Ms Patricia Murphy:

I thank the committee for its invitation to present the findings of the report on pension charges. The committee will have received copies of my speaking note. Copies of the report have also been provided to the committee.

My name is Patricia Murphy and I am the principal officer in the pensions policy section of the Department of Social Protection. I am accompanied by Mr. Robert Nicholson, assistant principal, pensions policy, Mr. Andrew Nugent, assistant head of policy at the Pensions Board, Mr. Joe Morley from the Central Bank and Mr. Niall McGrath from PricewaterhouseCoopers, who provided support in the report's preparation.

The report was requested by the Minister for Social Protection to gather information on the levels of pension charge levied on private and occupational pension arrangements for the purpose of assessing whether charges are reasonable and transparent, and to report on the findings and make recommendations, as appropriate, to the Minister and the Government. This is the first comprehensive Government report on the subject. The work was led by the Department of Social Protection with a steering group that included representatives from the Pensions Board and the Central Bank. Assistance throughout was provided by PricewaterhouseCoopers.

A primary objective of the research was to undertake a fact-finding exercise on the charging structures that apply across the various pension arrangements and provide an insight into the breakdown of charges and costs relating to pension provision in Ireland, with the goal of enhancing the understanding of the impact of such charges on the investments of pension scheme members and policy holders. The scope of the research focused on costs arising during the pension saving cycle from initial set-up to the point of retirement.

In undertaking the research, pension arrangements were divided into two main categories: employer-sponsored pension arrangements, which included defined benefit schemes, defined contribution insured schemes, defined contribution non-insured schemes, and public sector AVC schemes; and individual pension arrangements, such as retirement annuity contracts, executive or one-man pension plans, standard personal retirement savings accounts, and buy-out bonds.
Pension charges can be broadly categorised as disclosed or non-disclosed, which also is implicit. Disclosed charges vary in nature and include items such as an annual management charge, allocation rate, policy fee, bid-offer spread, exit fee and cost of commission distribution. Non-disclosed implicit charges relate to underlying costs of investment management, such as custodianship fees. These types of additional cost will have an impact on long-term pension values to differing degrees and are not typically disclosed to individual pension savers.

During the research, questionnaires were issued to the following: occupational pension scheme trustees, for those pension arrangements where trustees are in place, with 340 out of 1,015 responding; life assurance companies, for those pension arrangements in which life assurance companies were the predominant provider, with 12 out of 14 providers responding; investment management, with 8 out of 9 responding; and pension advisers, who often provide the link between trustees, employers and individuals and pension providers, with 37 out of 60 responding.

With regard to conclusions, the report highlights a wide range of issues with regard to pension charges and identifies a number of serious problems. It is recognised that the provision of pension schemes cannot be cost-free. It is also clear that there are major challenges to be addressed in the two main areas of reasonableness and transparency.

On reasonableness, the report concludes that there is a considerable variation in the range of charges imposed. Some schemes and individuals appear to be paying more than they need to. Smaller occupational pension schemes and individual pension arrangements appear to be comparatively expensive. A member of a defined contribution scheme with a final pension fund of €400,000 could lose up to 15%, or €60,000, in charges. An individual with a final pension fund of €400,000 could lose up to 30%, or €120,000, in charges. The research indicated that, as a rule of thumb, every 0.25% increase in the reduction in yield, which is the annual cost of all charges applied to the fund, results in a decrease of 4% in the final projected value of the pension fund.

With regard to transparency, the report concludes that there are deficiencies and inconsistencies in current practices and a culture of providing clear information in a simple manner is not evident. It also concluded that improvements in disclosure requirements, including those for pensions, were introduced in the Central Bank's 2012 consumer protection code and these should enhance transparency for those consumers covered by the code. There are also various ongoing developments at EU level which should lead to stronger consumer protection over time. The report may also be of interest to other agencies that have a role in market regulation and consumer protection.

Developments on broader pensions policy could also have a significant impact given that the research clearly identifies the importance of economies of scale in driving down charges. For example, the proposed introduction of an auto-enrolment pension scheme for all employees may be the most effective way to introduce change and could have a major impact in reducing charges, particularly for those people with small pension funds and reduced pension expectations.

The research also observed that the number of occupational pension schemes with legacy pension charging structures is small. A key finding is that scheme review and amendment, known as re-brokering, is significant in the case of occupational pension schemes and is also relatively common in individual pension arrangements.

The practice of applying commission is prevalent in defined contribution insured schemes but is particularly widespread within individual pension arrangements. There is no standardised approach to providing information on the impact of commission payments and the research shows that the various approaches used will affect members differently depending upon circumstances - for example, their age and period to retirement.

The recommendations in the report are principally focused on what can be achieved relatively quickly by improving regulation and best practice in disclosure. A summary of the recommendations is set out on pages 19 and 20 of the report and include the following proposals: develop approaches to improve consumer, employer and trustee awareness and knowledge of pension charges, which should ensure that information is clear and concise, with charges standardised where possible and based on best practice; develop a communications action plan on pension charges; review occupational pension disclosure regulations specifically to provide for the issuing of an annual statement to all deferred members, improve the information provided in the statement of reasonable projection, and review the need for focused detail; monitor developments and continue efforts to develop a single standard measure that would assess all costs and charges and thereby enable easier comparisons to be made; continue to monitor the implementation of the 2012 consumer protection code; conduct further research on the drivers behind consumer choice of individual pension products, with particular reference to PRSAs; ensure data on charges is collected on a periodic basis, with three-yearly intervals considered appropriate; and evaluate the impact of this report, these recommendations and future EU developments after two years and assess whether further and more stringent recommendations are required.

Individuals and bodies have been given an opportunity to consider the report and its recommendations and respond at the end of January. I thank the Chairman and the committee for inviting the Department here today. My colleagues and I would be happy to answer any questions you may have.