A friend of mine is eligible to join their new employer’s group pension scheme and asked me to advise them on it. Of course I obliged, but isn’t there a scheme broker to go through the scheme with them? No, they were sent an email with the form, asked to fill it out and return it to them. That was it. There wasn’t even a list of the funds available.
At my prompting, they were told the following:
The first thing that struck me is that the members are paying for the pension scheme! If an employer offers a pension scheme for their members, they should pay for it, not the employee through commissions. And seeing as the employee is paying for the scheme, where is the advice? The advisor in this case, has literally emailed the member a form, provided them with ZERO information and is charging them 2.5% of EVERY contribution that they make for the privilege.
The problem is, this is not an isolated case. I regularly get calls from people joining pension schemes looking for advice on their pension scheme. They tell me the advisor who looks after the scheme said they don’t provide advice. So members are looking to pay someone to give them advice on a benefit that their employer is providing?
It gets worse. Retiring is a huge change in someone’s life, especially when it comes to finances. You go from earning a regular salary and saving to no more salary and spending your savings. There is an element of vulnerability to it and people need to be coached and advised through it.
Again, I have seen countless cases of ARF forms being emailed out to members and being asked to fill it out. No advice on the other options or funds available and not a hint of charges and commissions. It is not unusual for these schemes to earn 4% commission for that time consuming email. Put that in numbers. If a member accumulates a pension pot of €800,000, they get €200,000 tax free lump sum and €600,000 into an ARF. The broker is paid €24,000 to fill out a few forms!!
As with my friend, lifestyling is the default option for almost all occupational pension scheme. That is, as the member nears retirement, they switch to “safer” funds i.e. bonds. Except bonds aren’t always safe. While central banks across the world tackle inflation by increasing interest rates, this has an adverse impact on bond prices.
So while bonds prices are falling, you are investing more and more into these falling assets as the default model does this automatically.
Below is the fund performance figures of New Ireland’s Managed funds and their Lifestyling fund for someone retiring in 2023. I am not picking on New Ireland, this is the same for all providers. The whole idea behind lifestyling is to reduce risk as you near retirement. But as we can see, with the exception of 1 month figures, the “safer” option has lost more money over 3, 6 and 12 months and by a considerable amount. For someone with €800,000 in their pension pot, that’s a difference of €61,400 over 12 months.
Occupational pensions is a very lucrative business. The big players have put a lot of resources into the online offering for staff. But what good is an online portal if you don’t know what you are doing? Advisors of occupational pension schemes need to step up and provide its members with the advice they deserve. And employers should be ensuring that this advice is provided.
Steven Barrett
13 March 2023