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Sunday 16 December 2018

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Varying DC fund charges creates a misleading picture

Written by Sunniva Kolostyak
04/12/18

Defined contribution fund charges appear competitive in the Netherlands and Sweden but are still lower in the UK when administration costs are added, a study from the Pensions Policy Institute (PPI) has found.

In its study, Charges, returns and transparency in DC: What can we learn from other countries?, the UK’s PPI looked at the competitiveness between fund charges in the UK, Netherlands, Sweden, US and Australia.

It found that Dutch and Swedish scheme figures appear competitive, but that the high levels of administration fees cause higher costs. As employers carry the administrative costs in the Netherlands, the costs are brought up significantly, PPI found.

However, the Dutch approach to drive forward voluntary proposals with regulator backing has ended up in a practical system that has improved the transparency of changes and is credited with impact on industry behaviour.

Swedish DC costs also look competitive, despite not disclosing transaction data, as a result of the buying power exerted by the four occupational schemes in the market. This is combined with contribution charges, in addition to fixed fees.

The default investments in Sweden are insured funds with minimum income guarantees but lower returns, creating a more complex picture which is not necessarily competitive with markets such as the UK.

According to the PPI, it demonstrates how the scale created in a small market through this social market structure can deliver internationally competitive fee levels.

Countries explored in the report all varied in investment approach, with Swedish funds still being committed to guarantees in their pensions through insured approaches, and Dutch CDC funds through shared-risk approaches.

The UK is moving towards passive investing for default funds, the US is also slowly transitioning from active to passive investment management for DC while Australia has the highest commitment to traditional active and alternative and/or direct investments.

The level of charges in the U.S. and Australia has been dropping by around 2 per cent a year, according to the PPI, and this suggests that as DC schemes grow so do the ‘economies of scale’. UK DC scheme fund charges are competitive with those in the U.S. and cheaper than those in Australia.

Commenting on the report, PPI head of policy research, Daniela Silcock said: “Until recently, UK disclosure did not facilitate direct examination of how costs are changing as it does in the Netherlands or Australia.

“It may be important for all stakeholders in the UK market to have access to this data to manage outcomes better as scale grows in UK DC.”



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