Local authority pension funds are being being overcharged by £500m a year, paying widely varying amounts for investment management, administration and custody costs, according to in-depth research compiled by consultancy Stonefish.
The Stonefish research found wide disparities in costs, some funds paying 85 basis points for investment management charges, compared to an average charge of 25.4 bps and some funds paying just 2 bps.
The research, conducted through documents obtained by Freedom of Information Act requests made to all local authorities, found one fund had seen portfolio turnover of 3,800 per cent in a single year.
The average administration charge was 12.6 basis points, but some smaller schemes were being charged in excess of 95 bps for admin. Custody fees averaged 1.2 bps, with some schemes of all sizes paying less than 0.5 bps, although one scheme was being charged 6 bps.
Most smaller schemes are paying considerably more than bigger schemes for both administration and fund management.
Stonefish argues that by combining funds into one £170bn fund, potential savings of £500m a year could be made. This saving is made up of £130m saved through lower administration costs, £350m in investment management savings and £12m in custody cost savings. This could reduce a deficit by £5bn over a decade.
It also argues that a better measure than AMC or TER would be the total cost of ownership (TCO) for a scheme member. The report argued that the TCO for retail funds is often as high as 4 per cent.
Fund churn data was also extremely diverse, with the average portfolio turnover standing at 130 per cent. One fund saw turnover of 3800 per cent, meaning shares of 38 times the value of the fund were bought and sold in a 12-month period. High portfolio turnover also means high levels of stamp duty will have been paid, argues Stonefish.
The Stonefish research also found average brokerage commission on equity trades was 10.3bps, although the levels of commissions paid varied between 0.3bps and 121.4bps.
Stonefish also argues custodians are in many cases offering their services almost for free. This, it argues, means they are making money elsewhere, through stock lending, interest income and F/X.
The report examined the overt and covert cost within local authority pension schemes by reviewing over 1,000 annual reports from 2001 to 2011 across all local authority pension funds. The consultancy was able to obtain this data through Freedom of Information Act requests because they relate to public documents. Similar access to information would not be available for private sector pension funds.
The report wasLocal authority pension funds are being charged widely varying amounts for investment management, administration and custody costs, according to in-depth research compiled by consultancy Stonefish. The report was first presented at a TUC conference eight months ago.