Business And Leadership, Ireland's Business News Service

The study, which was undertaken by IFG Corporate Pensions, found that pension charges can significantly impact pension performance. 

Management fees
For example a 0.5pc reduction in overall management fees could add 17pc 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 a pension fund by almost 13pc.

Taking a typical employee on €50,000, who will need a fund of over €700,000 to retire on a two-thirds of salary pension, the overall savings could hit €100,000, the IFG study showed.

Know what you are paying in charges
“The key for pension scheme members is to establish what they are paying and what exactly they are getting in return.  Concepts such as ‘bid/offer spreads’, ‘fund management fees’, ‘encashment value’ and ‘allocation rates’ are often used,  preventing pension holders from knowing exactly what they are paying out in fees and charges,” advised Fionan O’Sullivan, Director of IFG Corporate Pensions.

“While Irish pension funds recouped some of the 2008 losses during 2009, they still have some way to go. To put the dynamics of pension performance into perspective, when you lose 33pc of your fund, you need 50pc positive performance to get recover to your original position. Any savings that can be made on fees and charges will boost the fund in the long-run,” O’Sullivan added.

Defined contribution pensions
IFG said that while defined benefit schemes do still exist, the issue of fees and charges has greater relevance for the thousands of defined contribution (DC) pension holders throughout the country.

In many larger DC pension plans, the employer will cover the costs of administration and consultancy and will sometimes cover the costs of any life insurance, IFG noted, with the employee paying the investment management fees. These fees are rarely structured in a transparent manner, it said, adding that such fees are deducted by the fund manager at source and unless the member studies their employee booklet in significant detail, they are usually unaware of the charges being deducted from their fund.

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

Switching from active to passive fund management
IFG also said that many pension holders can negotiate a significant reduction on their management charge by switching from an active to a passive fund management approach, but that they should weigh up the benefits and the significant difference in the costs associated between the two approaches.

“Active funds attract a much heftier fee and members need to establish if they are worth paying or if the alternative of opting for a less expensive passive fund option is more beneficial. The higher cost of the active fund management can have a significant impact on your overall fund balance at retirement, a factor often ignored or indeed misunderstood by members. The average active fund charge would be around 0.6pc and upwards while passive fund charges would cost between 0.1pc to 0.2pc,” O’Sullivan said.