Fees paid to outsourced CIOs by U.K. pension funds have fallen significantly since 2017 amid market volatility, the end of the bull market and pricing competition, IC Select said.
The firm, which helps pension funds in the selection and oversight of investment consultants and OCIOs, said in its latest report that both base fees — the charge paid for an OCIO's services — and investment fees, which cover underlying manager charges, administration and custody costs, have declined over the period.
Base fees fell by between 10% and 28% for the period between Dec. 31, 2017, and Dec. 31, 2022, depending on the size of the pension fund hiring the OCIO. The bulk of the decline occurred between 2017 and 2019, IC Select said. For a £50 million ($61 million) pension fund, the base fee fell by an average of 10% vs. 28% for a £1 billion plan. IC Select said the rapid fall coincided with the launch of new services by lower-cost providers. Base fees have since stabilized. Actual figures were not immediately available.
The median investment fee, however, has fallen by an even bigger proportion — 38% since 2017. Most of that decline came in 2021 and 2022, IC Select said, attributing the drop to the ending of the longest bull market in history in February 2020.
The median investment fee for a portfolio targeting a return that meets liabilities plus 2% fell by 0.14 percentage points in absolute terms to 0.23%. While price competition has pushed fees down, the report said more defensive investment allocations have led to reduced costs.
The report was based on a survey of 12 OCIOs: Aon, BlackRock, Brightwell, Cardano, Charles Stanley, Goldman Sachs Asset Management, Legal & General Asset Management, Mercer, Russell Investments, Schroders Solutions, SEI, Van Lanschot Kempen and Willis Towers Watson.
While the fall in OCIO fees seems dramatic, it needs to be put into context, Anne-Marie Gillon, director and head of research at IC Select, said in a news release accompanying the report. "The decline in base fees owes much to a period of intense competition between fiduciary managers, which has now come to an end. And the more recent slump in investment fees is in part a function of market conditions. So we expect to see fees rise once more as markets recover their poise and managers look to invest in more expensive markets. Nevertheless, the essential attractions of fiduciary management — time and cost savings for trustees — continue to make a compelling case for this approach."
