Hidden costs in private pension funds

CHARGES associated with private pension funds are costing many people up to €100,000 in lost pension earnings, a study undertaken by IFG Corporate Pensions has found.

The study found that a 0.5% cut in the overall management fees could add up to 17% to the final pension fund of a person who switches to the lower cost funds 40 years from retirement.

“Similarly, over a period of 30 years the same reduction in fees will increase their pension fund by almost 13%,” IFG said.

IFG said across the life- time of a pension that needs to reach €700,000, a typical employee on €50,000 aiming for a pension of two thirds salary could hit €100,000.

IFG said the thing to do was to switch from an active to a passive fund management approach.

“The key for pension scheme members is to establish what they are paying and what exactly they are getting in return”, it said.

Terms such as bid/offer spreads, fund management fees, encashment value and allocation rates are often used by sellers of funds.

Use of such language prevents buyers from knowing exactly what they are paying out in fees and charges, said Fionan O’Sullivan, director of IFG Corporate Pensions.

On pension performance he said pension funds recouped some of the 2008 losses during 2009, but still have ground to make up.

“To put the dynamics of pension performance into perspective, when you lose 33% of your fund, you need 50% positive performance to get recovery to your original position.

Savings that can be made on fees and charges will boost the fund in the long-run, he said.

In many larger DC pension plans, the employer will cover the costs of administration and consultancy, he said.

Workers however, will have to pay the investment management fees and they are rarely presented in an open manner, he said.

These are deducted at source and members are usually unaware of the high level of charges involved, he said.

In the case of smaller employee and self-employed pension funds, all charges are invariably borne by the individual.

“Active funds attract a much heftier fee and costs can have a significant impact on your overall fund balance at retirement, a factor often ignored or indeed misunderstood by members,” he said.


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