Pension fund charges that make retirees poor

"For too long, pension savers have been at the mercy of their pension provider." 

Pension fund charges make retirees poor.

UK

Excessive pension fund fees capped by minister

"Full frontal assault" on pension charges revealed by minister could add thousands to workers' retirement pots

Pension fees will be legally capped in a move that will prevent workers from being “fleeced” of hundreds of thousands of pounds, ministers will announce on Wednesday.

Steve Webb, the pensions minister, said the limit is part of a “full frontal assault” on charges that can consume as much as half a worker’s retirement savings.

Older workers with long-standing occupational pensions are most exposed to what Mr Webb described as “excessive” fees.

The Coalition will present the cap as the latest in a string of measures they say will help households struggling with the rising cost of living.

The cap could be set as low as 0.75 per cent of the funds being managed, a lower level than previously proposed.

An Office of Fair Trading (OFT) investigation into the £275 billion pensions industry concluded that millions of workers are left short-changed and bewildered by retirement schemes that carry a complex web of up to 18 different hidden fees.

“For too long, private pension savers have been at the mercy of their pension provider. Apparently 'low’ charges such as 1 per cent per year can mount up to a huge sum over the course of a working life.”

A worker paying £100 a month into a pension with a 1 per cent charge will see £160,000 wiped off their retirement pot over a lifetime of saving, Mr Webb said.

UK announces 0.75 percent cap on annual pension scheme charges

Webb said the cap would transfer 200 million pounds ($331 million) "from the profits of the pensions industry to the pockets of savers" over the next 10 years.

But insurer Legal & General said the cap could have been set even lower and that one of the reasons people were not retiring with large enough pension pots was high charges.

"We would have liked the government to have capped auto-enrolment default schemes at 50 basis points, but we welcome the direction of travel," said Adrian Boulding, L&G's pensions strategy director.

However, even 0.75% is 10 times higher than the management fee for Norway's pension funds. Even 50 basis points (0.5%) is still very high.

Norway

According to the Norwegian Ministry of Finance report on the management of the Government Pension Fund in 2013, the management fee was only 0.07% for the Government Pension Fund Global and 0.09% for the Government Pension Fund Norway. The GPFG has about 5000 billion NOK (about US$750 billion).

The annual return, after deducting management fees, of the Norway Government Pension Fund Global is
- 9,93% for the last 12 months (Q3 2014 report)
- 6.3% over the last 10 years
- 5.6% since Jan 1998.

Singapore

The Central Provident Fund, which has a balance of S$260 billion contributed from worker salaries, is entirely managed by the Singapore Government. The government guarantees an interest of 2.5 to 4%, with an average of slightly more than 3%.

The CPF money is reportedly invested by GIC. The reported annualised returns are
- 12.4%,
- 7.0% and
- 6.5% for the five-year, 10-year and 20-year time periods respectively.

In return for the guaranteed return of about 3%, the Singapore government takes away any investment returns over that. For example, for the last five-year period, the investment return is 12.4%. The CPF interest is about 3%. The government management fee works out to be about 9%. This is 100 times more than the management fee rate (0.09%) for the Norway government pension funds.