The former manager of the Hermes Focus funds, now an executive fellow in finance at the London Business School, told delegates at the National Association of Pension Funds investment conference in Edinburgh that costs must come down.
He claimed that costs are often twice the stated total expense ratio, and reducing fees by even a few basis points could eliminate the deficit on defined benefit plans.
Mr Pitt-Watson said: “There is little evidence that costs are coming down, but these are the things that really matter. If we are trying to get the best return for beneficiaries of a defined contribution fund, we need to know this stuff.”
The problem is worse for individual investors, who pay twice what institutions pay, said Robert Brown, chairman of the global investment committee at consultancy Towers Watson.
He argued that the industry moves slowly, so moving to a system that provides better value for money for the end investor would take “forever”.
Mr Brown said costs are too high on aggregate, with as much as 90 per cent of the overall costs going in asset manager fees and transaction costs. As such, pension funds and their advisers would do better to concentrate more on asset allocation and less on stock selection.
Adviser view
Laith Khalaf, head of corporate research for Bristol-based Hargreaves Lansdown, said: “Employers, consultants and trustees should seek to minimise costs, but they need to consider charges alongside performance, portfolio construction, scheme administration and employee communications, because these features are not independent of cost. It is unwise to talk about cost as if it were totally detached from investment performance; it is not. It is a false economy to knock 0.3 per cent off your scheme costs if you are losing 2 per cent outperformance each year.”
Background
Last year, the Office of Fair Trading produced a report on costs, which found that the average charge of schemes written since 2001 is 0.63 per cent. However, older schemes carry higher charges.