Defined contribution pension charges

[Marsharua]

I am a 27 year old on average industrial wage and I joined my employer's defined contribution pension scheme a year ago. The scheme is administered by one of the large insurance companies through a firm of pension consultants. When I received my first annual statement recently I was astonished to find that in excess of 30% of the contributions had been retained by the consultants and no explanation was given as to how this amount was arrived at. When I queried this and asked for a statement of the charges I was informed that there was a 30% of contributions setting up charge, a €3.49 monthly policy fee and .75% fund management fee. These charges will also apply to any increase in premiums. In second and subsequent years the charges will be 6% of annual premiums, €3.49 monthly policy fee and .75% fund management fee.

Are these the normal charges made by pension consultants for setting up and managing defined contribution occupational pension schemes ? I have to confess I am weak on mathematics and financial matters generally and I would welcome advice and assistance from anyone who is in a position to help me. Because 30% would be retained by the consultant I have decided not to invest the proceeds of my SSIA in this scheme when the SSIA matures in 2006.. Have I made a correct decision ?

While I am looking for advice myself, may I offer one small piece of advice to others ? The pension consultant expressed surprise that I queried the charges saying few bother to do so. My advice is that people should take an interest in their pensions and know what they are being charged.

 

[rainyday]

30% seems huge. In my employer (large US multi-national), the charges are around 1%-3% all in, depending on which fund you choose. Did you employer issue a pension booklet or notice when you joined - what did this say about charges? Can you raise the issue with your pension trustees?

 

[ClubMan]

When I queried this and asked for a statement of the charges I was informed that there was a 30% of contributions setting up charge, a €3.49 monthly policy fee and .75% fund management fee. These charges will also apply to any increase in premiums. In second and subsequent years the charges will be 6% of annual premiums, €3.49 monthly policy fee and .75% fund management fee.

Those charges - specifically the 30% of contributions in year one and 6% of contributions thereafter - certainly seem over the top to me. Rainyday's are more reasonable/competitive.

Because 30% would be retained by the consultant I have decided not to invest the proceeds of my SSIA in this scheme when the SSIA matures in 2006.. Have I made a correct decision ?

You don't have to make any decision yet but I certainly would not be making any contributions into a pension that levied the charges above. If you want to use your maturing SSIA (in part or full) to top up your pension savings you might want to investigate the possibility using a PRSA or low charges personal pension fund to do this. Note that the charges on Standard PRSAs are capped at 5% of each contribution and 1% annual management fee although you can get even lower than this (e.g. 0%/1%) for a once off payment of an arrangement fee of a few hundred €.

While I am looking for advice myself, may I offer one small piece of advice to others ? The pension consultant expressed surprise that I queried the charges saying few bother to do so. My advice is that people should take an interest in their pensions and know what they are being charged.

Sound advice!

 

[Chord of Souls]

Marsharua,

The charges you quote are not exceptional for a small scheme (say 20 people or less), although they're not very competitive either. The charges quoted by RainyDay would lead me to believe that he is employed by a company with hundreds in the scheme. Charges per member do drop according to how many members there are in total.

It's true that not enough people question the charges on their pension scheme. Many simply take the view that "if I'm in the pension scheme I'll be alright at retirement". This is sadly not true - it's your money and you should be asking questions about it. Apart entirely from the charges, you should also be fully aware of the type of fund your pension contributions are invested in, and whether or not the level of contributions is sufficient to provide you with an adequate pension in retirement.

Well done for asking the questions. It's unfortunate that although commissions and charges must be disclosed at or before point of sale on Personal Pensions and personal PRSAs, there is no such obligation on a consultant to disclose these very important details to members of an Ocupational Pension Scheme.

What can you do for now? Well you can always suggest that the pension scheme trustee (often but not necessarily the employer) could review the scheme and consider moving it to another consultant who would administer it with lower charges. If you'd like to post back how many members there are in the scheme, I can give you a steer on what sort of charging levels would be available from the more competitive pension consultants around town.

 

[Marsharua]

In response to the comments from rainyday, ClubMan and Chord of Souls: When I joined the scheme I was issued with a Member Explanatory Booklet by my employer but it makes no mention of charges. I was just told there would be some extra charges in the first year but did not expect these would be so high. I was also told the company had examined several options and that the scheme selected was the most suitable for them.
Yes, Chord of Souls, it is a small company with less than 20 employees, so I suppose I should allow that charges would be a bit higher than they would be if it was a large company. Your statement that there is no obligation on a consultant to disclose commissions and charges to members of Occupational Pension Schemes is a useful piece of information to have available to others who may be considering joining such schemes. The trustee is my employer, and while I thank you for your suggestion that I can raise the issue there I do not think this is an option for me as I am a junior member of staff and they have already decided this is the most suitable scheme for them.
I also thank ClubMan for his advice as to how I might deal with the proceeds of my SSIA when it matures.
However, what I would like to do now is to obtain independent professional advice concerning how I should proceed from here. The difficulty is I do not know how to go about identifying a professional who is independent of the pensions industry and who will give reliable advice for a reasonable fee.

 

[rainyday]

Hi Marsharua - Thanks for the update. I'm not sure if it will be practical for you get professional advice on this matter. Why don't you post your further questions here - from past experiences, you will get excellent advice from a number of different professionals.

I understand in practical terms that it can be difficult to raise such matters with your employer. However, you should both be adult enough to be able to raise pension matters independently of your employee/employer relationship. Certainly, nothing will change or improve until such matters are raised up by staff.

Once small point - Does the scheme allow you to make AVC's (additional voluntary contributions)? I'm not suggesting that you should make AVCs through this scheme - I'm asking as this technical point impacts the employers obligation to offer you a PRSA as an alternative.

 

[Marsharua]

Yes, rainyday, the scheme does allow me to make additional voluntary contributions, also to make lump sum payments. And, thank you for the invitation to post back further questions. These are the main questions I would like to have answers to:
1. The projected policy values assume a return of 6% per annum over the lifetime of the policy [29 1/2 years]. Based on past performance of pension funds, is this a realistic figure ?. I realise that past performance can only be taken as a guide.
2. Based on a 6% per annum return, present rate of contributions will provide me with a pension of just over €800 a month. Contributions will increase in line with salary increases granted to me which should mean pension should be considerably greater than shown above. But will these increased contributions [which will be subject to the 30% 'penalty' clause] may be offset by the effects of inflation over the next 28 years or so. I am aware that, whatever the final amount of my pension, it is unlikely to be sufficient to sustain me in old age. So, what should I do about this ? Making additional voluntary contributions or lump sum payments to the pension fund is hardly an option because of the 30% penalty clause.
3. I am not availing of the full 15% of salary tax relief available to my age group, so can I set up a PRSA and obtain tax relief on contributions to it, provided I do not exceed the 15% of salary in total ?. If I can set up one, and decide to do so, I can look through AAM for best deals.
4. My employer contributes the equivalent of 12% of the premiums to my occupational pension scheme. If I were to double my present contribution he would have to double his but both contributions would be subject to the 30% 'penalty'. If I were to put my contributions in a PRSA instead I would lose out on his contribution, which would make a PRSA less attractive to me. Unless, of course, he agreed to contribute the 12% to my PRSA. Would it be unreasonable of me to expect that he should ?.
5. In relation to PRSAs, I read somewhere that the difference between standard and non standard is that the charges in the case of the former must not exceed 5% of contributions plus 1% of fund a year, whereas charges in non standards are not subject to restrictions. There must be other differences, otherwise why would anyone opt to pay higher charges for a non standard ?. What are these differences ?
6. Can you suggest an alternative to a PRSA for someone like me - 27 years, female, paying a mortgage, professionally qualified but unlikely ever to be a high earner ? Would a private pension be something I should consider ?
I hope I have not saddled you with too many questions.
I will post nothing more on this issue unless to answer any question addressed to me. Thank you, rainyday, and anyone else who has helped.

 

[rainyday]

1. The projected policy values assume a return of 6% per annum over the lifetime of the policy [29 1/2 years]. Based on past performance of pension funds, is this a realistic figure ?. I realise that past performance can only be taken as a guide.

6% is a reasonable figure for planning purposes.

. Based on a 6% per annum return, present rate of contributions will provide me with a pension of just over €800 a month. Contributions will increase in line with salary increases granted to me which should mean pension should be considerably greater than shown above. But will these increased contributions [which will be subject to the 30% 'penalty' clause] may be offset by the effects of inflation over the next 28 years or so. I am aware that, whatever the final amount of my pension, it is unlikely to be sufficient to sustain me in old age. So, what should I do about this ? Making additional voluntary contributions or lump sum payments to the pension fund is hardly an option because of the 30% penalty clause.

The 30% clause is a big deterrent. However, by choosing to invest in a pension, you will benefit from the tax deferral (no tax on contributions or growth - tax will apply to your pension income. Have a read of [link=http://www.askaboutmoney.com/guide/index.htm]the Guide[/link] to get a broader understanding of your options. Don't forget to bring your property into your planning - you may well be able to trade down your property to free up some cash when you retire.

3. I am not availing of the full 15% of salary tax relief available to my age group, so can I set up a PRSA and obtain tax relief on contributions to it, provided I do not exceed the 15% of salary in total ?. If I can set up one, and decide to do so, I can look through AAM for best deals.

I don't think you can set up a PRSA unless your employer explicitly offers this (though I'm not an expert on this & I'm open to correction). Given that they do offer you the normal pension scheme, they aren't obliged to offer a PRSA.

4. My employer contributes the equivalent of 12% of the premiums to my occupational pension scheme. If I were to double my present contribution he would have to double his but both contributions would be subject to the 30% 'penalty'. If I were to put my contributions in a PRSA instead I would lose out on his contribution, which would make a PRSA less attractive to me. Unless, of course, he agreed to contribute the 12% to my PRSA. Would it be unreasonable of me to expect that he should ?.

12% is a very strong employer contribution. The largest that I'd heard of elsewhere was 10%. Are you certain that they will increase this even higher to match your higher contributions?

5. In relation to PRSAs, I read somewhere that the difference between standard and non standard is that the charges in the case of the former must not exceed 5% of contributions plus 1% of fund a year, whereas charges in non standards are not subject to restrictions. There must be other differences, otherwise why would anyone opt to pay higher charges for a non standard ?. What are these differences ?

Non-standard does not necessarily mean higher charges. Some non-standard PRSA's are lower charging. But someone might be prepared to pay a higher charge to get a greater choice of investment funds.

6. Can you suggest an alternative to a PRSA for someone like me - 27 years, female, paying a mortgage, professionally qualified but unlikely ever to be a high earner ? Would a private pension be something I should consider ?

The only real pension alternative would be AVC's - Check out the Guide for other non-pension investment options.

Feel free to post again if you need further clarifications.