Consumers could be paying over the odds for pre-2001 pensions

Some pensions investors are unwittingly paying huge charges and commissions on pension plans sold prior to the introduction of disclosure rules in 2001, according to a leading discount broker.

The effect of the charges plus the failure to meet overly optimistic growth rate projections on old policies is a scandal in waiting, believes Michael Kiernan, who operates the MyAdviser website.

Mr Kiernan said that people who bought personal or executive pensions before 2001 should ask their broker if they could save money on fees and commissions by switching to a newer model of pension plan with lower charges.

Hundreds of thousands of pensions plans sold before that date charged policyholders an initial commission of 50 per cent on the money they invested in the first year, with ongoing annual fees and commissions further eating into the value of the fund.

Executive and company pensions are still sold without disclosure of charges and commissions, he said.

"There is little or no effort to explain the charges on these old plans and the ongoing commission that is paid out."

A "sting in the tail" for pre-disclosure, high-cost pension plans is that people trying to top up the value of their contributions in order to improve their pension benefits are being hit again for a 50 per cent commission charge.

Most of the plans were designed to disguise the impact of the charges, Mr Kiernan added.

"Things called initial units and nominal values gave the impression that you had a fund in the early years, but the reality is that the transfer value shows the true underlying value of your fund and it is always much lower," he said.

"Initial units are no longer used due to their lack of transparency, but nothing has been done for all the existing plans that have them."

Some policyholders take nine or 10 years to break even on their pension contributions because of the high fees and commissions they pay, according to Mr Kiernan.

The high percentage commissions may not be noticeable if the fund growth over the period is also high. On underwater pension funds, the losses are often blamed solely on volatile equity markets when excessive charges have also taken their toll, he added.

Little effort has been made by pensions providers to explain that there are lower-cost alternatives on the market today, he said.

"There is no incentive for the sales rep or the agent or the broker to say to the person that there's much better pensions out there now because, if they do that, they will get paid less."

"Oprhan clients", whose brokers or sales agents have retired or left the business since they sold them their pension, are continuing to pay commissions directly to the insurance firm.

People who are close to retirement will be less likely to make savings if they switch and may even be better off staying put, as many of the old-style policies had maturity bonuses of about 5 per cent.

"If you have only three or four years to go, you won't switch because you would lose the bonus. But if you have any kind of term left to go - 10 years plus - I would be surprised if you couldn't do better," said Mr Kiernan.

A policyholder aged 35 who contributes €350 per month is on target to achieve a fund of €403,623 by the age of 65 if they buy a personal pension at a full commission rate of an initial 50 per cent and 4 per cent renewal commission.

However, Mr Kiernan said such a policyholder could cut out unnecessary costs to the tune of €16,784 if they opted for a personal pension sold with discounted commission rates of 3 per cent upfront and 3 per cent renewal, leading to a higher fund value of €420,407.

A standard Personal Retirement Savings Account (PRSA), which has straightforward charges of 5 per cent on contributions and a 1 per cent annual management charge, would generate a fund of €403,965, according to Mr Kiernan, while a PRSA sold on a discounted basis could lead to a fund of €416,722.

All of the above fund values are based on expected annual fund growth of 6 per cent per annum. But this rate of investment growth is not guaranteed and older policies were sold with even higher growth assumptions of 8-12 per cent.

Policyholders often don't realise that these old growth rate projections are not being met.

"Say you see your fund is worth €50,000 after 15 years or 30 years. People are asking, is that good or bad? Up or down? They don't know."