PGGM, a Dutch pension fund running €186.6 billion has announced that it is to cease investing in outside money managers, including private-equity firms, that don’t fully disclose their fees.
The fund sets out for the first time what it deems to be acceptable compensation for money managers. It is worried that the pensions of its clients—social workers and nurses—are being undermined by high fees.
PGGM is concerned that the interests of its pension beneficiaries and the interests of the asset management industry are not always aligned. In other words, the management industry takes such a slice of fees that it robs the future income of workers.
The moves by PGGM are another major strike against the pension management industry where high fees and commissions are taken at the detriment of contributing workers, a major problem that is starting to be addressed at the highest level across many countries.
PGGM’s determination to reduce fees coincides with the US Securities and Exchange Commission (SEC) investigation into the private equity industry which has focused on expenses. In addition to annual management fees and keeping a share of profits, private-equity firms sometimes charge less-visible administration and transaction fees. In July, a group of U.S. state and city officials wrote to urge the SEC to require private-equity firms to make better disclosure of expenses.
PGGM will gradually introduce its new rules and will stop investing in funds that don’t disclose all fees by 2020. In addition, it will also stop investing in funds whose fees are deemed to be “considerably higher than costs.” PGGM expects remuneration to be based mainly on the performance of managers’ funds, and it is monitoring how much of each manager’s own money is invested in their funds.
To reduce its fee bill, PGGM stopped investing in infrastructure funds and started investing directly in infrastructure assets a few years ago. As a result, annual infrastructure fees have declined from more than 2% of assets to less than 1% and PGGM expects them to decline further. PFZW paid €36 million in infrastructure fees in 2014 and had €4.3 billion in the asset class last year.
In private equity, the pension fund has started to invest directly in takeovers, such as the €3.7 billion purchase of car leasing company LeasePlan Corporation NV in July. It is also backing the creation of new private-equity firms in exchange for better terms on fees. Last year, PGGM supported the spinout of Nordian Capital Partners, formerly the private equity unit of Rabobank. The fund is also committing larger amounts to some managers to gain more favorable terms.