Cost of pensions in the private sector


Sir, – The cost of pensions in the public sector has received much attention, and perhaps it is time to consider the cost of those in the private sector. The pensions industry is currently valued at €118 billion and is very profitable, as shown by the millions of profit Irish Life pays by way of dividend to its Canadian parent company.

Evidence suggests that the impact of pension charges is not fully understood by savers mainly due to the opaque nature of many of the charges and their structures. Because pension savings are made over long periods of time, the impact of apparently modest charges can be amplified. The 2012 Report on Pensions Charges in Ireland gave an example: “An individual aged 30 years who saves €250 per month over 35 years would result in a fund of €200,000 resulting in a pension of €10,000 per annum. Apply the average charge of 2.18 per cent per annum to this fund and the final fund is reduced by 31 per cent, ie the fund is reduced by €62,000, resulting in a lower pension of €6,900 per annum. This impact would be significantly higher where the maximum charges apply”.

Furthermore, there is no guarantee that one’s fund won’t lose money despite inordinate charges. Unit-linked funds are the main fund structure used by retail consumers to save for their retirement and appear to have collective investment element. However, the units are notionally allocated to pension investors but they are not owned by them.The funds are in fact owned by life assurance and insurance companies which means that there is no legal or regulatory requirement to account to investors for fund performance. The companies which own those funds are subject to the consumer protection code but these funds, on which end-pension values depend, are not regulated.

Underperformance of funds to yield adequate retirement income is not always down to the charges but could be due to a bad call by the investment managers. The risks involved in pension products are hard to understand and are not properly explained to consumers by the intermediaries, such as brokers and financial advisers – who sell those on behalf of the insurance companies.

Inadequate retirement income not only causes hardship for the individuals concerned but can lead to over-dependency on the State. This is another potential cost. As pensions continue to move increasingly from defined-benefit to defined-contribution model, this is the time to examine and review how pension products are approved, marketed and sold and perhaps consider alternatives to those currently on offer which could result in cheaper, more transparent and less risky pension provision, benefitting both savers and the State.

Auto-enrolment has been described as a key policy tool to increase pension coverage. If this system is to be implemented with the range of funds at varying risk levels, then fund regulation and investor accountability – the cornerstone of good consumer protection – need to be crucial elements. – Yours, etc,


Sandymount, Dublin 4.