Report on pension charges throws light on expensive, opaque business

ANALYSIS:There are few shocks in the report on charges in the pension industry, which highlights a lack of transparency, writes DOMINIC COYLE

IT MAY look small in isolation but the cumulative impact of annual charges of 1 or 2 per cent on a pension pot is dramatic. And that’s just the costs they tell you about. Undisclosed charges take a further 3 or 4 per cent.

All told, the value of a pension fund will be 12 to 31 per cent poorer than it would otherwise be over a 30-year period because of the impact of industry charges.

It could be worse, according to the first Government report on pension industry charging*, published last night. It says employers are funding additional scheme “running costs”. For an average defined-contribution (DC) scheme with 51 to 500 members, this amounts to about €12,300 per year. This pales beside the €72,900 running costs for the average final salary defined-benefit scheme with the same number of members.

The bottom line is that pensions are expensive. The smaller the scheme, the higher the charges are likely to be and the bigger their impact on your eventual pension.

The impact is also magnified for those who start to save for their retirement later in their career. This is not breaking news, even if it is surprising to find that occupational DC schemes are better value than their UK equivalents – at least before the arrival of the UK’s automatic enrolment scheme.

Nor is it particularly shocking that the industry is lacking in transparency. Anyone trying to get a handle on how much the industry makes out of Ireland’s pension savers down the years will attest to the opacity of the sector.

Even now, almost two-thirds of pension scheme trustees responding for the report said they had difficulty getting the relevant data from fund managers. And that’s in a climate when the new Consumer Protection Code means pension funds have to send each scheme member an annual statement outlining performance and changes – so the information should be to hand.

What’s interesting, as Brendan Kennedy, chief executive of the Pensions Board, the industry regulator, said, is that for the first time we have figures and a detailed evidence-based report in this area. What’s also interesting is the timing of its release.

The Department of Social Protection published the report at a hastily convened press conference yesterday afternoon. This points to the report requiring clearance from yesterday’s cabinet meeting.

Minister for Finance Michael Noonan has stated that tax relief on pension contributions, already diminished in recent budgets, is again up for review. The industry, still rankling at the minister’s raid on pensions with his 0.6 per cent annual levy on funds until at least 2016, is raising a storm at this renewed attack on retirement savings, with headlines warning of a cost to individual taxpayers of about €800.

What better time to turn the spotlight on the industry and the money it makes from pension scheme members – and the magnified impact that has on people’s retirement income.

It would be comforting to think Noonan was making decisions in the context of a broader policy framework. The piecemeal dipping into the pension pot in recent years suggests otherwise.

It is to be hoped the upcoming report from the OECD, commissioned by Minister for Social Protection Joan Burton, will provide some policy direction for the Government, and longer-term stability for pension scheme members.

Meanwhile, the industry has more explaining to do. One of the more surprising findings of the report is that as many as 80 per cent of pension funds have been “rebrokered” in the past five years. While some scheme review and amendment is always likely, the scale of it recalls the churning that tarnished the financial services sector previously. The Central Bank, one of the groups behind the study on charges, has undertaken to review this particular issue.

* Report on Pension Charges in Ireland 2012, iti.ms/UxITVu

PENSION CHARGES HOW THEY ADD UP

Charges occur at various stages of the process – when an individual sets up a pension plan, as he or she contributes to it, and when a member exits a scheme. Some are disclosed, but others are not.

Disclosed charges:

annual management charge contribution charge – an umbrella term covering the percentage of each monthly contribution that actually goes to purchase investments net of fees, and the bid/offer spread which reflects the gap between the price at which units in an investment fund can be bought and sold on any given day policy fees – a monthly or annual fee to cover administration charges exit penalties – for leaving a policy early commission – to broker who arranges your mortgage.

Undisclosed charges include:

brokerage commission custodianship and trusteeship costs audit costs fund accounting costs stamp duty and other taxes.