# Use of ETF's in Pension



## gnf_ireland (11 Aug 2016)

Are ETF's more attractive for use in a pension fund, given their associated tax treatment as income in Euro domiciled cases. I assume this would not apply within a pension fund scenario

I would assume that the management charges of ETF's would be lower than most index funds, even passive ones.

Transaction charges may be an issue, but for once off contribution maybe not !


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## Steven Barrett (11 Aug 2016)

You can access ETF's through a pension. You have an additional layer of costs in that you have to pay the life co, platform provider as well. 


Steven 
www.bluewaterfp.ie


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## gnf_ireland (11 Aug 2016)

@SBarrett Thanks for confirming this. I had assumed this to be the case. I guess my question is are they more attractive in a pension fund due to their taxation arrangement, rather than outside of it ? 
What level of 'life co/platform provider' costs would you assume is reasonable above the EFT cost itself (say 0.3%), for a comparison with a standard fund of say 1%


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## Steven Barrett (11 Aug 2016)

Who says a standard fund is charging 1%? That's the management fee charged by the insurance company. How much (if any) of that goes to the fund manager? Trading costs are deducted before the units are priced each day. With insurance companies, we just don't know the cost of running a fund. For example, you may pay 1% AMC for your pension and invest in property. The cost of running a property fund is close to 2%. Where is that disclosed? That is why people get annoyed that they pay 1% for cash funds. That 1% pays the insurance company to administer your fund, light & heat and profit. 

You can pay a platform provider 0.4% AMC and whatever your fund manager charges on top. Complete transparency on charges. 


Steven
www.bluewaterfp.ie


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## Marc (11 Aug 2016)

We have looked at this question in detail and concluded it simply isn't cost effective to use ETFs within an Irish Pension structure especially as it is now possible to purchase the equivalent mutual fund with no transactions costs.

Compare 
IShares MSCI World UCITs ETF  Total Expense Ratio 0.50%pa
Plus dealing costs to buy and sell

Vanguard Global Stock Market Index Fund (Institutional Plus)  Total Expense Ratio 0.15%pa
No dealing costs


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## Sarenco (11 Aug 2016)

SBarrett said:


> You can pay a platform provider 0.4% AMC and whatever your fund manager charges on top. Complete transparency on charges.



Hi Steven

Can you elaborate on this somewhat?  When you say "platform provider" are you referring to a life company, pension trustee or something else?  Also, when you say "0.4% AMC" - is that the total hosting cost or is there another layer of costs (in addition to the underlying fund OFC and portfolio trading expenses)?

I continue to find it extraordinary that Irish life companies are not required to disclose the full OFC for unit-linked funds.  The opaque pricing of units really should be addressed by the Central Bank at this stage.


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## gnf_ireland (11 Aug 2016)

Marc said:


> We have looked at this question in detail and concluded it simply isn't cost effective to use ETFs within an Irish Pension structure especially as it is now possible to purchase the equivalent mutual fund with no transactions costs.


Thanks Marc - clear response much appreciated


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## gnf_ireland (11 Aug 2016)

SBarrett said:


> How much (if any) of that goes to the fund manager? Trading costs are deducted before the units are priced each day





Sarenco said:


> I continue to find it extraordinary that Irish life companies are not required to disclose the full OFC for unit-linked funds.


Agree - a Total Expense Ratio for each and every fund would be very welcome and allow much greater transparency to people


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## Sarenco (11 Aug 2016)

Just to be clear, I am not asking for advance disclosure of future portfolio trading expenses.  Nor am I asking for further disclosure of intermediary or broker commissions.

I am simply looking for disclosure of any hosting/platform costs and the ongoing fund charges -
based either on the previous year's expenses or, where relevant, based on an estimate believed on reasonable grounds to be indicative of the amount likely to be applied to the units in the year to come.

Is that too much to expect?


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## Steven Barrett (11 Aug 2016)

Sarenco said:


> Hi Steven
> 
> Can you elaborate on this somewhat?  When you say "platform provider" are you referring to a life company, pension trustee or something else?  Also, when you say "0.4% AMC" - is that the total hosting cost or is there another layer of costs (in addition to the underlying fund OFC and portfolio trading expenses)?
> 
> I continue to find it extraordinary that Irish life companies are not required to disclose the full OFC for unit-linked funds.  The opaque pricing of units really should be addressed by the Central Bank at this stage.



Sure, no problem. I use ITC for self directed/ SSAS pensions. They provide the pension wrapper. Another company called Conexim provide access to the range of funds as well as direct investing(if you wish). Pershing Securities are used as your custodian and hold the money. The charge for the 3 of them is 0.4% of the value of your fund each year. Under that structure, you cannot purchase property directly, it is for funds and shares etc (access to over 3,500 funds). 

You also have to pay for the fund that you invest in, the OFC. This will vary depending on the fund. A property fund could cost you 2% or you can go with an index where you will probably pay 0.25% per annum. 

There are no enhanced allocation rates or commissions. If the broker's fee is paid from the fund, it is simply deducted from the money in the account. As they are not on the hook for paying commissions, there are no early exit penalties, so you can move your money whenever you want. You need to be putting in an initial premium of €20,000. If making monthly contributions afterwards, the minimum is €1,000 per month. 

In fairness to insurance companies, a few of them are moving towards lower charges, more transparent structures. The OFC is still an issue though. In many contract structures, part of the fund manager fees are built into the AMC that you are charged. It's difficult to know what isn't though. They are quicker to set up too (if year end is approaching, setting up a self-admin structure will take too long).  

Advisor fees are not included in any of the above. 


Steven
www.bluewaterfp.ie


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## Sarenco (11 Aug 2016)

Thanks Steven - that's really helpful.

So the total ongoing cost to an investor that opts for an index tracker with an OFC of 0.25%, is 0.65% per annum - right?

Presumably you also need to get paid for your services!  If it's not too rude to ask, do you typically negotiate an individual advisory fee for each investor or do you operate on a tiered % basis depending on the amount invested?

Also, do you (or can you) charge a "set up" fee for the above, separate and distinct from an (ongoing) advisory fee?

I suppose one of the other advantages of the typical life company pension structure is the comfort of the life co's balance sheet/reputation.

Somebody in the pension industry once told me that the true OFC for a policy linked to a developed market equity index fund would be around 10% higher than the disclosed AMC.  Does that sound about right to you?


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## Steven Barrett (11 Aug 2016)

Yes, that's correct. 

I have a tiered charging structure. The more money I have under management, the more I have to pay for indemnity insurance, levies etc, so it's not a once off cost to me to have money under my management. I charge a set up fee to cover the costs of investment strategy, implementation and compliance and an ongoing fee to provide advice on a regular basis. 

The reason I use ITC/ Conexim is they use Pershing Securities as their custodian. When I was looking for a platform provider to use outside of the insurance companies, Custom House Capital was always ringing in my head. I couldn't use a smaller provider knowing my clients money was at risk. Pershing hold the clients money. 

I also use insurance companies a lot too as the self directed isn't for everyone, especially if you haven't built up a decent sized fund yet. 

Looking up the Ongoing Cost of a Global Equity Fund on Morningstar, they charge 1.52%. You can expect that level of charges for an actively managed fund. 


Steven
www.bluewaterfp.ie


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## Marc (11 Aug 2016)

Sarenco,
Did you see the piece I had in the Sunday Business post on mirror funds?

*Zurich Japan Index Fund vs Nikkei 225 Index 10 years ending 17/12/15*


*Source*: FE Analytics


Difference in total return 12.59% over 10 years ending 17th December 2015 (1.193%pa)


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## Sarenco (11 Aug 2016)

SBarrett said:


> Yes, that's correct.
> 
> I have a tiered charging structure. The more money I have under management, the more I have to pay for indemnity insurance, levies etc, so it's not a once off cost to me to have money under my management. I charge a set up fee to cover the costs of investment strategy, implementation and



Thanks Steven - the point about your own ongoing costs is well made.


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## Sarenco (11 Aug 2016)

Marc said:


> Sarenco,
> Did you see the piece I had in the Sunday Business post on mirror funds?
> 
> *Zurich Japan Index Fund vs Nikkei 225 Index 10 years ending 17/12/15*
> ...



Hi Marc

No, I missed that piece.  

Can you work out the difference between the Zurich fund's AMC and OFC from the total return of the linked fund?  The difference would obviously have a compounding impact over time.


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## Marc (11 Aug 2016)

So the reference in that case was the underlying Nikkei 225 Index which has no costs.
The (1.193%pa) is the annual compound difference between the Fund and the Index (which includes all dealing costs and tracking error against the index) so it isn't correct to say that it is the fund management cost but it certainly is the real cost to an investor.

This was my favourite direct comparison between two supposedly identical funds that we looked at was:


*Aviva Irl Emerging Markets Equity Inc vs Aviva Investors Emerging Market Equity Inc (SICAV LU0280564351) 6 years ending 18/12/15*


*Source* FE Analytics


Difference in performance 22.73% over 6 years ending 18th December 2015 (3.47%pa)

The Total Expense Ratio of the SICAV is 2.33%pa (source Morningstar)

Implied total cost of investment *5.8%pa*


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## Sarenco (11 Aug 2016)

Marc said:


> So the reference in that case was the underlying Nikkei 225 Index which has no costs.



Thanks Marc but I'm really just trying to compare the cost of investing in a simple tracker through a life wrapper versus a self-directed/SSAS structure.

I now know that Steven's structure adds 0.4% to the underlying fund's OFC (which is probably around 0.45% for a fund that tracks the Nikkei 225).

If Zurich charge an AMC of 0.75% for their wrapper then that wouldn't appear to be any more expensive than Steven's structure (assuming the OFC doesn't exceed the stated AMC by 10%).

I am also assuming that Steven's on-going advisory fee would equate to what he charges by way of commission for organising the life wrapper.

Happy to be corrected.


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## Steven Barrett (11 Aug 2016)

A simple comparison: 

AMC of 0.4%
OFC of 0.45%
Growth before charges of 6%
€1,000 a month invested over 30 years
Fund of €855,728


AMC of 0.75%
OFC of 0.45%
Growth before charges of 6%
€1,000 a month invested over 30 years
Fund of €802,147

Difference - €53,581

This could be accurate or it may not as we don't know how much (if any) of that 0.75% charged by Zurich goes to their fund management team.


Steven
www.bluewaterfp.ie


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## Sarenco (11 Aug 2016)

Thanks Steven but I'm not sure I follow.

Are you suggesting that the AMC charged by Zurich is in addition to the OFC of the linked tracker?  Surely that can't be right.

My understanding was always that the AMC charged by a life company incorporated all fund management costs (including the costs of any underlying fund(s)) but did not capture the full cost of the wrapper as other costs (custody, audit, director fees, etc.) are also applied to the fund units.

Why would Zurich's fund management team receive any element of the charges?  They're not managing the fund assets in this case.

The lack of transparency in this whole area is really ludicrous.


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## Marc (11 Aug 2016)

Ok I think this is what you are asking : for pensions let's use the 0.40% wrapper cost ( a PRSA is 0.50% and my SSAS is with ITC and Pershing and I only pay 0.34%pa) but 0.40% is a common fee structure for brokers in Ireland.

So the comparison for an investor is as follows (note that these are investment costs and are before advice costs are added)

using the reference of the Japan index investment

Zurich 1.193%pa
New Ireland 0.919% (same time period and from the same study)

Remember that if a broker adds an ongoing commission this is added to the cost.

Unbundled contract
trustee and custody 0.40%
OCF.        0.23%
Total 0.63%

If an adviser adds an ongoing fee this is added to the cost

I've used the Vanguard Japan Stock index fund eur institutional for the Comparison OCF which is a fair comparison as we have clients invested in Irish pensions in the fund.

Cost effective implementation is one of the key advantages of working with a really good adviser who are able to negotiate better terms for clients rather than just selling the retail version of a fund.


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## Gordon Gekko (11 Aug 2016)

As a member of an occupational scheme, I pay 0.5% (no VAT) for a life company's global equity fund and nothing else (the employer covers the scheme's costs).

That's pretty good, isn't it?


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## Sarenco (11 Aug 2016)

Many thanks Marc but I have a couple of follow up questions.

The 1.193%pa figure is the annual compound difference between the total return of the Zurich Fund and the MCSI Japan Index (which includes all dealing costs and tracking error against the index) as calculated over a particular 10-year period - right? 

Is the 1.193%pa figure inclusive or exclusive of Zurich's AMC and, if so, what is the AMC in this case?  I strongly suspect the figure incorporates an AMC of 1% (which wouldn't be particularly low).

The Vanguard Japan Stock Index Fund Eur Institutional currently has an OFC of 0.23% and this covers administration, audit, depository, legal, registration and regulatory expenses incurred in respect of the Fund. 

However, to allow me to make an apples-to-apples comparison with the Zurich Fund figure above can you also give me the annual compound difference between the total return of the Vanguard Fund and the underlying Index as calculated over the same 10-year period (so we are picking up all dealing costs, tracking error and the impact (if any) of stock lending fees)?

I appreciate the foregoing is entirely focused on product costs and ignores intermediary costs and commissions.  Could you also give us some indication (even a ballpark range is fine) of the sort of set up and on-going advisory fees that you might charge a client?


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## Sarenco (11 Aug 2016)

Gordon Gekko said:


> As a member of an occupational scheme, I pay 0.5% (no VAT) for a life company's global equity fund and nothing else (the employer covers the scheme's costs).
> 
> That's pretty good, isn't it?



I've actually come across AMCs as low as 0.25% for passive equity mandates.


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## Gordon Gekko (11 Aug 2016)

Sarenco said:


> I've actually come across AMCs as low as 0.25% for passive equity mandates.



That's excellent (0.25%).


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## Marc (11 Aug 2016)

I should be ably to run exactly the same analysis in the morning and then we will have a precise number on a like for like basis.

Don't be fooled by quoted annual management charges this is the whole point of this analysis to demonstrate that the amc is meaningless


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## Steven Barrett (11 Aug 2016)

Sarenco said:


> Thanks Steven but I'm not sure I follow.
> 
> Are you suggesting that the AMC charged by Zurich is in addition to the OFC of the linked tracker?  Surely that can't be right.
> 
> ...



I don't know what charges are covered by the AMC and what aren't. There are certainly more costs that are not included the the 1% AMC. Maybe Marc knows more as he is closer to that side of things than I am. 

Add in, there is no definition of TER so you can't even compare the charges covered under a TER if they are declared as they can include/ exclude different costs. 

Steven
www.bluewaterfp.ie


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## Gordon Gekko (11 Aug 2016)

People need to be more diligent around withholding taxes also...a lot of return is left on the table by some investment managers.


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## Sarenco (11 Aug 2016)

Marc said:


> I should be ably to run exactly the same analysis in the morning and then we will have a precise number on a like for like basis.



Super - that would be greatly appreciated.  I wouldn't expect the difference to be material but I think it would be a worthwhile exercise nonetheless.



Marc said:


> Don't be fooled by quoted annual management charges this is the whole point of this analysis to demonstrate that the amc is meaningless



Sure, but if we don't know what AMC applied to the Zurich fund in your example, then we have no way of knowing what we need to add to that AMC to arrive at the true cost to the investor.  Really without knowing what AMC was applied to the Zurich fund in your example, I'm not sure that the comparison would tell us anything very meaningful.

If my suspicion is correct that an AMC of 1% was largely responsible for the spread between the TR of the Zurich fund and the TR of the underlying index over the relevant period, then I can figure out roughly what I need to add to that AMC to arrive at a comparable OFC figure.

My industry contact suggested that I should add around 10% to the quoted AMC to arrive at the OCF for a unit-linked fund that tracks a DM equity index.  That would seem to align with your figure showing the annualised difference between the TR for the relevant index versus the TR for the Zurich fund (allowing for tracking error, etc., of the linked tracker fund).

If we could establish that much then I think we could really advance the discussion.


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## Marc (11 Aug 2016)

"People need to be more diligent around withholding taxes also...a lot of return is left on the table by some investment managers."


Agree I've written a white paper of DWT and some funds just don't make any sense.

Like a Lux fund holding US equities and paying 30% tax rather than 15% for an Irish fund


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## Sarenco (11 Aug 2016)

SBarrett said:


> Add in, there is no definition of TER so you can't even compare the charges covered under a TER if they are declared as they can include/ exclude different costs.



Thanks Steven but there is a pretty detailed ESMA Rulebook for calculating a fund's OFC (the artist formerly known as TER!).  Essentially it covers all administration, audit, depositary, legal and  regulatory costs - there's really not much controversy about what is, and is not, included.


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## Sarenco (11 Aug 2016)

Marc said:


> Agree I've written a white paper of DWT and some funds just don't make any sense.
> 
> Like a Lux fund holding US equities and paying 30% tax rather than 15% for an Irish fund



I suspect GG is referring to the DWT assumption made by the index provider (which is usually pessimistic) in calculating the TR of the relevant index and whether or not the manager actually bothers to reclaim DWTs where possible (they invariably do).  

This is one of the reasons why it is not unheard of for a tracker fund to actually outperform its index. Stock lending income allocated by a manager to the fund is also important in this regard.


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## Marc (12 Aug 2016)

So I am updating my earlier post on a like for like basis (or at least as close as I can achieve)


*Disclosures:*

The comparison index used is different (Nikkei 225 for Insurance and MSCI Japan for fund)
The time period for the mutual fund is 10 years ending 11/8/2016. I can't use the same time period due to launch dates. ) I may update the original study in due course to cover the same time periods.


Zurich 1.193%pa 10 years ending 17/12/15
New Ireland 0.919% (same time period and from the same study)
Average 1.056%

The Vanguard fund returned 23.20% compared to the index return of 26.75% a difference of 3.55% or 0.34945%pa compound


Therefore the comparison with the unbundled contract is as follows:
Trustee and custody 0.40%
NAV reduction in return compared to MSCI Japan Index 0.34945%

Total 0.74945%pa

So a reasonably fair estimate of the difference between an Insured contact investing in a Developed Market Index fund in an Irish Pension compared to a Mutual Fund would be 

0.30655%pa in favour of the unbundled contract.

Assuming an adviser charges the same fee as their commission then their cost should cancel out on both sides of the equation leaving the client better off by the difference in product costs.
*Note *that if an adviser charges a consulting fee but doesn't act as an intermediary then the fee would be subject to VAT


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## Sarenco (12 Aug 2016)

Thanks Marc but you're still not telling us one critical detail - the AMCs applied to the Zurich and New Ireland funds in your example.

Using your figures, the cost to an investor in the Vanguard Fund was 0.34945%pa compound (versus a current OFC of 0.23%), whereas the cost to an investor in the Zurich Fund was 1.193%pa compound (versus an AMC of X%). 

Without knowing "X" the comparison is incomplete.

Life companies do not charge a single AMC to all investors in a particular fund.  It is entirely possible that one investor could be charged an AMC of 1%, whereas another in the same fund  could be charged an AMC of 0.5%.  Therefore, it's critical to know what AMC is applied in your example.

Otherwise, you are only concluding that the additional cost of the life company pension wrapper over the unbundled contract would be 0.30655%pa on average. 

The difficulty is that investors don't pay an average AMC - they pay whatever AMC is applicable to their individual contract.


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## Marc (12 Aug 2016)

Sarenco,

I see your frustration.

The data reported in Financial Express is the NAV of the fund NOT the contract.

The AMC disclosed by Zurich to Financial Express is 0.40%.
New Ireland did not disclose an AMC.

Therefore we should think of this as the wholesale cost of the fund.

Any additional contract costs are usually added by way of commission options and, as you correctly say, result in a myriad of differences in charges payable by investors.

However, if we are willing to assume that the underlying fund cost has been reported before contact fees which should primarily represent commission options, then we should be able to think of this as the "clean" or wholesale number.

If a broker adds a 0.50% trail commission or I charge an annual fee of 0.50% the effect on the net return should be the same.


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## Sarenco (12 Aug 2016)

Thanks Marc - the "wholesale" number is exactly what I'm trying to get to.

So, in the above example the cost to an investor in the Zurich Fund, excluding intermediary costs, was 1.193%pa compound (incorporating an AMC of 0.4%).  Is that correct?

And the comparable cost to an investor in a comparable fund using the unbundled structure, again excluding intermediary costs, was 0.74945%pa - right?

So that's a difference of 0.4435%pa.

Two final questions! 

Can you tell us the OCF of the BlackRock index japan fund to which the Zurich fund is linked?
Also, is this fund denominated in euro?

I'm obviously trying to establish that the wholesale cost differential arises at the wrapper level rather than the underlying fund level.

Thanks again.


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## Marc (12 Aug 2016)

Yep, that's spot on.

I don't know exactly which fund Zurich would buy into
LU0938202743 has a TER of 0.03%pa and 10M minimum
LU0852473288 has a TER of 0.22%pa and 50M minimum investment

IE00BZCTKC13 has only just launched this year 

These are all Euro share classes

I wouldn't get too hung up on the minimums as these can be waived at the managers discretion. We have access to a fund range with a minimum initial investment of €200M so I'm sure Zurich will have negotiated decent terms.


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## Sarenco (12 Aug 2016)

Thanks Marc.

It's certainly shocking that the true cost to the investor of the Zurich product was almost three times the disclosed AMC - for a simple DM index tracker.

It's bizarre to me that this situation is allowed to continue.  Is it any wonder consumers don't trust the financial services industry?


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