'No connection' between pension fund costs and returns, survey shows

The costs of administration remained flat in 2016 for Dutch pension funds last year, while combined asset management costs dropped by just 3 basis points to 0.54% on average, according to LCP.

The consultancy – which surveyed more than 200 schemes for the sixth consecutive year – said it still hadn’t discovered a positive connection between costs and achieved returns.

In 2016, Dutch pension funds reported returns of 10.4% on average, against 1.4% for the previous year.

LCP found that administration costs remained at €115 per participant on average, while asset management costs had dropped from 0.48% to 0.46% on average.

It added that average transaction costs had decreased by a single basis point to 0.08%.

As the pension funds’ combined assets had risen to €1.2trn due to achieved returns, total asset management costs increased by €100m to €6.6bn, said LCP.

Jeroen Koopmans, partner at LCP and author of the survey, argued that asset management costs could be reduced further by five or even 10 basis points.

“Asset management costs at many schemes are between 30 and 40 basis points and these pension funds haven’t performed less than schemes with higher costs,” he argued, suggesting that pension funds could demand lower costs or opt for less expensive investments.

Reducing asset management costs has a much bigger impact than spending less on pensions provision, according to Koopmans.

If pension funds succeeded in reducing asset management costs by five basis points, they would save €600m in total annually.

Despite average administration costs per participants remaining stable, LCP found significant differences between pension funds.

Half of them reported a rise of 15% on average, citing increased VAT costs as well as expenses as a consequence of stricter rules.

Other pension funds, including the €403bn civil service scheme ABP and the €189bn healthcare pension fund PFZW, posted a drop in administration costs of 11% on average.

Koopmans said the consultancy could not explain the cause of the costs decrease, as pension funds had failed to improve their usually meagre disclosure of cost changes.

ABP’s cost of pensions provision fell by €5 to €79 per participant, while PFZW reported a decrease of €1.50 to €67.90.

If costs at ABP and PFZW were not taken into account, administration costs per participant of Dutch schemes would have been €141 on average.