A recent government-commissioned study of Swiss pension funds' asset management fees has been greeted by a large amount of debate at an important time for the industry. Pension Funds Insider gauges the reaction

"Those hoping or expecting that the study would give fuel to criticism of pension funds' investment capabilities look to be well disappointed", beamed Peter Wirth recently, in an editorial for the newsletter of Vorsorgeforum, an umbrella organisation representing the entire Swiss pensions industry.

The survey comes at a time when pension funds are on a defensive footing as they try to change  unpopular reform. Fees within the pension industry have been a political talking point, which left many relieved that the report did not find them to be overpriced. Instead, it claimed that "the second pillar asset management market is structured in an extremely competitive and price-efficient way, both in an international comparison and when compared to other investor groups."

The foreword to the survey's report from Martin Kaiser-Ferrari, a key civil servant at the Federal Social Insurance Office explains how asset management fees became the subject of public scepticism: "As part of the campaign for the referendum on 7 March 2010 to amend the pension conversion rate, controversy flared up surrounding seconded pillar costs. The focus of this controversy was on asset management costs. Experts have long been aware that the asset management costs reported in pension funds' operating statements do not show the complete picture."

That complete picture, according to the report, is that Swiss pension funds are charged 0.56% management costs for their assets, substantially more than the 0.15% that their accounting reveals. Industry figures claim that hidden charges on collective investments vehicles (with charges taken by lowering actual returns) were behind much of this discrepancy.

Dieter Stohler, director of the Basel municipal pension fund, also told the Basler Zeitung newspaper that the difference "is down to the system. The hidden costs do not have to be separately accounted for, so few pension funds do that. Secondly, there is no common regulation about what the term asset management costs actually amounts to."

The eagerly-awaited survey, compiled by the c-alm consultancy, also found that overall asset management fees varied by a factor of twelve amongst the 73 pension funds surveyed, from 0.15% to 1.86%. The average management fee charge of 0.56% is therefore "not very explanatory" says Wirth's editorial.

Hanspeter Konrad, director of pension fund association ASIP meanwhile said "[the survey] has shown that occupational pension provision in Switzerland also represents an advantageous system to savers regarding costs."

Wirth says "the much-criticised financial service providers have proved not to be rip-off artists, nor are pension funds their naive victims."

With the Swiss Federal Social Insurance Office currently at loggerheads with pension funds over the forthcoming regulations that pension funds desperately want to moderate, Wirth admitted to being pleased the report gives no real ammunition to the bureaucrats' position. He says that the recommendations made by the report to improve cost efficiency in asset management "would be best left for pension funds to implement without them [government]".

Focus on alternatives

Zurich-based newspaper Neue Zürcher Zeitung greeted the survey results with a focus on the management costs of alternative investments. The report found that although making up just 6% of total fund assets for the sample, alternatives accounted for a third of asset management costs.

Neue Zürcher Zeitung also remarked that despite these high fees, performance of alternatives is often erratic. Some Swiss private equity fund-of-funds have performed negatively over the last ten years and some major pension funds such as the Zurich canton fund BVK saw substantially negative returns on hedge fund mandates between 2007 and 2009.

Marco Bagutti, head of investment at the government-sponsored occupational pension safety net fund, Stiftung Auffangeinrichtung BVG, told Pension Funds Insider that he also considers hedge fund management fees to be too high. He said that his fund "has invested 3% of its CHF6.5bn (£4.7bn) assets in hedge funds and pays more than one third of total fees to this asset category, on a look through basis. Even though the net return of hedge funds has been satisfactory, its contribution to the total return of our fund has not nearly reached the level of the costs."

For their part, several hedge funds pointed out to the Swiss press that their fees tend to be higher as their investing techniques are complex and require the hiring of talented managers in order to produce enhanced returns.

Bagutti echoed other commentators by welcoming the publication of the survey. He said "the study helps the process of increasing transparency in asset management and the fair comparison of investment opportunities."

He added that pension funds and asset managers could both rethink their traditional approach to management fees to get better deals in the future.

Bagutti said: "It is my opinion that institutional investors do not yet make full use of their buying power. As long as multiple sales representatives call us each day to try to sell their products, suspicion arouses that fees are still way too high in the market.

"Besides driving a hard bargain, Swiss pension funds could form buying syndicates to negotiate more favourable fees. Furthermore one should rethink the remuneration model that is defined in basis points based on the level of assets managed. Wouldn't it make much more sense to pay a fixed amount that is in direct relation with the efforts of the asset manager?" 

First published: 10.06.2011

dbillingham@wilmington.co.uk