provider (technically the funder) who negotiates with fund managers and measures the results. The trustees have a governance role but they are subordinate to the scheme’s executive.
It is only where the weak practices of DB purchasing spill over into DC schemes , that we see poor value funds at poor value prices. I worry that the exclusion of small DC schemes run on a hybrid basis will allow DC sections of DB trusts to track the poor purchasing of the DB scheme. The DWP have convinced themselves that in combination, a DB and DC scheme under the same trust will benefit from the superior governance that comes from scale. They should look at how large DB schemes, holding well in excess of £100m are behaving.
The vast majority of the £6bn a year, Chris Sier is claiming could be saved, is being lost from large schemes with perceived good governance.
In my view, good governance comes from commercial accountability and most DB pensions do not have them. DC schemes – well the commercial ones – have accountability in spades and it shows.
Small wonder that institutional fund sales teams hate the workplace and stick with the cosy world of “institutional decision making”. They know which side their bread is buttered.