Cost-benefit ratio of a pension fund: Costs

The book on the true costs of a pension fund comprises three chapters. Each of these chapters – or rather each cost component – can be transparently derived from the pension fund’s annual report.

The three cost components are administrative expenses, asset management costs and the cost premium. In this week’s chart we stacked these three components for each pension fund. The total costs amount to an average of 0.64% of pension fund assets.

Let us now look at the individual cost components:

Administrative expenses (average 0.16%): Administrative expenses include general administrative costs, marketing and advertising costs, brokerage activities, auditor fees, fees for occupational pension experts and supervisory authorities. Administrative expenses can be read directly from the pension fund’s operating statement.

Asset management expenses (average 0.44%): Asset management costs must be reported separately. These include asset management fees, custody fees and expenses related to real estate management. Since the structural reform of 2011 and a directive from the supervisory authority, costs contained in collective investment vehicles (investment funds, investment foundations, structured products etc.) must also be disclosed in the notes to the financial statements.

Cost premium (average 0.04%): Some pension funds – particularly those closely linked to insurance companies – outsource the provision of risk benefits and sometimes retirement benefits to a life insurance company. In return they pay an insurance premium consisting of a savings premium, a risk premium and a cost premium depending on the scope of coverage. The corresponding breakdown must also be disclosed in the notes to the pension fund’s financial statements. The cost premium should therefore be regarded as an integral cost component of a pension fund.

Although high costs may sometimes be justified, the general assumption that one is better off with a cost-efficient pension fund is not wrong.