Pension fees can leave you shortchanged
While it's fairly straightforward to ascertain the annual management charge on a fund, a plethora of other charges, such as allocation rates and early exit penalties, can also apply
It’s somewhat shocking to realise that much of the tax relief you get for saving into a pension fund can be eaten up by the various charges and fees levied on that money by pension providers.
But this is what a report by the Department of Social Protection on charges in the industry found late last year – it revealed that the average annual charge of 2.18 per cent can diminish your final pension pot by as much as a third.
And the higher the charge, the more severe the impact.
As Marc Westlake, head of wealth management with Goldcore notes, a differential in fees of 1-2 per cent “absolutely kills you over 30 to 40 years”.
So what’s going on? And can anything be done about it?
Firstly, the opacity of the market means it’s very hard for pension savers to work out exactly what they’re being charged.
“A lot of people are not aware [of charges] and there’s sometimes a lack of transparency about these things. People don’t understand the information they get,” says Pensions Ombudsman Paul Kenny.
“Where the system breaks down is that, effectively, we’re not given the information in a way that’s meaningful,” says Westlake, adding: “The current system of delivering pension products attempts to conceal some of those costs”.
While it’s fairly straight forward to ascertain the annual management charge on a fund, a plethora of other charges, such as allocation rates and early exit penalties, can also apply.
Paul Delaney, senior financial planning consultant with IFG Private Clients, notes that trail commission, whereby an adviser receives commission on an annual basis years down the line from having sold the policy, is one charge of which people are often unaware.
Kenny refers to a recent incident where a pension customer was aggrieved to learn that he was being charged fees of 5 per cent on his pension – in return, the fund had given him an allocation rate of 102.5 per cent. That reduced the impact of the higher fees but the problem was that the pension saver couldn’t understand the charges being levied.
In this regard, a “cleaner approach” in disclosing charges would be of benefit to savers, notes Kenny, who adds that, at present, pension fund providers aren’t in breach of any legal requirements when it comes to disclosing all the charges levied on a pension. Under the Pensions Act disclosure regulations, only certain minimum information is required to be given.
So would a total expense ratio, or TER, as is used in instruments such as exchange-traded funds (ETFs) to calculate charges, solve the problem?
“It’s only half the picture,” says Westlake, adding that if the fund is actively managed, the TER will only disclose administration costs – not operational costs such as transaction fees etc.
Another measure which might be more useful, is a Reduction in Yield, which was used in the Report on Pension Charges Ireland 2012 to indicate how much pension savers were losing as a result combined charges.
Whatever the measure used, it is clear that some standardised assessment of total charges is needed.
“I don’t think you can fully standardise charges, but you could standardise the way in which charges are being disclosed,” says Kenny.
After all, higher charges don’t always mean a lower pension fund – sometimes, opting for a more expensive fund manager can lead to a better performing fund and therefore a better outcome for your pension fund. The difficulty is where you don’t realise that you’re paying over the odds.
And it’s fair to say that consumers, as well as the financial services industry, have to up their game.
“The client has to take a more aggressive role in these meetings and ask questions to ensure that they are getting good advice, and that their retirement plan will not be lining the adviser’s pocket until the client’s retirement age,” says Delaney.
This has always been a thorny subject, with the broker industry often in favour of the commission-type structure while customers have wondered whether or not it was in their best interest. However, almost all were happy to get financial advice for no upfront cost. So who is right?