Swiss pension funds are starting to look more closely at the fees they pay, including those going to external managers.
“There is scarcely any competition on the market. If an employer changes managers, it involves enormous costs,” said Rudolf Strahm, a former Swiss legislator and former head of the country’s price monitoring office.
He argues that administrative costs in Switzerland today amount to between CHF700 ($745) and CHF800 per year, per insured. Though other statistics show a lower figure (some estimates say closer to CHF300), cost is certain to remain an issue.
One area where providers are going to face increased scrutiny is with regards to so-called retrocessions, effectively kick-backs intermediaries receive for selling third-party products. Strahm calls these “retros” a “scandal,” saying the amounts paid to outside providers should be published as a matter of course, and not simply on demand.
One speaker pointed to currency transactions as an area where fees are high. “There are very few asset managers in Switzerland that do their currency transactions with different counterparties. There are very few I know that do best-execution in forex trading. In the Anglo-Saxon world, this is state-of-the-art.
It should also be like this in Switzerland,” said Marco Bagutti, who manages CHF6.3bn in occupational pension funds for workers in Switzerland who can’t, or haven’t joined a mandated benefit scheme.
Another group Bagutti criticises are hedge funds, which, according to him, in some cases can charge more fees for managing just 3% of an investment portfolio, than the costs associated with the remaining 97% of assets. He still invests in hedge funds, but, he added, “we are looking more critically” at the costs.
One way to compensate for higher costs would be to bolster returns. Alternative investments and emerging market access are aspects of such efforts likely to get more attention in the future. These investments could include emerging market exchange traded funds, which offer ease of access and lower management fees than typical open-end funds, according to Thomas Merz, who heads Credit Suisse’s exchange-traded funds business in Switzerland and Liechtenstein.
Some, including Jens Kruse, director and country head of Franklin Templeton Investments in Switzerland, said a problem here has been to convince pension funds that diversification into new asset classes makes sense, when most have traditionally concentrated on Swiss bonds and plain equities.
There are some ways funds could raise efficiency and lower costs, such as reducing the number of board members. While Swiss workers’ pension funds have an average number of board members of about ten, “the optimal number would be six,” according to Andreas Zingg, a professor at the University of St. Gallen and executive at iShares in Switzerland, part of BlackRock. A recent survey done by the university found that about three-quarters of 96 funds surveyed, managing in total about half the country’s occupational retirement savings, had no external experts on their boards. Of the total, 40% had little transparency with regards to their so-called “Soll-Rendite,” meaning targeted return, while a further 20% had a target return higher than their expected return.
Funds could also professionalise their management structure. “There is a link between governance and performance, especially with regards to the investment strategy. Those with a full-time manager perform better,” Zingg told the conference. In addition, he noted none of the pension funds surveyed had reported any direct links between compensation paid to managers and performance.
Meanwhile, Vera Katra Staub, chief investment officer of Zurich City pension fund, PKZH (Pensionskasse Stadt) which oversees about CHF13bn for city workers, said more consolidation could rein in costs.
“In our industry, we’ve had some consolidation, but we will need more in order to realise the economies of scale that we need to achieve for the good of the insured and the employers,” she said.
This week's edition of Professional Pensions is out now.
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