Cost.
Results Overview
Cost.
Cost scores were based on 42 questions across four components common to all, and seven questions for member services. Member services represented 10 per cent of the total cost factor score but was only applicable for organisations that administer benefits in addition to managing the fund. This weight was redistributed to the other factors for funds that do not administer benefits, thus each individual fund would always receive a score out of 100.
There are barriers to comparability in reviewing costs across the globe. The differences in tax treatment, organisation/plan types, and accounting and regulatory standards means that it is difficult to find common ground for assessment. Thus, the review is not meant to be a comprehensive review of all cost disclosure elements as they vary from region to region and even from fund to fund. Rather, it is focused on the material areas common to most funds.
The average country cost factor score was 48, unchanged from last year’s review. Individual fund scores ranged from 4 to 89. The lowest scoring cost component continued to be transaction costs (country average of 26, down slightly from 28 last year), followed closely by detailed asset class cost disclosure (country average of 32, again slightly lower than last year’s average of 34).
As the dispersion in scores suggest, cost disclosures varied considerably in completeness. There was a wide range of quality as well, though qualitative factors were out of scope. Disclosures were better when the pension fund (defined benefit or defined contribution) was a single-purpose entity rather than a silo of a larger organization such as a wealth management company or a government department.
The Netherlands continued to lead the way with the highest country score of 77. Scores were tightly banded from 71 to 89. In fact, the top four cost factor scores were held by Dutch funds. The 5th spot was occupied by an Australian fund, a defined contribution plan provider. The primary distinguishing factor of these leading funds is the strict regulatory environment that they operate in.
A second common factor of these top scoring funds was portability and competition. Dutch employers can move to another vendor if they are dissatisfied with the service from their third-party provider of asset management and administration services. The Australian DC funds’ relationships are with the member directly, but they similarly have the same freedom to change provider. A competitive environment seems to improve cost transparency.
The cost factor was assessed by looking at five criteria
1. Total fund cost.
Average country score: 62 (last year 63)
Total fund cost disclosure was again the highest scoring cost factor component. Despite this we still observed a wide range in both the quality and the completeness of costs disclosed. All stakeholders are entitled to know the total costs incurred in operating the fund, including what has been paid to external managers. Stakeholders are also entitled to proper context for assessing and comparing costs, including costs as a % of AUM, cost trends, comparisons to budgets, etc. This year, the assessment looked at whether there were disclosures which indicate that the organisation is actively managing costs, for example by comparing costs to similar funds. Additional marks were provided for discussions of costs in a prominent location apart from the financial statements themselves, for example in the MD&A section of annual reports.
- 88% of all funds reported total costs, same as last year.
- 78% of all funds reported external management base fees, up from 73% last year.
- 51% of all funds had disclosures which suggest they are actively managing costs.
Questions relating to total fund cost
Are the fund’s costs discussed in a prominent location, other than just the financial statements? e.g., management discussion & analysis, annual report overview, key takeaways/KPIs,?
- If yes, are they disclosed in total local currency?
- If yes, are they disclosed as % of assets or per member or in some way other appropriate context such as % of insurance contribution?
- If yes, are prior years’ included for comparison?Is there evidence in the disclosures that the fund is actively managing costs? For example, a comparison against third-party benchmarks, comparisons against budgets/forecasts.
Do the investment expense/asset management costs discussed in the prominent location (noted above) include:
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- External management fees? Not applicable if no externally managed assets.
- Internal operating costs (e.g. salaries, trading systems, risk management)?
- Allocation for shared overhead/back-office costs such as governance, operations, real estate costs?
- Transaction costs?
General review of the level of disclosure, marks were awarded if the following items are separately disclosed, regardless of location:
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- External management base fees,
- External management performance fees,
- Transaction costs,
- Total Internal operating costs (e.g. salaries, trading systems, risk management) and if outsourced, separate disclosure of other costs such as oversight, custody, and administration,
- Total salary and benefits of employees,
- Total overhead, premises & equipment,
- Total professional & consulting costs and costs for third-party suppliers,
- For private assets: capital committed, outstanding commitments, net capital, and fair value,
- Selling expenses (applicable to third-party Defined Contribution funds, sometimes commission for insurance type pension assets).
2. Member service/administration.
Average country score: 47 (last year 60)
Some of the funds reviewed were investment operations only, but most also provide benefit administration services for their members. Service levels are important to employers and plan members whether or not they have a choice of pension provider. Understanding related costs is also important, especially in conjunction with reporting on service plans and goals as well as actual performance metrics (eg customer satisfaction, net promoter score). Again, context, clarity on cost allocations, and level of disclosures, were all items reviewed.
- 83% of funds reported administration costs, but only 53% disclosed these costs in a prominent location.
- 50% reported salary costs for administration personnel separately from total personnel costs.
Questions relating to member service cost disclosure – if applicable
This section is applicable only to organizations who are also charged with administration of member pensions/benefits.
- Are member service/administration costs disclosed separately in a prominent location, other than just in financial statements?
- Are member service/administration costs also disclosed on a relative basis? (e.g., cost per member, cost as a % of holdings)
- Are prior years’ member service/administration costs included for comparison?
- Is there any strategy discussion or explanation for change in member service/administration costs?
- Are the following separately disclosed in respect of the administration functions (regardless of whether the functions are outsourced or performed in-house)?
- Salary and benefits of employees,
- Overhead, premises & equipment costs,
- Professional, consulting, and other third-party provider costs.
3. Asset class/Option level disclosures.
Average country score: 32 (last year 34)
For stakeholders to understand investment costs, it is important to know how the fund invests, both its asset allocation and implementation approaches (active, passive, external/internal management). Combining asset class performance with cost disclosures allows stakeholders to assess the fund’s effectiveness in deploying assets. For defined contribution plans, the questions in this section were answered from the perspective of the investment options available.
- 52% reported management expenses by asset class/option, down slightly from 57% last year.
- 35% reported prior years’ costs by asset class/option for comparison.
- 20% reported performance fees separately, a slight improvement from the 16% of funds that did so last year.
Questions relating to asset class/option level disclosure
For defined benefit and insurance funds, asset class level disclosures were reviewed. For defined contribution plans, disclosure related to the largest funds (by AUM) were reviewed.
- Are the following item disclosed:
- Management base fees,
- Management performance fees,
- Transaction costs,
- Are prior years’ figures presented for comparison?
- Are disclosures made as a % of assets?
- Is implementation style (e.g. active/passive, internal, external) disclosed?
- Are internal management, oversight or total costs disclosed by asset class? (applies to defined benefit and insurance funds only.)
- Are administrative costs for defined contribution options disclosed? (applies to defined contribution funds only.)
- Is the selling cost for DC options disclosed (entry, exit, switch, buy sell spread, etc.) ((applies to defined contribution funds only.)
4. Completeness of external management costs.
Average country score: 58 (last year 53)
Though this component had fewer questions, it was the hardest cost factor component to score. Typically, it required imputing the extent of external management fees included in total fund or option costs as external manager costs were often not identified separately. Disclosure reviews were also hampered by differences in accounting practices, which generally favour form (eg how expenses are disbursed) over substance (eg directly netted expenses are usually excluded from the financial statements). Therefore, marks were awarded for disclosures regardless of financial statement treatment.
- 5% of all funds reported the highest level of inclusion for private market asset classes: all external costs without netting of rebates and other expenses. Despite the low score, this was an improvement over last year, when no funds disclosed this information.
- 20% of all funds reported invoiced or paid expenses, but did not clearly explain the treatment of private asset performance fees.
- 17% of all funds did not disclose or discuss any external management fees.
Questions relating to completeness of external management fees
Recognizing different accounting practices around the world, credit was given for clear disclosure irrespective of whether disclosures were included in financial statements or in other areas. Credit depends on how clearly costs are presented and how well the basis of disclosure was described. For defined contribution plans we evaluated the completeness of the disclosure of asset management fees at the option level.
Possible responses, which are mutually exclusive, are listed below. Full credit was given if the first item on the list below was true, with credit given declining for each item in the list. Credit given reflects stated basis of disclosure. If the fund was silent on the basis for cost reporting, minimal credit was given.
- All external management fees reported with no netting of private asset management fees for rebates and offsets.
- All external management fees but silent on treatment of rebates and offsets on private asset management fees, or if rebates and offsets are explicitly netted.
- External fees based on fees invoiced or otherwise disclosed in capital call or notices (therefore pooled, fund of fund fees, funds that net directly would not be captured).
- External fees exclude private asset performance fees, or the treatment of private asset performance fees is unclear.
- External fees exclude all performance fees, or if the treatment of performance fees is unclear.
- Disclosure excludes all private asset fees.
- Disclosure excludes all external management fees, or no discussion of cost disclosure basis or costs.
Additional marks were awarded if estimates of amounts excluded from formal disclosures were provided and the rationale for exclusion was provided. Partial additional marks were awarded if estimates of amounts excluded from formal disclosures were provided but no discussion of rationale for exclusion was provided.
- Is the accounting method for cost disclosed?
- Is the cost basis (i.e., cost or accrual) disclosed?
Transaction cost disclosure & completeness
- Are brokerage commissions (including stamp duties) disclosed?
- Are fixed income and/or foreign currency (implicit) spreads disclosed?
- Are other costs, for example, switching fees, entry/exit fees on pooled funds, market impacts disclosed?
- Are private asset transaction costs and/or collective investment units disclosed?
5. Completeness of transaction costs.
Average country score: 26 (last year 28)
These questions focused on the completeness and level of detail across several transaction cost types ranging from: brokerage commissions, the most commonly reported and accepted; to market impact, which is less accepted and harder to quantify.
- 59% of all funds reported brokerage commissions.
- Mirroring the overall scores for this factor, Australian and Dutch funds scored highest in this area, reflecting country specific disclosure requirements.
- In-line with last year’s review, in three countries we observed no disclosure of transaction costs.
Questions relating to transaction cost disclosure and completeness (for DC investment option level)
Recognizing different accounting practices around the world, credit was given for clear disclosure irrespective of whether disclosures were included in financial statements or in other areas. Credit depends on how clearly costs are presented and how well the basis of disclosure was described. For defined contribution plans we evaluated the completeness of the disclosure of asset management fees at the option level.
Possible responses, which are mutually exclusive, are listed below. Full credit was given if the first item on the list below was true, with credit given declining for each item in the list. Credit given reflects stated basis of disclosure. If the fund was silent on the basis for cost reporting, minimal credit was given.
- All external management fees reported with no netting of private asset management fees for rebates and offsets.
- All external management fees but silent on treatment of rebates and offsets on private asset management fees, or if rebates and offsets are explicitly netted.
- External fees based on fees invoiced or otherwise disclosed in capital call or notices (therefore pooled, fund of fund fees, funds that net directly would not be captured).
- External fees exclude private asset performance fees, or the treatment of private asset performance fees is unclear.
- External fees exclude all performance fees, or if the treatment of performance fees is unclear.
- Disclosure excludes all private asset fees.
- Disclosure excludes all external management fees, or no discussion of cost disclosure basis or costs.
Additional marks were awarded if estimates of amounts excluded from formal disclosures were provided and the rationale for exclusion was provided. Partial additional marks were awarded if estimates of amounts excluded from formal disclosures were provided but no discussion of rationale for exclusion was provided.
- Is the accounting method for cost disclosed?
- Is the cost basis (i.e., cost or accrual) disclosed?
Transaction cost disclosure & completeness
- Are brokerage commissions (including stamp duties) disclosed?
- Are fixed income and/or foreign currency (implicit) spreads disclosed?
- Are other costs, for example, switching fees, entry/exit fees on pooled funds, market impacts disclosed?
- Are private asset transaction costs and/or collective investment units disclosed?
To view all questions to each component, visit the Methodology page here.
Average country score
Highest score
Cost questions asked
Overall Results Cost.
Year-on-Year Comparison
Overall Ranking
1.The Netherlands
2.Switzerland
3.Canada
4.Chile
5.Sweden
6.United Kingdom
7.Australia
8.Brazil
9.Denmark
10.Norway
11.United States
12.South Africa
13.Japan
14.Finland
15.Mexico
“It’s not what you pay a man, but what he costs you that counts.”
Will Rogers
Cost.
One all-too-common problem for stakeholders of large funds is incomplete and inconsistent cost transparency. Most costs reported to stakeholders are those that are explicitly paid (e.g., through written cheques or wire transfers) and exclude material costs that are netted from returns or from AUM. This is especially true for external management fees and transaction costs, two of the most material expenses for asset owners.
Generating adequate ‘net’ investment returns is an absolute requirement for success for all funds. CEM’s unique asset owner performance database clearly shows that net returns are materially impacted by investment management costs, with approximately 75 per cent of gross returns above benchmarks going to pay related investment costs. Paying more does not necessarily get you more. Cost-effective investment management strategies generally outperform high-cost approaches over the long-term. Costs matter. They should be understood, managed, and disclosed.
The assessment of cost disclosures included 49 questions organised across the components below. They focused on the completeness, accessibility, and level of detail provided for costs. Some weights and questions have been adjusted within each component to better reflect the relative value placed on each item or improve readability. Otherwise, the questions and scoring methodology remain materially unchanged as compared to last year.
Annual reports and financial statements were the main sources of information used for scoring. Occasionally, funds also provided cost information on their websites. For a few countries, some cost disclosures were sourced from regulatory body websites. These disclosures were reviewed if they were referenced on pension fund websites or in annual reports.
1. Total fund cost disclosures (25% of factor score)
Questions focused on whether total cost and the various components of total cost were disclosed. Additional marks were awarded for describing and discussing cost/expenses in a prominent location, not only in the financial statements. Marks were also awarded for: putting total costs in the proper context (e.g., as a % of assets or compared to prior years’); for clarity on what costs were included and allocated; and, for the completeness of disclosures.
2. Asset class level disclosures, or investment option for DC plans (15% of factor score)
Asset mix is an important driver of total fund costs. The focus was on completeness and level of disclosure across the various asset classes. Additional marks were awarded if disclosures also provided additional context for why costs might be different, such as implementation style, and for reporting of cost trends.
3. Completeness of external management fee disclosures (30% of cost factor score)
External management fees are typically the largest investment cost, even for funds that manage high proportions of their assets internally. The focus was mainly on external management fee disclosures in annual reports and financial statements. Generally accepted accounting principles for reporting investment costs vary considerably by country. This means that external managed costs are often not fully disclosed in the financial statements themselves. However, points were awarded if these costs were acknowledged, quantified, and reported elsewhere, such as in management discussion and disclosure analysis, key performance indicators, etc. For DC plans, these questions were answered from the context of disclosure of option level costs.
4. Transaction costs (20% of factor score)
Transaction costs are also material, but similar to disclosure of external manager fees, difference in accounting standards result in inconsistent disclosure across funds. Marks were awarded for completeness as well as the level of detail included (e.g., estimating fixed income transaction costs based on spreads, market impact). For DC plans, these questions were answered from the context of disclosure of option-level costs.
5. Member service cost disclosure (10% of factor score, where applicable)
Some organisations managed both the investment function and benefit administration for plan members. For these organisations, member service cost disclosures were scored separately. In contrast to the investment functions, member service “returns” are not as visible, so it is doubly important to provide stakeholders with the information that lets them know that cost monitoring is in place and that incurred costs are reasonable. Cost disclosures were reviewed for completeness, context, and level of detail.