Friday 24 November 2017

What your pension actually costs you

Charlie Weston

Charlie Weston

IT is not unusual for costs to eat up as much as €100,000 worth of the pension fund built up by a typical saver.

The charges placed on pension funds can vary by 1pc or more a year, according to Fionan O'Sullivan, director of corporate pensions at IFG.

If pension fund trustees were more aware of the costs associated with their pension, it's likely they would opt for a lower-cost, default-investment offering, he said.

On a typical fund of €250,000, this would save pension savers as much as €208 per month.

"We believe that if there was greater transparency in relation to fees, an overall reduction would be inevitable," Mr O'Sullivan said.

IFG Corporate Pensions looked at an example of the impact of pension fees.

It found that a typical pension saver can incur costs of over €100,000 over the lifetime of their pension, reducing the final value by 39pc or more.

"Surely pension holders should be alerted to the impact that these sometimes hidden costs are having on their savings for retirement," Mr O'Sullivan said.

It is not widely known among pensions savers, but research shows that funds with higher fees actually have worse performance track records, he said.

He suggested that Irish 'active' managers either reduce their charges to 'passive' rates (typically 0.25pc to 0.4pc) or manage these funds in a truly active and wholly independent manner.

Consensus funds are effectively passive funds and shouldn't warrant any more than 0.3pc in annual charges, he said.

If you are paying active fund management fees, you should be getting above-average performance over the longer term.

Earlier this year, IFG Corporate Pensions undertook a survey of finance directors, pension trustees and others with key responsibility for company pension schemes.

The survey showed that, on the issue of pension investment fees, an overwhelming majority of respondents were dissatisfied with their structure and wanted fees tied to investment performance.

A staggering 84pc of respondents believe that investment fees should be tied to performance, which clearly demonstrates their dissatisfaction with the current "pay regardless of performance" structure.

Half of the respondents felt that total pension fees for members in group schemes should not exceed 0.5pc. More than two-thirds felt that pension fees should not exceed 0.75pc. Mr O'Sullivan said: "Noting the significant impact fees can have on pension funds, it is imperative the scheme members are informed about the impact of fund management fees on their long-term pension goals."

He said there was a stark lack of transparency in this area.

And he called for an industry-wide approach to be adopted where fees would be disclosed before pension savers and trustees alike made any decision on fund investment.

He said higher fees were warranted where the potential for higher return was there and the fund manager had a proven long-term track record of same.

But very few if any Irish fund managers have such a track record and yet continue to charge active fund management fees, the pensions expert added.

"Lately, there has been much criticism of the Government's lack of pension policy and the levy it has applied to private sector pensions, but the fact remains that people still need to take a proactive approach when it comes to retirement provision."

Mr O'Sullivan said the country was grossly underfunded in pension terms.

There was a hope among workers that tax reliefs would remain in place, but people needed to take full advantage and save for their retirement.

The role of pension trustee carries huge responsibilities, one of which is to ensure that their members are getting value for money, Mr O'Sullivan said.

A review of charges is probably the first and most significant step in ensuring that they deliver on that obligation.

If the fund manager is delivering top-end performance, then higher fees are appropriate, but if it's average or poor, members may be better off choosing a low-cost passive management option, Mr O'Sullivan said.

Irish Independent Supplement

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