Pension fees can leave you shortchanged

Churning has been an issue for the investment industry for years and while no definitive finding was made in relation to churning in the Department of Social Protection report, it did note an unusually high amount of pension customers being switched out of one plan and into another.

Passive v active

Is it worth paying more for an investment manager to “actively” manage a fund, by seeking to out-perform a market? Or is a low-cost passive approach, which aims to replicate the performance of a particular index or basket of securities, the better option?

There’s nothing new about the dilemma, but it’s one that nonetheless affects almost every investor.

“There are merits to both: it really depends on the fund in question,” says Sheena Frost, senior associate with Mercer.

“Generally, you would find that active management has higher fees attaching. What a [pension] trustee needs to be comfortable with is: are they satisfied that this higher charge is justifiable, that the fund can add value to the member and their ultimate balance at retirement”

For Westlake, there is a lot to be said about a passive approach.

“Passive works. It is better, it is cheaper therefore it works – on average. It’s not possible for us all to beat the market and be above average,” he says.

Value for money

Paul Giblin, director of investment selection with Davy Private Clients, agrees.

“There are a lot of passive instruments available, including a huge range of ETFs, that are cheap and tend to provide people with a lot of the exposure that they want,” he says, although it’s not the whole story.

“I would also say that it is true that the active industry does have a lot of skilled people in it and there are a lot of talented active managers out there who do justify their fees,” he says, adding: “It’s a question of value for money rather than just costs”.

By sacrificing the potential for outperformance, any saving on management fees can quickly become immaterial, notes Ryan.

“Investors forgo the benefit of the fund manager’s judgment – an ETF or index fund does not respond to changing market conditions and will continue to hold securities as their value declines,” he says.

But if this is true, how can one distinguish the wheat from the chaff – especially if one is to believe that oft-quoted statement “past performance is no guarantee of future performance”.

“It’s not an easy task,” agrees Giblin, noting that an advisory service can help investors make such a decision.

Westlake is less convinced, however. “While there will be managers that beat the market from time to time, chances are it’s down to luck rather than skill,” he says.

Long-term investment performance, especially in the US where these things are more closely studied, tends to bear him out.

Charges checklist: what  to ask your fund provider

Annual management charge:This covers the costs of administering the fund. It typically ranges between 1 and 2 per cent of the value of the fund.

Allocation rate:The percentage of each contribution that goes into a pension fund, with the remainder going to the provider as fees. It typically ranges from 90 to 105 per cent.

Bid offer spreads:Similar to the allocation rate where not all member contributions are invested in the fund; a typical spread would be 5 per cent.

Policy fees:A monthly or annual fee levied by a life assurance company to cover administration costs, typically of the order of about €3 a month.

Exit penalties:These fees apply for early exit from the policy.