Pension charges punching hole in retirement funds
Issued : 24 October 2012
Pension fund charges are eating away as much as one euro in every six (17.4 per cent) of retirement savings in occupational schemes, according to a report on charges published last night.
The figure is dramatically higher for those with individual pension arrangements - such as personal retirement savings accounts (PRSAs) and executive pensions - where the average "loss" is between 21 and 31 per cent.
The figures are on top of the 0.6 per cent annual levy imposed on all private sector pension funds by the Government and will add to concerns of pension fund members ahead of a budget in which Minister for Finance Michael Noonan has already signalled tax reliefs for pension contributions are under review.
The Report on Pension Charges in Ireland 2012 was compiled by the Department of Social Protection, with assistance from the Pensions Board, the Central Bank and PricewaterhouseCoopers. It studied the impact of disclosed and hidden charges on retirement savings.
Apart from the scale of charges, senior department officials pointed to a "worrying" lack of transparency in just what funds are being charged.
Every pension fund scheme member is, from this year, supposed to receive a pension statement outlining, among other things, the charges levied on their savings.
However, almost two-thirds of trustees said they had difficulty getting some of the information on charges required for this report. The study found that there was no evidence of a culture in the pensions industry of providing clear information in a simple manner.
Presenting the report, principal officer at the department Patricia Murphy said that, as a rule of thumb, every additional quarter percentage point reduction in yield, or annual fund growth, due to charges reduces the value of the final pension fund by 4 per cent.
The report illustrates the point with the example of an individual aged 35, who saves €250 per month towards a pension for 30 years. This will create a fund of about €200,000, which would pay a pension of about €10,000 a year.
"Apply the average charge of 2.18 per cent per annum to this fund and the final fund is reduced by 31 per cent - €62,000 - resulting in a lower pension of €6,900 per annum," states the report.
"It is clear from the research that many schemes and individuals are paying more than they need to," said Minister for Social Protection Joan Burton. "The research particularly points to small occupational schemes and individual pension policies incurring high costs."
While individual charges are expensive when benchmarked against pension costs in the UK, group defined contribution schemes are broadly offering better value, the study finds.
However, the charges are adding to other factors exerting pressure on members of defined contribution schemes - where the pension depends on the investment performance of contributions made over a working life. These are the focus of the Government study, commissioned by the Minister last year.
Scheme members are struggling to keep up payments in the face of lower wages and tax increases. Poor returns and longer life expectancy also mean people need to accumulate bigger pension pots - an effort undermined by the impact of the charges.
Poor investment performance, higher cost of annuities and increased longevity are also affecting defined benefit, or final salary, schemes, which pay a set amount of salary in retirement based on service. As many as 80 per cent of such schemes are "under water" and employers are increasingly reluctant to commit to funding them.
The study suggests improving awareness of charges and transparency, including monitoring compliance with new regulations under the Consumer Protection Code.
The department has published the report online at iti.ms/UxITVuand will now open a three-month period for comment and submissions. It is still awaiting a report commissioned from the Organisation for Economic Co-operation and Development on the broader direction of pension policy in this State. This is expected to be published next month.
Dominic Coyle, Deputy Business Editor