Key Post "Should I just save money or contribute to a pension?"

Discussion in 'Pensions' started by LDFerguson, Jul 12, 2012.

  1. DerKaiser

    DerKaiser Frequent Poster

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    There's really no such thing as "Irish" pensions, we have a certain level of state pension, certain tax incentives for private pension provisions, a range of DC pension providers offering thousands of funds, a number of employer run DB pensions, regulations and legislation around what information and protections a policyholder is entitled to, etc.

    Because of there are multiple aspects (or strands, or pillars, or whatever you wish to label them) to how we save for retirement here in Ireland, I think it is important to set out clearly what particular aspect we believe to be sub standard by international standards, e.g.:

    1) Is our state pension too generous or not generous enough?
    2) Are tax incentives appropriate? (We have a very similar tax incentive framework to the UK in terms of private pension contributions)
    3) Do Irish fund mangers systematically under perform their benchmarks? (remember as well though available funds include cash / low risk alternatives and international fund manger offerings on offer anywhere in the developed world)
    4) Have Irish employers been particularly inept when it comes to managing DB pensions for employees? (Defined benefit employer pensions are a common feature in the UK and Ireland, both countries have suffered from the current low interest environment in terms of an underfunding crisis).
    5) Are there issues with Irish pensions legislation e.g. lack of priority rights to members in service relative to retired members?
    6) Is the solvency regime and regulatory oversight sufficient? (No private pensions providers have ever gone under in Ireland)
    7) Do retirement savings providers here charge extortionate rates for their services relative to other countries?
    8) Are we happy with the services provided by brokers?

    In relation to point 7, after several years of bashing on these forums, I have yet to see anyone provide solid information that fees in Ireland are comparatively bad value. In fact, here is an extract from the recent report on pensions charges (http://www.welfare.ie/EN/Policy/PolicyPublications/Pensions/Documents/PensionChargesIreland2012.pdf):

    The research provided a comparison of charges with other external benchmark pension types to show the relative competitiveness of pension charges in Ireland from a member or individual pension savers’ perspective. Findings suggest that occupational pension schemes compare favourably to these benchmarks. The average Irish occupational scheme reduction in yields (in relation to disclosed costs only) identified are 0.52% to 0.91% (Defined Contribution insured schemes of various sizes) and 0.30% 0.58% (Defined Contribution noninsured schemes of various sizes) compare favourably to the equivalent reduction in yields calculated for UK Stakeholder pensions (1% and 1.63%) and the typical charging structure for standard PRSAs (1.27 to 1.57%).
     
  2. Bronte

    Bronte Frequent Poster

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    I know that you are an expert in this area DerKaiser and I am not. So I'm not going to dispute with you. But what I will say is that you see those questions 2 to 8, I'd imagine that Ember would like the answer to those questions too.

    As an ordinary layman who doesn't fully understand pensions, and I don't think I'm stupid, but anytime I've ever tried to understand them I find them veiled in secrecy, cannot figure out if they will actually give a return and cannot figure out how much of a return nor have any guarantee and never be clear on the charges being deducted.
     
  3. DerKaiser

    DerKaiser Frequent Poster

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    This comment is why I felt compelled to write the note above.

    What happened at Waterford Crystal is indicative of the fact that employer run DB schemes are struggling with the increased cost of annuities arising from historically low interest rates (in addition to unrealistic expectations of benefits versus contributions).

    This is totally unrelated to whether a person should contribute to their own personal DC pension or not.

    As for Ember's case, I feel we go around and around in circles on these threads. Embers fund did badly and in hindsight wishes a cash type investment alternative was available. Without getting into whether they might have thought different had their fund done well, Ember's dream of a deposit type savings fund is a reality. Even now, you can walk into a pension provider and get a guaranteed return (net of charges) over 5 years in excess of 3% p.a. - This actually exceeds the best 5 year rate in best buys!

    So, going back to the thread title. If you want to invest for retirement in a safe deposit type fund on a DC basis, it would be unhelpful to allow your decision to be impacted by either the ineveitable experiences of certain individuals invested in poor performing equity funds that did badly or the wind up of DB schemes whose promises were not matched by either the contributions or fund performance.
     
  4. Bronte

    Bronte Frequent Poster

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    Ok let's keep it simple and just deal with the Waterford Crystal case, as I along with many other will get lost otherwise.

    How come the contributions were too low, should someone not be accountable for this. How come the members of the scheme were not aware of this, how come those managing it didn't tell them or didn't know themselves. Why were historically low interest rates not factored in and why were people being given unrealistic expectations? Who created those expectations?
     
  5. DerKaiser

    DerKaiser Frequent Poster

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    Fees and investment performance are always the hot topics.

    My take on fees is that Ireland is not extortionate, but there is a wide variation and an individual should ensure that they are not being screwed. A good rule of thumb is to check that 100% of your money is being allocated and you are paying no more than 1% of fund in charges per annum.

    In terms of investment performance, again, there is nothing particularly unique or inept about Irish fund managers and in any case there is now massive choice in the market. A broker can advise you, but if you invest in an equity fund with no guarantees, anything can happen.
     
  6. serotoninsid

    serotoninsid Frequent Poster

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    After 9 years in company pension scheme, my fund is worth more or less exactly the same as the actual $$ both my employer and I have contributed to it - and no more. Is this normal?
     
  7. DerKaiser

    DerKaiser Frequent Poster

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    I really have to get back to work, but it can work like this.

    Say you start saving in 1972 to retire in 2012. For much of that period of time it would have been safe to assume an interest rate on retirement of 8% and that a retirement income of €35k could be provided by a lump sum of €500k.

    By 2012 risk free interest rates were more like 2.5% and the €35k retirement income now requires a lump sum of €1m.

    This didn't happen suddenly, but it didn't happen gradually either and by the time it was obvious that very low interest rates were here to stay for a long time, it was too late to reasonably adjust contributions to meet the target benefits.

    An additional issue is with legislation. If there were two people in this fund, one working aged 64 and the other retired aged 66, the retired person would get full retirement income and the person working would get nothing on wind up.

    I'm sure there were other issues particular to Waterford Crystal, but the point I have outlined highlights why promises made years or even decades ago by DB funds are not now being met.

    You can solve the inequity between retired members and working members of a scheme through smarter legal rules (these are on the agenda), but there is very little can be done by the massive increase in the cost of annuities that has arisen from rapidly falling interest rates over the last ten years.
     
  8. DerKaiser

    DerKaiser Frequent Poster

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    Sounds well below average from 2004 to 2013, but you should check
    a) The charges
    b) The fund provider and fund you are invested in
     
  9. LDFerguson

    LDFerguson Frequent Poster

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    Latest figures I have readily to hand are to end November 2012. For a nine year period (December 2003 to end November 2012) the average Irish Managed Pension fund is up +4.2% per year, less charges.

    Like any average, some managers will have done better and some will have done worse. The average annualised figure does not represent steady growth - it's an average over nine years that includes some years where the values dropped. The maths is also complicated by the fact that you've presumably been contributing regular amounts each month over the nine year period, so not all of your fund has been invested for nine years - some contributions have only been invested for a month, some contributions have been invested for three years etc.

    But breaking even after nine years still seems below par. I'd echo DerKaiser that you should be querying what the charges are. Presumably there's a Financial Broker or pension consultant involved with your employer's pension scheme. Good place to start with such enquiries.
     
  10. Jim Stafford

    Jim Stafford Frequent Poster

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    The reality is that most of the discussion on pensions will revolve around tax effeciencies vis-a-vis other investments. However, I would suggest that a key consideration for people who might be exposed to personal liablity (i.e. business people) is basic asset protection. Generally speaking, the assets in an individual's pension plan cannot be taken by creditors. Another consideration to consider is that of basic asset diversification i.e. do not have all your eggs in the one basket.

    We have a large number of clients whose "pension" was investment in property. Some of these clients are now financially wiped out. We have other clients who invested in their pension plans, and whilst some of the clients may be financially bankrupt, at least their pensions are protected from creditors.

    Jim Stafford
     
  11. orka

    orka Frequent Poster

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    I agree that fees/charges/investment performance are the hot topics and also that Ireland is not particularly bad value for money – but a big problem for the pensions industry is that it is perceived as a poor past performer and poor value for money – and pointing to current fees/charges (which have indeed come down compared to 10/20/30 years ago) doesn’t do enough to dispel concerns over what is a very long-term locked-in investment. Serious question: does anybody know anybody who is happy with their defined contribution/personal pension performance? A great ad campaign for a pension provider would be to show some success stories – “my name is Joe and I’m having a comfortable retirement because I invested for 30 years with XYZ LifeCo.” – a real person saying – “look you can come out the far side of contributing to a defined contribution scheme and not feel hard done by”. Do such people exist?
     
  12. Daddy

    Daddy Frequent Poster

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    Der Kaiser one can walk in to a pension provider and get 3%after charges p.a for 5 years. I would take that if available from New Ireland. In a plan since 2005 and like another poster i am line ball right now value 81k and ee and er corribstudents 80k. So I would be happy to take 3% but this is not available to me I don't think in New Ireland. Can Der Kaiser expound a little on this. Thanks.
     
  13. leroy67

    leroy67 Frequent Poster

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    4.75% gross available at the moment through New Ireland, deposit provider is EBS and as far as I know can only be bought through broker channel. These funds do fill quickly so wouldn't hang about. Aviva have something similar at present also
     
  14. Daddy

    Daddy Frequent Poster

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    Thanks. But I don't think this product is available to me under my scheme. I will check though as my info booklet states what funds I can get Ino and this isn't one of them. 4.75% gross will give me a net what after levy etc.,
     
  15. leroy67

    leroy67 Frequent Poster

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    If amc is 1% and levy 0.6% would give you 3.15%,
     
  16. Bronco Lane

    Bronco Lane Frequent Poster

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    A problem that I have is trying to get the company who deals with my pension, "Mercer" to answer my queries regarding my pension. Over the years I have been told on a number of occasions that the person who was dealing with my query has either moved on or has been transferred to another department. This is usually about 2 to 3 months after my initial correspondence. I have also had conflicting correspondence from them about the historic growth of my pension.
     
  17. LDFerguson

    LDFerguson Frequent Poster

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    You are not alone, apparently. See here. Send them a registered letter, enclosing a copy of your original letter and tell them that you want a full reply within 10 working days or else you will be making a formal complaint.
     
  18. ashambles

    ashambles Frequent Poster

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    There are many problems with the way pension fund returns are reported, one is where they use fixed periods in time to report performance.

    Have a look at

    http://stockcharts.com/freecharts/historical/djia2000.html

    This is the Dow Jones but it gives a reasonable view into how an equity fund performs over time. 2003 was a bad year the DJ went as low as 7286, and currently it’s about 13,400. So that’s as high as an 80% increase in 10 years so 8% per year. (Currently pension companies love the 10 year figure – but soon you can see it’ll be the 5 year one they’ll concentrate on.)

    But look at 2004, the DJ was say around 10500. So the return over 9 years was around 27% or 3% per year. This isn’t intuitive – you’d naturally expect returns from 9 and 10 years to be very similar. The 10 year figure itself will vary wildly from month to month.

    However a bigger problem is that in 2004 your fund was probably starting from zero. Until you’ve several years of contributions in there the pension returns reported by the pension companies don’t reflect what you experience. In my opinion you could really ignore the first couple years of pension performance, at that stage whatever happens in the markets doesn’t really matter, your next monthly contribution will mask it.
     
  19. Bronte

    Bronte Frequent Poster

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    Very good question and yet no answer. You'd imagine that some of the guys on here who sell pensions would be able to say, look I've sold 1000 pensions and 90 percent of them performed well, 5% were ok and 5% were abysmal (because ......). My distrust of pensions is that 90% are eaten up by bad investment decisions combined with high hidden fees, charges and commissions. Particularly where one is 'advised' by a broker whose only interest is their commisison and not the well being of your pension.
     
  20. serotoninsid

    serotoninsid Frequent Poster

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    So basically, if the funds that my pension is placed with had a couple of bad years towards the end of that 9 year period, this is probably the cause for what looks like poor performance (on the basis that there was a lesser sum invested overall in the earlier years)?

    My pension has been invested in Irish Life Global Consensus(75%) & Standard Life GARS Fund (25%).