FREE KIC - NO. 71 OCTOBER 11
MORE PENSION CONFUSION
Last month I criticised the government for causing confusion around pensions. This month I am going to criticise pension providers for the part they have played in adding to the confusion. The catalyst for doing this was provided by George Lee in the RTE documentary "Pension Shock: The Future is Now". (The documentary came out a couple of weeks after I had written last month’s opinion piece and as soon as I saw it I realised that my original piece was not broad enough.)
Before I go on to talk about the interesting aspects of the documentary I want to be slightly critical of one aspect of the programme. In my opinion the programme was a little disjointed and it may have left the average person confused on some fundamental issues. I believe that the programme did not explain the basic difference between occupational and personal pensions. Nor did it explain properly the difference between defined benefit and defined contribution schemes. I realise that the programme ran the risk of boring people if they did this but I believe that informing people in an entertaining way is part of the art of a documentary maker.
I think terms like “non-demographic claim” add to the confusion and give pensions a bad name.
George also spent a lot of time talking about sky high charges and fees and he interviewed Bridget McNally an academic from Maynooth University. She talked about the conclusions she has reached from her research. She said that the charges can be quite dramatic. This sounded so interesting that I thought it would be interesting to read her research but to my disappointment it does not appear to be publicly available. I searched the Maynooth website but there is nothing in her publications section. I therefore have to take her word that the research is accurate.
It is also important to point out that I have not even mentioned other aspects of pension fund costs like allocation rates and policy fees. At least these have to be disclosed but I think that many people struggle to understand exactly how these things end up costing them money.This was just an attempt on my part to highlight the fact that current charging structures are confusing.
The UK has had its own problems in this area and they are about to try a fairly radical change in their charging system. They are going to introduce a system whereby consumers pay a fee for financial advice. I believe that this system should be introduced here because it surely cannot be as bad as the current commission system with its use of allocation rates and policy fees on top of management charges.
Finally I want to turn to the subject of performance. George highlighted an OECD report that showed Irish pension funds as being the worst performing funds in the whole of the OECD area. He basically said that the managers of these funds had gambled on the stock market and got it wrong. This is a fascinating topic and one that could be the subject of a whole opinion piece but all I want to say at this stage is that in my opinion it is harder to find a solution to this particular problem. The numbers however speak for themselves because a decade of poor returns has added to the sense of confusion and disillusionment.
In conclusion I want to say that I genuinely feel sorry for anyone trying to deal with the subject of pensions. The government and the pension industry have managed between them to create an almighty mess. George Lee is right to talk about it but I worry that he may have added to the confusion. I therefore hope that Minister Joan Burton can surprise us all by starting the process of simplification.