BlackRock has defended the practice of asset managers requiring pension funds to sign non-disclosure agreements despite an outpouring of anger that such arrangements prevent fee transparency.
The world’s largest fund house said it was “neither in the interest of institutional investors nor of investment managers to ban non-disclosure agreements”. Pension schemes argue the arrangements prevent them from comparing fees and securing the best deals for their members.
The agreements, signed when pension schemes appoint a fund company to manage some of their assets, are of particular concern with respect to public sector pension plans, which are effectively funded by the taxpayer.
BlackRock said: “A corporate or public sector pension fund looking to appoint an investment manager can access pricing information from a number of sources: by requesting proposals from different market participants; by reviewing third-party surveys on fees; and by using consultants to assist in the search.
“It is sometimes deemed desirable to enter into an agreement that contains an NDA to protect confidential information of one or both parties.”
Many want the agreements outlawed, believing they allow fund managers to overcharge clients. David Blake, director of the Pensions Institute at Cass Business School in London, told FTfm last month: “Local authorities are not allowed to compare fee deals, and that is an outrage. It should be made illegal.”
The UK’s pensions regulator has also warned about the potential dangers of signing non-disclosure agreements and said it would be concerned if schemes were putting their members’ interests at risk as a result.
Fund managers counter that if pension funds do not want to sign the agreements then they are free to go elsewhere.
Daniel Godfrey, chief executive of the Investment Management Association, which represents the interests of the fund industry, said: “[Pension funds] are the clients and if clients tell investment managers they only want to hire managers that allow them to publish details of fees, then investment managers will have no choice but to allow them to do so.”
He added: “We believe NDAs regarding fees are rarely used.”
But the belief is the practice is widespread. The UK’s National Association of Pension Funds, which represents more than 1,300 schemes, has raised the issue with the Financial Conduct Authority, the regulator.
The NAPF believes pension funds have little option but to sign the deals. “Pension schemes are simply the price takers – the negotiating strength is in the hands of the investment firms,” said Paul Lee, head of investment affairs at the NAPF.
A pension consultant, who asked to remain anonymous, added that it is difficult for pension schemes to challenge such agreements after they have spent six months selecting a fund manager. “It is hard for them to [start over],” he said.
The disparity in fees was evidenced by research published in the FT last year, which showed the Staffordshire public pension fund paid £7.2m in fund management fees in 2011/12, while Devon’s public pension fund spent just £2.7m for almost identical investment contracts.
Robert Higginbotham, head of global institutional services at T Rowe Price, a large US fund company, condemned the use of NDAs: “If [the use of NDAs] does go on, I am not a supporter of it. We are only going to get through any debate about costs if we have transparency and buyers can figure out if they are getting a reasonable deal. “It is good this is being highlighted. Anyone doing it should have to explain themselves.”
The FCA told FTfm it is not responsible for regulating pension funds, while the Competition and Markets Authority said it has no plans to look at competition issues in the pension industry.
The UK government’s Department for Work and Pensions said it plans to consult on draft legislation bringing about full public disclosure of costs and charges for pension scheme members next year.
Susan Martin, chief executive of the London Pensions Fund Authority, said: “We expect our investment partners to show clarity on where we are investing and offer transparency on fees. We have shown in the past that we may come out of strategic relationships if our investment partners do not meet these requirements.”
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