Average pension scheme could save £700,000 on active costs
A typical defined benefit (DB) pension fund could cut costs by around a third per year by centralising and standardising their investment, administration and trading functions, according to the Asset Management Exchange (AMX).
The platform set up by Willis Towers Watson six months ago to reduce cost and resource duplication for schemes, looked at a hypothetical £250m scheme with an actively-managed portfolio based on 55% allocation to active global equities, 30% to active bonds and 15% to diversified growth funds.
It calculated such a scheme with five different investment managers could incur total management costs of £1.4m, and administration and transaction costs could add another £700,000 in fees.
By sharing administration and transaction resources, this fund could save in the region of 28 to 39 basis points (bps). This drills down to 18-27bp savings on investment management fees, 5bps on administration, and 1bp on market-related costs.
A £700,000 saving annually is also equivalent to around one sixth of a typical sponsor's deficit contribution, according to the AMX's estimates.
It comes amid increasing focus on cost transparency as most pension schemes do not have a complete picture of all the different types of costs incurred through investing, such as transaction costs.
Speaking to PP, the platform's head of digital Bill Jooste said some costs are very visible while others are less so. Costs can come from various different counterparties in the investment chain such as prime brokers which provide services to hedge funds.
"Hedge funds are not as good as they could be at managing costs as it's not a core focus for them," he added.
Global head Oliver Jaegemann pointed out that the AMX's estimates are much higher than figures in a recent survey by The Pensions Regulator, which found schemes estimate their total costs at around £540,000 a year.
"Our calculations suggest that many UK pension funds could therefore be underestimating their costs by almost four times," he added.
"Greater transparency in fees paid by institutional investors, though obviously a good thing, is only really useful if it inspires meaningful actions to reduce costs.
"Under the current industry model, each manager and asset owner transacts individually and basic administrative functions are needlessly replicated across a portfolio of asset managers, wasting significant sums."
Since its launch in February, the platform has increased its assets under management from $750m (£564.6m) to $2bn currently, which includes seven funds with six investment managers. At the time of the launch, the firm said it would revolutionise institutional asset management in the same way Amazon changed retailing.
PP had explored how the investment platform marketplace is undergoing an upheaval with the entrance of Willis Towers Watson's AMX.
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