HAVING your pension reviewed is always included in the sort of financial wealth check provided by independent financial advisers when they first meet a new client. But what sort of findings emerge from such a review?

Paul Overy is a director of Financial Engineering Network, (FEN), a fee based Dublin brokers who create bespoke investment and insurance products for their clients. Pension reviews at FEN not only establish whether clients are funding their retirement adequately and rank the performance of the investment funds, but also investigate whether the plan represents true value. Hidden charges are a major target of investigations.

Mr Overy provided Family Money with two cases of director's pension plans and one of a group pension scheme in which FEN was asked for its opinion. In the first case of a company director, aged 47, a total of £49,965 had been invested since the summer of 1990. The pension company quoted very attractive total fund growth over the six years of 21.8 per cent per annum. Yet the total cash value of this person's pension fund was just £53,764.00.

"What we discovered was that the actual internal rate of return - that is, the growth rate after all charges, including initial and renewal commissions, the 5 per cent bid offer (or investment) charge and annual management charges - was a mere 2.9 per cent per annum. Of the nearly £50,000 invested, £24,814.09 had been absorbed in direct and indirect charges," explains Mr Overy.

As much as £17,600 had been paid out in initial and renewal commission to the broker who had sold the policy in the first place, while the balance was taken in the farm of the annual hid offer spread and the 0.75 per cent annual fund management fee. "The cost of the initial commission was very high 64 per cent of the total charges to date - but over the term of this contract, the impact of the commission will decrease while the management charges will continue to rise, we estimate to such a level that it will have reduced the real value of the pension at retirement by as much as 11 per cent."

Case two involved a 15 member group pension scheme set up in the spring of 1986. Total premiums paid in amounted to £126,490. A with profit scheme, the pension company informed the trustees earlier this year that the fund had achieved an annual yield of 11.4 per cent per annum, yet the total value of the fund was just £128,992, the equivalent of an internal rate of return of less than 2 per cent. How was this possible?

"With profit funds are not as transparent as unit linked ones and so we can only make a number of suppositions about the charges involved," says Mr Overy.

He suggests that identifiable direct charges for commission to the broker and the with profit equivalent of the 5 per cent bid offer spread amounted to £18,543. The impact of life cover and the management charge could not be ascertained, "but one thing we did discover from this review was that the broker set up the pension as 15 individual schemes, rather than a single group plan."

Instead of costing the members, through the fund, about £100 a year in policy fees, the cost was £1,000 a year.

Since there was no financial advantage to the broker in setting up 15 separate plans instead of one, Mr Overy suggests "it was done out of ignorance". The pension company involved "should have pointed out his error, but didn't".

Case three concerns another company director, aged 58, who was convinced to take out four separate pension plans in March 1986, March 1988, October 1988 and December 1994 but all with the same company. (These days, brokers recommend spreading your risk by taking out pensions with different companies.)

Since 1986 he has paid in £74,803 in premiums and was told that the current value of his fund was £101,303. Direct and indirect charges that have been identified amount to £12,260.71 with commissions amounting to just over half that total. In all, nearly 18 per cent of all the premiums have been absorbed so far in charges.

The accompanying table shows the premiums paid in to date, the quoted growth rate from the pension company and the real, internal rates of return that Mr Overy discovered after all charges were deducted.

Aside from giving clients a wider and more accurate picture of existing pensions, Mr Overy says independent, fee based brokers are also in a position to sharply bring down costs in a pension contract.

"The impact of commission looks very high in the early years, as case study one shows," he says. "But in all fairness to commission paid brokers, over the longer term the impact does diminish while the company's fees and charges begin to have a greater effect on the fond values.

"Virtually every new pension product on the market gives intermediaries a number of commission options - nil commission, spread of commission, tiered commission and every investor should be aware of this and discuss the option they prefer.

"What we aim to do is to not only reduce the impact of the commission on the fund by charging a fee instead (it can amount to about half the price of a standard commission) but which results in 100 per cent allocation of premiums, before company charges, directly into the fund.

The 5 per cent bid offer on every investment allocation is the next area that we can work on by getting the company to increase the initial allocation to the fund, to say, 104 per cent. When the 5 per cent bid offer spread is deducted the allocation is now 99 per cent, rather than 95 per cent.

Independent advisers - and it should be said, many commission based ones also provide clients with a regular assessment of the investment position of their fund, how the fund managers are performing from year to year and advise on any changes that are occurring within the pension company. Annual statements - depicting not just the quoted fond performance, but the real cash value after all charges are also sent out to clients.

A proper review of a pension fond should also include the establishment of the risk strategy of the investor, according to Mr Overy.

"Perhaps the only certain thing these days is that the client's situation is going to change at some stage over the life of the pension. The policy has to be flexible enough to change with the client, without incurring too many costs."