The Association of Member Nominated Trustees has called for small schemes to consider pooling to reduce their investment fees. Tanya Ashreena analyses the process
The Association of Member Nominated Trustees (AMNT) is exploring how pension schemes can participate in pooled funds to save money by paying lower fees.
Pension schemes can agree to amalgamate their assets with other schemes through a custodian bank, which then negotiates lower charges on their behalf by making use of their combined size.
Schemes usually participate in pooled fund arrangements to benefit from economies of scale, meaning lower trading costs per unit of investment, and so lower fees for members.
Pooled funds can also access a greater variety of investments in order to maximise returns to their constituents. Alternative assets classes – such as hedge funds, private equity and specialist property – are often beyond the reach of small schemes.
Size matters
Small pension schemes – those under 100 members, according to the Pensions Regulator's categorisation – usually face steeper fees than their larger counterparts.
Barry Parr, co-chair of the AMNT, said the organisation's key concern was the "very high" fees being paid out by members with less investment bulk.
He added: "Fund managers prefer to deal with bigger schemes, as it is cheaper to deal with them."
And Janice Turner, co-chair of the AMNT and a member-nominated trustee of Bectu Retirement Fund, said some schemes had been told to "take it or leave it" by managers.
She said: "There were also reports of some investment companies automatically charging higher rates for smaller sums invested."
The lobby group is exploring the "mechanics" of how schemes could pool their assets to achieve economies of scale.
Case study: The Army and Navy Club pension scheme
The Army and Navy Club plan avoids the hurdles other small schemes face by using investment manager Smith & Williamson to handle all its investments.
The defined benefit scheme has just 21 active members, according to National Association of Pension Funds data.
Scheme secretary Ayres de Souza said handing over the investment process makes administrating the scheme simpler.
He said: “We do not have to deal with the problems a small scheme would otherwise have to put up with."
Laurens Vis, a managing director at Kas Bank, said the custodian bank is already offering such an arrangement.
"Small schemes can come to custodian banks like ours and amalgamate," he said. "Once they collaborate, they get critical mass."
The custodian will go to directly to asset management firms and negotiate fees on behalf of the collaborating schemes.
He added: "Asset managers then have a lower margin of risk and error through this method, and the smaller schemes can benefit from considerably higher rebates."
How pooled funds work
When pension schemes amalgamate, they have to enter into a formal relationship with a custodian bank.
The schemes remain responsible for the manager and fund selection.
The custodian assumes responsibility for the operational set-up in areas such as legal documentation, account opening, anti-money laundering documentation and establishing connectivity with the transfer agent and fund managers.
The custodian should assume responsibility for negotiating fees with the managers, usually through a network of agents.
In Kas Bank's arrangement, where fees have already been agreed between scheme and manager, these are incorporated, or improved upon by the bank.
The only substantial transfer of responsibility is to shift the power for negotiating fees and opening accounts to the custodian.
All other arrangements stay the same, or can be adjusted according to the scheme's wishes.
Beyond establishing a relationship with the custodian and agreeing to process fund subscriptions and other operational activities through their systems, nothing else is required.
Vis added: "The first step would be for us to undertake a more detailed analysis of each portfolio so as to tailor account set up and other arrangements.
"[This is] to ensure that the services provided are fully customised to the scheme’s needs and scale, and to ensure that the best fee arrangements can be negotiated."
