Average fees paid by pension plans worldwide have jumped 50% over the past five years, with active managers making up the bulk of the increase, according to a new report by Watson Wyatt Worldwide.
“A Fairer Deal On Fees” reports the average pension plan now pays about 110 basis points in annual costs, compared with an average of 65 bps in 2002, with most of the money coming from fees paid to external managers and brokers.
“We strongly believe that managers should be compensated for a job well done,” Watson Wyatt said in the report. “But fees are too high for the value they currently represent, particularly if we are moving to an environment in which market returns are lower.”
Fees have risen primarily because of an increased emphasis on alpha and an “appetite for alternatives,” according to the report. But returns in recent years have been driven more by market strength than manager performance, and often investors are “paying up for leveraged beta” rather than true alpha. Now, larger pension plans are more aware of the roles alpha and beta play in their portfolios and how to separate the two.
“If active managers want to win over more of this sophisticated, long-term money … they will need to offer institutional clients a fairer deal,” according to the report.
