AVC PRSA can pay for public sector employees

It may be worthwhile avoiding the AVC group scheme nominated for you, writes Laura Slattery

Public sector workers who want to make additional voluntary contributions (AVCs) to their pensions may be able to save money by avoiding the group scheme nominated by their union and placing their money into a lower charge Personal Retirement Savings Account (PRSA) instead.

New Revenue rules may be of particular benefit to nurses and teachers, who up to recently have been obliged to arrange their AVCs through Cornmarket Group Financial Services, a subsidiary of the Irish Life & Permanent group. Cornmarket acts as an intermediary for Irish Life, which manages the investment funds.

Irish Life levies a 5 per cent charge on the AVCs contributed and an annual management charge of 1 per cent of the value of the AVC fund. These charges are in line with the maximum charges insurance companies are allowed to impose on standard PRSA customers.

But Cornmarket also charges customers a further 1 per cent for deducting the contributions through payroll and passing them on to Irish Life.

It then levies an additional flat rate consultancy fee, which it does not seek from customers up front but deducts from workers' contributions over the first year of membership.

In the case of the nurses' AVC scheme, this consultancy fee is €835. If member nurses wish to top up their existing contributions, they may be charged a consultancy fee of €417.50 for any advice given.

Deduction charges and advice fees can be avoided or substantially reduced if workers select a separate, individual PRSA as the home for their AVCs.

Two insurance companies, Canada Life and Eagle Star, have been the most active in promoting these new AVC PRSAs since the Revenue approved them last year.

In most cases, PAYE employees who arrange to contribute to a standalone standard AVC PRSA will only be charged a maximum of a 5 per cent contribution charge and a 1 per cent annual management fund charge.

Some brokers may charge a fee if they do not receive commission from the insurance company. For example, Canada Life does not pay commission to brokers on contributions lower than €125 a month.

"With the advent of PRSAs, people can shop around for the AVCs they want. Some people shop around on price alone, others look at the range of investment funds available," says Mr Pat Ryan, pensions manager at Canada Life. "The power is with the punter. You can negotiate with your own financial adviser, as opposed to simply having to accept the charges of the AVC scheme's financial adviser."

Mr Ryan estimates that just over half of its AVC PRSA business has come from public sector employees.

Cornmarket defends its extra charges by stating that employers in the private sector meet the cost of setting up AVCs but public sector employers do not.

In the case of the nurses' AVC scheme, the traditional expectation that a group scheme should be cheaper than an individual arrangement does not apply, according to Cornmarket, because nurses are employed at a range of locations and tend to have complicated service histories.

"Nurses' AVCs involve considerably more administration than PRSAs and the service is far more comprehensive," argues Cornmarket director Mr Robert Power in a written response to an Irish Times reader who has queried the level of charges.

Cornmarket received three written complaints about fees from members of the nurses' AVC scheme in 2004.

The €835 consultancy fee can be avoided if nurses opt for Cornmarket's execution-only service. However, Mr Power says most nurses want someone to discuss the benefits of an AVC with them and that this advice must be provided in the home.

"The key point is that, although technically a 'group' scheme, nurses availing of the AVC scheme must in fact be handled on a one-by-one basis.

"Given all these complexities, we believe that an execution-only service is inappropriate for most nurses who are considering joining the AVC scheme," he writes.

When Cornmarket started to operate the nurses' AVC scheme in 1996, the scheme had approximately 500 members. It now has about 12,500.

"Naturally, this has been to our benefit as our heavy investment in the nurses AVCs scheme has paid off for us and for this we make no excuse," Mr Power says.

"Our thesis was that there is little point in having charges which are very competitive if no one joins the scheme - far better to have charges set at a level which allows for significant effort to be put into bringing the scheme to the attention of members." In other words, public sector employees are paying over the odds in order to cover Cornmarket's costs in advertising to a market in which it has had a monopoly.

Financial adviser Mr Liam Ferguson, one of many intermediaries who can now advise public sector employees on their retirement planning, rejects Cornmarket's argument.

"The captive AVC schemes will have the normal commission charges and then charge a fee on top of that. I've heard as justification for this that public sector schemes are, by nature, very complicated because you might have people with broken service and people buying back notional years of service.

"But I have to say I wouldn't really accept this. Even in the private sector, pensions are by their nature a complicated business," he says.

Pensions are always a hard sell, Mr Ferguson says.

"I don't agree that it is more difficult to market to a public sector group than it is to the rest of the population. If anything it is easier, because most of the captive AVC schemes have been set up through the union and, therefore, the brokers have had ready access to the members."

The Irish Times reader querying the fees on the nurses AVC scheme believes that the 1 per cent handling charge Cornmarket pockets for passing on AVCs deducted from payroll to another part of the Irish Life & Permanent group is a rip-off.

Cornmarket points out that both the 1 per cent deduction charge and the €835 set-up fee are eligible for tax and PRSI relief, reducing the real cost to the employee.

The Irish Times reader finds this argument "particularly nauseating". He believes that basic advice on the nurses' AVC scheme should be provided to staff, at no cost, by either the human resources departments of the health boards or the unions or both.

There are, however, practical implications for both public and private sector workers who decide to ignore their group scheme and opt for a separate AVC PRSA.

Instead of receiving the tax and PRSI relief at source, workers will have to contact the Revenue to adjust their tax allowances and then wait until the end of the year before they can claim back the PRSI. The same system applies to Cornmarket customers who seek to avoid the 1 per cent payroll deduction charge by contributing via direct debit from their bank account.

"With the captive AVC schemes, the tax relief will be immediate, but if you do go the standalone route, you will have to claim the relief yourself and, in that respect, you will have to do a bit more work," says Mr Ferguson.However, according to Mr Ferguson, the financial rewards for going it alone will build up and could save employees money over a considerable period of time.