The Dutch market is the first in Europe earmarked for the introduction of a service for pension funds to measure their costs on a comparable basis.

Toronto-based Cost Effectiveness Measurement (CEM), which provides these services to over 275 funds in Canada and the US, has established operations in Amsterdam. CEM director Jane Ambachtsheer says the company has had commitments from nine major Dutch funds, amounting to 65% of the pensions asset market, to participate in the service. We work on a peer group basis, so we needed to build up a group of funds which are suitable to be compared to one another."

The service starts by putting funds' returns on to a standardised basis, enabling those with different asset mixes to be compared. "We obtain the details of a fund's policy and the weighting and benchmarking for each asset class, so we can see how they did as against how they would have done passively, which gives us their added value." Then the costs are looked at both as to the operational and direct costs, as well as the governance and administration costs, she says. "We do not go through a fund's transaction costs one by one, but we break the portfolio down into 16 asset classes and four investment 'styles': internally managed both active and passively, and externally managed, active and passive." This enables funds to see what their peers are paying for the same asset class.

This section of the report shows the range of experience for the relevant peers in terms of medians and quartiles, and how it has performed.The information is gathered through a survey that every participating fund completes, Am-bachtsheer explains. "We look at the funds' investment costs for each asset category per investment style, where every cost relating to these areas should be in-cluded, both their internal management costs and their direct external costs, such as management fees, participations, performance fees and so on." All the hidden and netted costs need to be disclosed, she adds. "We gross it all up."

The data collection and processing is a very strenuous process, particularly in the first year, as it has to go through a very heavy cleaning process. "Our program looks out for inconsistencies and things that are off-beam and it takes funds a little time to get the hang of it!"

The fund is provided with a report setting out the fund's benchmark costs, comprising 'the expected average operating costs' of a fund with its characteristics, such as size, asset mix and location. It also details the 'excess costs', which are the actual costs of a fund less the benchmark costs. From this is de-termined if the costs are average, high or low.

To arrive at the question of wheth-er the fund is cost-effective or not, these excess costs are compared with the returns the fund made, over and above what these would have been had the portfolio been invest-ed passively. "The aim is to arrive at a measure of what you have ach-ieved, the added value from your investments compared with the costs of running them." But the re-port also provides basic cost information, such as in the governance and administration coverage in the CEM report to the fund. "It is very useful to see what your fund is paying for in trustee and custodial costs, for example, compared with similar sized funds. So if you are way off, you may need to make a phone call!" Fennell Betson"

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