novarca communication of asset management costs

Communication of asset management costs

How to explain costs levels of asset management to stakeholders

April, 20th 2016Eric Veldpaus

Agenda

1. Introduction

2. Costs and press

3. An example

4. Best practice disclosure

5. Questions and contact

2© April 2016

Agenda

1. Introduction

2. Costs and press

3. An example



3© April 2016

Dutch landscape of Pension Funds

• 85% of employees is a member of a Pension Fund

• 70 large pension funds for specific branches of industry such as government employees (ABP, with up to € 356 billion AuM and health care employees (€ 166 billion AuM)

• Approximately 300 smaller company Pension Funds

• Mostly Defined Benefit contracts, but risk sharing between employers, employees and pensioners

• Specific framework set by Dutch Central Bank (DCB)

• Necessarily to hedge interest

• Limits with regard to asset allocation

• Influence of currencies

• Obligations with regard to information to stakeholders

1. I

ntr

od

uct

ion

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Pension Fund industry: roles and responsibilities

• Board of trustees includes social partners

• Fiduciary managers / service-providers

• Asset managers

• Federation of Dutch Pension funds

• Regulatory landscape (AFM, DCB)

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Responsibilities Board of Trustees with regard to costs

• The Board is responsible for costs and cost reporting

• Organize adequate reporting of costs by their asset managers and / or service-providers

• Disclose costs (taking complexity into account)

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Recommendations

• Report the costs related to pension management in euros per member. The number of members is the sum of active members and pensioners.

• Report the asset management costs as a percentage of the average asset under management. In addition, review these costs in relation to: • The investment mix selected and the associated benchmark costs

• Long term return

• On a separate basis, report the transaction fees as a percentage of the average assets under management.

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Implementation results

• High compliance rates to the Recommendations. 96% of funds report pension management costs, 95% asset management costs and 77% transaction costs (2014).

• Increase in cost comparability between funds.

• Regulator and supervisor use Recommendations in law and regulations.

• Transparency leads to media attention, questions from

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Source: Federation of Dutch Pension Funds, February 3rd, 2016

Agenda

1. Introduction

2. Costs and press

3. An example



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10© April 2016

Source: Pensioen Pro Nr. 07

Asset management costs 2014

Top 15 highest costs(bp) Top 15 lowest costs(bp)

• Compare cost level with other pension funds?

• Asset management costs compared to peer group?

• How to explain to stakeholders?

• Comparing apples to oranges ?

© April 2016 11

How to explain?

Risks, return and costs

Costs

• Risk and return are central issues; costs follow from these.

• Do not look at the costs separately, but always in relation to return and risks.

Return(asset

allocation)

Risks

Agenda

1. Introduction

2. Costs and press

3. An example



13© April 2016

Pf. A Pf B.

Gemiddelde vermogensbeheerkosten sector : 53 bps

IBI Benchmark 17 79

Asset management costs (in bps) 22 70

• Aandelen 35% 50%

• Vastrentende waarden 60% 30%

• Alternatieve beleggingen 5% 20%

Netto rendement verslagjaar (in bps.) 500 1.000

Gemiddeld netto rendement afgelopen 3 jaar (in bps.) 300 900

IBI Asset Allocatie Index 85 125

IBI Alpha Index 15 110

IBI Implementatie Index 115 85

© April 2016 14

Which pension fund do you prefer?

Waarvan prestatie gerelateerde vergoedingen 0 20

Waarvan excess rendement 0 100


Pf. A Pf B.

Average management costs of the Dutch pension fund industry 53 bps.mark17 79


• Aandelen 35% 50%

• Vastrentende waarden 60% 30%

• Alternatieve beleggingen 5% 20%



IBI Asset Allocatie Index 85 125 15 110


© April 2016 15

Average costs as a norm?




Pf. A Pf B.

Average management costs of the Dutch pension fund industry 53 bps

IBI Benchmark 17 79


• Equity 35% 50%

• Fixed income assets 60% 30%

• Alternative investments 5% 20%



IBI Asset Allocation Index 80 125



© April 2016 16

Asset allocation important cost driver




Takes differences in asset allocation into account

Pf. A Pf B.

Average management costs of the Dutch pension fund industry : 53 bps

Benchmark costs 17 79


• Equity 35% 50%

• Fixed income 60% 30%







© April 2016 17

Use benchmark costs as the reference




Pf. A Pf B.




• Equity 35% 50%

• Fixed Income 60% 30%


Nett return (in bps.) 500 1.000





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Cost in relation to return




Pf. A Pf B.




• Equity 35% 50%



Net return (in bps.) 500 1.000





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Active / passive management

Including performance related costs 0 20

Including excess return 0 100


Takes differences of active / passive management into account

Pf. A Pf B.




• Equity 35% 50%








© April 2016 20

Hedging interest important for return

Including performance related fees 0 20

Including excess rendement 0 100


Including return interest hedge 200 150

Pf. A Pf B.



• Equity 35% 50%




Average netto return past 3 years (in bps.) 300 900



IBI Implementation Index 115 85

© April 2016 21

Interest hedge return past three years

Including performance related fees 0 20





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Matrix

Pf A

Pf BExcl. performance

related costs

IBI Asset Allocation Index vs cost of policy mix

IBI Asset Allocation Index vs cost of policy mix

IBI A

sset

Allo

cati

on

In

dex

vs

cost

of

po

licy

mix

Fund

Peers

Universe

IBI Transparency Index tm

• IBI developed a Transparency Index

• This index shows whether all asset management costs are disclosed

• Similarly for Pension administration costs

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IBI Transparency Index vs asset management costs

Tran

spar

ency

Ind

ex

Fund

Peers

Universe

Asset management costs

Too much disclosure is unnecessary and confusing

• Use investment believes to explain the cost level;

• Avoid detailed tables with costs per asset category next step is to explain that pension funds use different strategies;

• The disclosure of cost levels might even be confidential information agreed with asset managers and other service providers such as custodians.

The board of directors :

• Is responsible for the implementation of the strategy agreed upon in the annual investment plan.

• They should receive relevant and detailed information and judge whether the costs are in line.

• Based upon this information they might decide to optimize costs.

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28© April 2016

Eric Veldpaus

+31 20 208 8507

[email protected]

Institutional Benchmarking Institute

P +31 20 208 8555

F +31 20 208 8525

www.institutionalbenchmarking.org

Questions?

novarca communication of asset management costs

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