NAPF to cut private equity charges

Britain's biggest institutional investors are set to open a new front in the increasingly wide-ranging campaign of attrition against private equity firms. The National Association of Pension Funds, the body that represents the UK's £800bn pension scheme industry, is drawing up proposals to reduce the fees its members pay on private equity investments.

The plans, which will form part of the NAPF's submission to an ongoing Treasury review of the private equity industry, launched by Gordon Brown in March, are likely to include a restructuring of the way in which pension schemes pay private equity investment managers.

Under agreements drawn up by the pension scheme industry a decade or so ago, when institutional investors first began placing assets with private equity firms, pension schemes typically pay an annual management fee for fund managers' services.

However, at up to 2 per cent, this fee is much higher than the equivalent charges made by traditional investment managers, which are often below 1 per cent for large institutional clients.

In addition, most pension schemes have agreed lucrative performance fees for private equity managers, often handing over as much as 20 per cent of profits above a pre-agreed target.

"There is no doubt that private equity is a big issue that is on our radar," said a spokeswoman for the NAPF yesterday. "Fees have not been reviewed on an industry-wide basis for 10 years and when private equity first came into existence, it was a much more specialist industry - and a much smaller concern."

The average pension fund now has around 3 per cent of its assets invested in private equity, but this represents tens of billions of pounds, making scheme trustees the most important clients of many firms.

The NAPF said it had planned a review of private equity charges before the latest furore over private equity managers, who have come under unprecedented attack over the past few weeks.

At two hearings before the Treasury Select Committee over the past forntnight, senior private equity executives have faced angry confrontations with MPs accusing them of asset-stripping and exploitation of tax loopholes.

However, while these attacks have led to a series of damaging headlines, a concerted effort by pension schemes to reduce the fees they pay to private equity firms would potentially be much more worrying for the industry.

If the schemes are successful at the same time as the Treasury review recommends the abolition of tax breaks from which private equity firms benefit, the industry's profits would be dramatically reduced.

Pension schemes' relationships with private equity firms are also in the spotlight amid concerns that trustees do not always get sufficiently involved in takeover and merger activity. David Norgrove, chairman of the Pensions Regulator, is understood to have told MPs last week that trustees should be party to all talks between companies and private equity firms considering takeovers.

There has been widespread concern among trades unions that private equity takeovers of firms whose pension funds are significantly in deficit could jeopardise the retirement benefits of staff.