At the recent UK and Irish Pension and Investing Summit in Dublin, David Bennett-Rees, trustee director of the University of London Pension Fund, claimed that LDI products which employed derivatives such as interest rate swaps to generate, for example, a return of Libor plus 4 per cent typically levied charges of 75 to 100 basis points in addition to a 25 per cent performance fee on any extra return. Addressing the annual conference, he said that if an LDI strategy using derivatives returned 6 per cent but charged up to 2.25 per cent in various fees, the pension fund “might as well go into cash.”
“The problem with LDI products is that no-one is absolutely certain what the costs are. Is the pension fund getting proper insurance or is LDI more profitable for the product-provider?” asked Mr Bennett-Rees.
Mark McNulty, head of liability-driven investment at Bank of Ireland Asset Management (BIAM), told FT Mandate that LDI products can prove costly if pension funds go into them “with their eyes shut”. But he claimed that the level of understanding of LDI was growing and that trustees are increasingly “savvy” about fees.
“As they become more informed, pension funds will pay what they deem to be a reasonable price for an LDI product because they will understand what they are paying for,” he added.
BIAM rolled out a series of pure liability-matching funds in September aimed at small-to medium-sized pension schemes. The products which generate Euribor over a 30 year duration, with the aid of swaps, charge an annual management fee starting at 30 basis points for smaller clients and falling to 20 basis points for larger investors. A variable mid-to-mid spread or the price at which BIAM is able to transact the swap in the market is also levied in addition to administration fees.
The cost of investing in hedge funds also came in for criticism. John Corrigan, director of Ireland’s National Pensions Reserve Fund cited high fees as one of the reasons why the €18bn scheme was steering clear of hedge funds, while tentatively embracing commodities and private equity.
He said: “The fees are hard to stomach, especially those charged by a fund of funds vehicle.”
HS
