My geekiest post (so far)

I was trawling the Govt’s statistics on local government pensions recently, as you do, and was interested to see the changes in fund management and admin costs that the DCLG reports. In this table look at the line “Costs charged to the funds”. If my maths is right then the changes in fund management and admin costs look like this:

2001/02 – 2002/03: -2%
2002/03 – 2003/04: +10.6%
2003/04 – 2004/05: +15.1%
2004/05 – 2005/06: +15.5%

I can understand the first entry as that was when the markets hit rock bottom. That should have meant that fund management fees fell. Much of the fund management cost schemes incur will be based on assets under management, and I’m sceptical that many managers would have earned any performance-related fees in this period. As such, for the same reasons, you can understand the subsequent pick up in costs afterwards.

For comparison here are the average (mean) changes in market value across the funds in the same period (taken from SF3 returns).

2001/02 – 2002/03: -19%
2002/03 – 2003/04: +25%
2003/04 – 2004/05: +13%
2004/05 – 2005/06: +26%

Here are a couple of obvious points. First, the fall in costs is a lot less than the drop in the market value of the funds. Secondly, when the fund values recover, the costs also increase fairly significantly. I did wonder if there was something going on with the admin costs (excluding fund management) but that doesn’t seem to be the case. Below are changes in both admin and fund management costs per scheme member over the same period as the previous figures, plus a couple of extra years (in bold) that I have data for. (I know this isn’t a like for like comparison, I’ll try and do that later).

Admin

1999/00 – 2000/01: +3.7
2000/01 – 2001/02: +3.6
2001/02 – 2002/03: -0.11%
2002/03 – 2003/04: +0.7%
2003/04 – 2004/05: +7%
2004/05 – 2005/06: -1.2%

Fund management

1999/00 – 2000/01: +13.3%
2000/01 – 2001/02: -4.4%
2001/02 – 2002/03: -12%
2002/03 – 2003/04: +11.6%
2003/04 – 2004/05: +12.6%
2004/05 – 2005/06: +16.8%

As you can see the admin costs are fairly stable, whereas the fund management costs jump around quite a bit. And the fund management costs are very roughly double the admin costs so have a greater impact on the total. Overall in the period 1999/00 to 2005/06, admin costs per scheme member went up by 14.2%. Despite the stockmarket correction, fund management fees per scheme member went up by 41.3% in the same period. Nice work if you can get it.

I will do more on these stats when I have time. The underlining SF3 data tells some interesting stories, with inner London funds seemingly paying way more in fund management and admin costs than any other group. Although they are generally smaller funds, my initial skim of the data suggests that it’s not all about economies of scale.