April 25, 2021

Pension Funds and Fees

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Last week there was extensive media coverage of a report that, at a very high level, seemed to imply that Pension funds and Fees are exorbitant, quoting a charging structure of 3% p.a. in fees and are putting pension plan holders’ future pension pots in jeopardy as a result. For my own part a number of my own clients reached out to me and enquired as to whether this report was relevant to them and how much fees were they themselves paying.

Understanding the figures

As someone who is advising on pensions for a very long time this type of reporting and the media reaction to it can be very jarring until, of course, you actually read the report that got all this coverage. It turns out that the 82 report itself has been published by the Labour Party and is available on their website at the following link . When you look to see who actually wrote the document there is no indication as to who the author actually is. What is referred to in the report actually turns out to be a collection of pension related reports some as old as 2012 which appear to be interwoven with each other in a rather erratic way.

In any event, the relevant points regarding the 3% fee level could be found at page 17 where the charges are identified as follows:

  1. Fund Manager: 1%
  2. Service Providers (Platform, Trustee, Custodian): 1.25%
  3. Adviser: 1%

Product Structures and Fees

The type of structure that these costs are related to is what is referred to as a Small Self-Administered Pension (SSAP) and is used by primarily self-employed business owners particularly in the past who wanted to buy a property with pension monies. The structure that most pension holders in Ireland who are employees or self-employed use is a contract issued by an insurance company and depending on the product provider the fund manager, trustee and custodian fees are between 0.50% and 1.00%, considerably less than the above mentioned total of 2.25%. They also invest primarily in equities, also referred to as shares.

The annual Adviser costs can vary but for the most part my experience across the industry is that these might be circa 0.50%.

Pension Fee Whitepaper review

Nevertheless, it made me want to dig deeper into the aforementioned pension funds and Fees 3% charge and this was partly provided by a 9 year old Pensions Authority paper, which referred to a charge of 2.18% and it referred to what is referred to a Reduction In Yield figure. This RIY assumed that the set up costs were at the very highest level including, among other items, a commission rate that is so high any right minded adviser would be embarrassed to charge it today, but some obviously did back then.

The balance of the 0.82% in charges, it appears, comes from a Maynooth University paper called “A note on pension fund charges in Ireland“, that was published 8 years ago. Unfortunately, the note itself does not identify any actual amount of how much the charges are understated.

All told, the pension funds and Fees document itself would appear to be used for political purposes which in a political environment is probably quite normal. Nonetheless it would be better if someone with a finger on the pulse of the current market costings was to produce a genuinely valid report based on the pension products in the market place now. I’m all for transparency when it comes to what a client pays for – investment management, trusteeship, custodianship and advice. These are all integral parts of what a pension plan entails and clients need to be satisfied that they are getting value for money for each of these services.

Aspire Wealth Management’s Approach to Fees

For our own part, we have been advising clients for years to use lower cost investment funds, principally passive funds that track major global equity indices at a level that is considerably cheaper than the active managed fund approach. Ironically the same pension report mentioned above references such passive funds in a positive light but does not actually acknowledge that they are widely used within the Irish pension industry. By using a knowledgeable and experienced pension adviser such as ourselves the additional services of trusteeship and custodian requirement can be added on for a small amount extra.

With regard to our own fees, we charge far less than 0.5% p.a. for the majority of our clients that only hold a pension product. For those that hold additional products we can charge up to 0.5% p.a. but this includes payment for our financial planning services which are in addition to pension advice.

Finally, it should also be remembered that everything that we consume in life has inbuilt costs ranging from the TV, holiday and car you might buy as a larger ticket item to the daily usage of utility services, food and clothing. Customers will gravitate towards those products which they perceive as providing value for money. In our experience the same happens with pension products.

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