Following the publication of the "Report on Pension Charges 2012
" on Tuesday 24th October 2012, the Minister for Social Protection Joan Burton T.D. invites interested parties to submit comments and observations regarding the report within a 3 month period (before end January 2013). Material can be sent to firstname.lastname@example.org
The Minister will then review comments and observations submitted to inform considerations in relation to any further policy or regulatory action that may be required. A response to submissions will be published.
This report has gathered information on the level of pension charges levied on pension arrangements for the purpose of assessing whether charges are reasonable and transparent, to report on the findings and make recommendations, as appropriate, to the Minister for Social Protection and the Government.
A primary objective of the research is to undertake a fact‐finding exercise and to provide an insight into the breakdown of charges and costs relating to pension provision in Ireland with the goal of
enhancing the understanding of the impact of charges levied on occupational pension scheme members and individual policy holders. The research work was designed to obtain comprehensive and detailed information on all types of costs across the range of pension scheme types. The scope of the research focused on costs arising during the pension saving cycle from initial setup through the accumulation phase, up to and including the point of retirement.
While the process of saving for a pension cannot be cost free due to administration and management requirements, the charges incurred serve to reduce the level of income which individuals receive in retirement. In addition to gathering information on the level and application of pension charges, the report has sought to provide visibility on the financial impact of these charges. This is important, as evidence would suggest the impact of pension charges is not necessarily readily understood by the saver.
Pension costs are expressed as either ad valorem costs (i.e. charges which are levied on funds invested and expressed as a percentage of the fund under management), fixed costs (such as regular fees, of a certain amount every month) or as contribution charges (where a certain percentage of each pension
contribution made is deducted as a pension charge). This can mean that the monetary impact of each of these charges individually, and the cumulative impact of the charges overall in monetary terms, can be relatively difficult to identify and understand. Potentially adding to this challenge is the fact that pension savings are by their nature made over long periods of time, meaning that the impact of apparently smaller charges can be amplified over time.
This can be illustrated in the following example. If an individual age 35 saves €250 per month for a pension for 30 years, a fund of approximately €200,000 is created which results in a pension of about €10,000 per annum. Apply the average charge of 2.18% per annum to this fund and the final fund is reduced by 31% i.e. the fund is reduced by €62,000, resulting in a lower pension of €6,900 per annum. This impact would be significantly higher where the maximum charges apply.
What initially appears to be modest charge equates to significant difference in pension payment.
How the Report is Constructed
- Chapter 1 provides a background to the Irish pension landscape, identifying the key stakeholders andbroad role of each in the provision of pensions in Ireland. It also explains the various occupational and personal pension types. An overview of the number of pension arrangements in operation and estimated member coverage is also provided.
- In Chapter 2 the structure and mechanics of how pension charges operate are explained. This includes consideration of disclosed and implicit (non‐disclosed) costs, and within this, the use of distribution charges (or commissions) and the practice of ‘bundling costs’. The chapter sets out the rationale for using the Reduction in Yield (RIY) as an approach for measuring disclosed charges. Implicit/Non disclosed charges are measured separately. The Reduction in Yield then provides the basis for the assessment of the impact of charges on a pension scheme/arrangement over a period of time.
- Chapter 3 describes the methodology used to conduct the research, the data gathering process and the survey participants. It highlights the challenges involved in carrying out the research and details the limitations involved.
- Chapters 4 to 7 consider group schemes which are occupational pension vehicles utilised by a large number of Irish pension savers. These include Defined Contribution and Defined Benefit schemes. Defined Contribution schemes can be set up as ‘insured’ or ‘non‐insured’ and the nature of each is outlined in chapters 4 and 5.
- Chapter 6 builds on the two previous chapters, by providing a comparison between the charges applying to Defined Contribution insured and Defined Contribution non‐insured schemes. In addition, other benchmark comparators are provided to allow a level of understanding of the relative
competitiveness of Irish occupational pension schemes from a member’s perspective. For this purpose, Personal Retirement Savings Accounts (PRSAs), UK Stakeholder Pensions and the relatively newly established UK National Employment Savings Trust were chosen.
- Chapter 7 considers funded Defined Benefit occupational schemes. DB arrangements are somewhat different in construction from DC, given that in practically all cases all pension costs and charges are borne by the employer rather than the individual pension saver.
- Chapter 8 considers Retirement Annuity Contracts (personal pensions), Executive Pension Plans and PRSAs which are arrangements where it is more common to have a single pension saver only. This chapter outlines the less homogeneous nature of individual pension arrangements versus occupational pension schemes.
- Chapter 9 considers public sector additional voluntary contribution (AVC) arrangements.
- Chapter 10 considers Buy Out Bonds which are typically used when an individual pension saver withdraws benefits from a company‐sponsored pension scheme into a personal vehicle (perhaps on leaving service, or because the scheme is winding up). These arrangements are not used as pension
savings vehicles per se, but can be considered as ring‐fencing accumulated pension savings until the individual reaches retirement age.
- Chapter 11 addresses the entry costs of the two main post retirement options available, these being the purchase of an annuity or the investment of the accumulated pension fund in a post‐retirement savings vehicle i.e. an approved retirement fund (ARF).
- Chapter 12 focuses on the transparency of pension charges. Having within previous chapters, identified the type and range of pension charges information disclosed at present, this chapter details the various forms of existing regulation and the type of disclosure this regulation prescribes for
occupational and individual pension arrangement. It considers developments regarding disclosure on an Irish and EU level and makes a number of findings and recommendations regarding improving transparency of charges for the user.
- Finally, Chapter 13 presents the reports overall observations and conclusions and culminates in a summary of recommendations aimed at addressing issued identified in the course of the research.