It’s time for pension funds to show some leadership on funds management fees, to demonstrate that they are at the top of the food chain – they have the check book. Roger Urwin, global head of investment content for Watson Wyatt Worldwide, believes pension funds have, to a large extent, been captive to the fee structures of their agents. He spoke with GREG BRIGHT.
Most of the fee structures for funds management firms were established long ago, say 30-40 years, when the industry was smaller, yet they persist today.
According to Roger Urwin, of Watson Wyatt, the fee structures are anachronistic and do not adequately reflect the scale which the aggregation of pension fund money has brought to the industry.
“There is some change, but it’s not happening as quickly as you’d like to see it take place,” he says. Watson Wyatt, with between $2-3 trillion under advice, has been urging client funds for some years to be more aggressive with their external managers on fees and charges.
“Institutional funds should be managing their cost budgets more aggressively. They’ve been looking at the opportunities and have probably been more keen to manage costs with their own staff.”
Urwin says those funds with significant internal investment resources have tended to recognise the value proposition being presented by agents more accurately, and have therefore been more aggressive in negotiations.
Competition is relatively weak among workplace pension markets across the world, he says. The two main symptoms of this are governance and cost structure.
“The point about governance,” Urwin says, “is that the pensions industry hasn’t shown its leadership mettle yet. It hasn’t acted as though it’s at the top of the food chain. It has the check book and it’s managing the expenses.”
Most of Watson Wyatt’s research is set against the backdrop of fund governance. When asked what sort of investment strategies a particular fund could pursue, for instance, the firm needs to study the fund’s governance first.
As a basis for such a study, Watson Wyatt uses a paper co-written by Urwin and Professor Gordon Clark of Oxford University on governance best practice. This paper drew on the governance structures and procedures at 10 of the world’s largest and “best” pension funds and sovereign wealth funds.
These funds could be classified as ‘Level 3’ funds and were characterised by boards which set the parameters but which delegated well to inhouse investment teams who had ambitions to take advantage of a range of sometimes complex investment options. They would probably need funds under management of between $2-3 billion for adequate staffing.
‘Level 2’ funds have, clearly, not achieved the same level of staffing and/or do not have the same degree of delegation in place. They have to be careful about what they are investing in.
‘Level 1’ funds could be described as ‘minimalist’. They mostly outsource investments and run a tight ship with costs. They may index a large proportion of their portfolio.
Each of the categories can be effective as fiduciary investors as long as the governance level matches the investment strategies used.
Urwin, who continues to monitor the 10 funds, which contributed to his paper, says that these ‘Level 3’ funds tended to “skate through” the global financial crisis more smoothly than others.
The crisis has also tended to reinforce the view that the balance in the investment world is shifting away from the US and Europe and towards the Asia Pacific region.
The phenomenal growth spurt from China this year and strong figures, no matter how rubbery, from other countries in the region perhaps signal a long-term decoupling of Asia from the rest of the world.
Watson Wyatt believes that the four fundamental reasons that this crisis has been different from others are:
- Policies have only addressed symptoms of the problem, leaving a predisposition to further crises. The complexity and inter-linked nature of the financial system represent big pieces of the problem.
- Developing countries are probably heading into a period of under-performance, which will reduce the speed of recovery.
- Sustainability concerns where ownership interests will occur under lines of stewardship rather than trading. For example, if you were an owner of Royal Bank of Scotland perhaps you should have exercised more responsibility for what was going on. And if you manage a $200 billion fund, perhaps you should show some stewardship over carbon-emission matters rather than just buying and selling stuff.
- Questions over what is the responsibility of corporations for environment change. For example, is it okay to commit money to organisations which are creating problems for future generations?