There is “zero evidence” to support the “hidden fees hysteria” that unknown costs are damaging pension funds, the Investment Association (IA) has argued.
Research from the industry body, published 9 August, estimates returns on equity funds are 0.71% per year above index returns. This is in comparison to an estimated -1.59% underperformance expected if suspected ongoing charges figures (OCF) of 1.42% and transaction costs of 0.17% were impacting on returns.
The IA's research used internal data and information from the Fitz Partners Transaction Fee dataset. It explored the levels of OCFs, explicit and implicit investment costs, and other costs, including entry and exit costs, within 1,350 equity funds.
The research will throw into doubt previous accusations that a third of pension pots was being lost to these costs. The Transparency Task Force (TTF) had argued more than 100 hidden charges were impacting on pension pots.
The IA added the asset-weighted average portfolio turnover rate (PTR) across these equity funds was 40%, which is lower than it would have expected if there were high hidden costs.
It said its evidence showed the high hidden costs and charges were the industry's "Loch Ness Monster".
Director of public policy Jonathan Lipkin said the IA's research cleared the industry of any malignance.
"The industry should be judged on its actual delivery, not on perceptions of delivery," he said. "If you look at the actual performance delivered to fund investors, this is the proof point and we do not see evidence of high transaction costs, either explicit or implicit."
However, TTF founding chair Andy Agathangelou questioned whether the research was complete.
He said: "Hidden costs undermine social justice, substantially reduce net returns, prevent market efficiency and they stop pension trustees from being able to do their job properly.
"Every transaction incurs a cost to the investor, not half of the buy or sell transactions. So are real PTRs being under-reported here? What PTR calculation methodologies have been used?
"And the OCF does not typically include a number of costs such as many implicit costs, custodian transaction costs and one-off.
"So is the research complete? If not, will it mislead investors wanting to know the ‘true cost of fund management' when comparing products?"
An independent IA advisory board is working on a new disclosure code for the asset management industry. This is designed to standardise reporting of fees, charges and implicit costs, in a bid to make the industry more transparent.
The board will report on its findings later this year, before the IA launches a public consultation on the proposed code.
However, the board has been criticised for holding its meetings confidentially. Its chairman Mark Fawcett, who is also chief investment officer of NEST, said the requirement was to ensure "a full and frank discussion".
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