THE charges and commissions associated with personal pension plans were highlighted last week when Equitable Life Assurance took out full page advertisements in the national press showing just how low their costs are in comparison to 12 other major pension providers. Using figures gathered by the independent actuarial firm Compar Ltd., Equitable illustrated that the difference in costs between pension suppliers can amount to a pension fund payment difference of thousands of pounds between those who buy a low cost pension and those who purchase a fund with high charges. The example given concerned a man aged 50 when he started his level, as opposed to indexed, contributions of £100 a month, (ie. £1,200 a year.) He retires ten years later, aged 60. It was assumed that all the companies surveyed achieved the same 9 per cent annual growth rate.
The Equitable Life advertisement was in the form of a bar chart and only showed the impact that commissions and charges made on the maturity value of the unit linked pension fund after 10 years, which at 9 per cent growth was £20,565.
In order to give Family Money readers an even clearer picture, we have translated that chart into cash values - the real money value of the charges and the real value of each of the 13 pension plans after all the charges are deducted from the benchmark figure of £20,565. These comparative figures are contained in the table below.
That Equitable Life's costs and maturity values are superior to the others is undisputed. As the table shows, the difference in cost and maturity values between Equitable Life and Lifetime is £2,600. Twenty year values, which were not reproduced by Equitable, but are available show a very similar picture, though the ranking of the companies changes with Friend's Provident, Norwich Union and Ark Life jostling with Hibernian, Canada Life and Eagle Star for the higher positions.
While Equitable Life should be commended for keeping its charges so low - it does so by not paying broker commissions - the table is nevertheless selective.
For example, a number of insurance companies and brokers have pointed out that the above figures compare a nil commission product (the Equitable), with those that carry a 60 per cent upfront commission and a three per cent annual renewal charge.
Yet virtually all of the life companies offer nil commission pension plans to clients through intermediaries, who then charge the client fees. Such an arrangement will immediately result in the maturity values of the other companies improving. However from the client's point of view the broker's fee must then be factored in.
Family Money also spoke to Lifetime, the life assurance arm of Bank of Ireland about its seemingly high costs (it appeared at the bottom of the chart). Lifetime has recently brought out a new, nil commission pension plan which includes a 5 per cent premium charge and a two per cent annual fund related charge. After 10 years, the latter drops to 0.75 per cent. (Equitable Life charges a 5 per cent bid offer spread and a 0.5 per cent annual fund charge.)
Lifetime's poor ranking has certainly caused embarrassment in the company. Managers attempted to defend its cost structure by quoting other Compar Ltd. statistics which shows that its new pension performs closer to the top than the bottom of the rank when higher premiums are invested. The high range of premiums is the £200 to £250 per month bracket. Further, such premiums should be indexed. The Bank claims this is a more typical contribution scenario for many self employed people, especially directors. Company directors' pensions have become a very lucrative business for which all the life companies are now bidding.
Lifetime also insists that its fund's break even point, the date when contributions and fund values merge, is also second only to Equitable Life at all premium levels. This reflects the way the charges are set and is of major importance to people whose job pattern or career path is irregular.
The problem with this argument, from a consumer perspective, is that Lifetime has never positioned itself as a life and personal, pensions provider for higher net worth professionals or directors. It very clearly is a company with a large captive market of bank customers who represent all walks of life. All are being encouraged to buy an AVC or personal pension with Lifetime. A new product aimed at those making higher contributions, or to those who are aware that they may transfer or discontinue their pension contributions after just a few years, does not take account of the wider customer picture.
Equitable Life's comparison exercise confirms what it has been saying since it entered the Irish market five years ago: that its low cost/expense ratio of 4.8 per cent, plus a consistently strong fund performance is the reason for superior maturity values. The no commission philosophy, which is as old as the 250 year old company, has helped to push it to the top of the new sales league in Britain.
This exercise also confirms something else - that the cost issue has become important enough for the life companies to reassess the charges imposed by their industry. Many would argue that a change in commission levels for pensions, that is being introduced on January 1st, will result in poorer rather than better value. What is apparent is that, more than ever, investors need to seek out independent, fee based, advice.
