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How safe is my pension? Thumbnail

How safe is my pension?


Introduction

With the media once again full of stories of what can go wrong with Financial Products and Brokers  Its hardly surprising that one of the questions we are frequently asked is "where does my money actually go, and how safe is it?"

The following analysis relates to a modern, "unbundled" platform-based pension structure  which is our preference due to the greater transparency and wider investment choices as distinct from a retail Life Assurance Contract.

We recently asked an Actuary if they could review the price disclosure of Irish Pensions provided by Insurance Companies and unfortunately they concluded that the task was impossible based on publicly available information. So, to spell that out an Actuary can't work out the real cost of investing in an Irish Pension because the pricing is too opaque!!

Investor Protection

With savings accounts, the simple rule is that up to €100,000 per person per institution is fully protected should your bank go bust. This protection is guaranteed for personal investors but does not apply to companies or other forms of "institutional" investor. Above this amount savers should seriously consider holding more than one bank account with multiple institutions or more lucratively making full use of State Savings products.

However, when it comes to regulated pension and investment products, investors are covered by the Investor Compensation Scheme established under the Investor Compensation Act, 1998. This legislation provides for the establishment of a compensation scheme and to the payment, in certain circumstances, of compensation to clients of firms covered by the Act. However, you should be aware that a right to compensation will only arise where money or investment instruments held by this firm on your behalf cannot be returned either for the time being or in the foreseeable future and where the client falls within the definition of eligible investor as set out in the Act. In the event that a right to compensation is established, the amount payable is the lesser of 90% of your loss which is recognised as being eligible for compensation or €20,000. Your legal rights are not affected by this scheme.

Contrast this with the position in the UK where the compensation limit under the FSCS is £85,000.

From this we can conclude that regulatory protection generally fails to prevent transgressions from happening (like the two examples referenced above) before they happen and the compensation scheme certainly isn't going to provide much comfort if things go wrong. So, what matters for investors is the structural protections that are put in place to protect them.

I wrote at the time of the Custom House Capital scandal that investors are best protected by ensuring that the different parties to a pension service are kept separate from one another.

"Financial services work best when there are clear divisions of trustee, custodian and advisory functions. Investors are put at risk when investment providers, brokers or advisers are able to combine these separate services while having direct access to their clients' funds and assets.

Investors are better protected by making sure their investments are held with an independent custodian who is legally separate from the adviser. Where advisers or brokers directly hold client money, there is always a potential risk to clients' funds."


So, lets look at the different parties to the provision of a retirement planning service and how the different parties must work together to deliver a more transparent and effective outcome for investors.


Roles and responsibilities 

 

Global Wealth


Global Wealth will provide advice on an ongoing basis regarding the continued suitability of the portfolios for your investment and retirement needs, in the context of your overall net worth and taking account of future contributions and withdrawals. Fermat Point Ltd t/a Global Wealth are regulated by the Central Bank of Ireland. 

Global Wealth confirms that they take the necessary steps to analyse your financial situation (including capacity for loss and willingness to take risk), knowledge and experience and investment objectives.

As set out in our Terms of Business, in relation to investment services and instruments, we offer the following services to our customers:

  • Discretionary Portfolio Management: We may from time to time introduce you to firms which have Discretionary portfolio management capabilities. We will guide you to a suitable investment mandate and this will govern how your account is to be managed on an ongoing basis without the need to consult with you on every single transaction provided that the transaction is always within the guidelines established by the mandate. There is no fund research, due diligence or ongoing monitoring required by Global Wealth and consequently this is our preferred way of working and we charge a lower fee; 
  • Advisory Services: An advisory service is where we will offer you advice on your proposed investments, as necessary. Where you have an advisory account, you are not obligated to act on any advice given to you by us and you are solely responsible for your investment decisions. All instructions must be approved by you and signed off before execution. This is administratively more cumbersome for us to operate and requires additional fund research, due diligence and ongoing monitoring. We therefore charge a higher fee for an advisory service and generally only work for more complex, tax planning driven portfolios.

In all cases, Global Wealth confirms that the investment strategy is suitable for you and will record our recommendations and provide you with this statement of suitability which complies with the Regulatory Requirements, which the Discretionary Manager (if appropriate) can request from Global Wealth.

Global Wealth has agreed to provide advice to you on an on-going basis and commits to re-analyse these assumptions and your circumstances periodically, but not less than annually. Should a new Investment Strategy be agreed then Global Wealth will send the Discretionary Manager an updated investment mandate.

A detailed analysis of the performance net of charges of a real  Global Wealth portfolio over almost 10 years can be found here

Global Wealth Client Portfolio compared to the Standard Life Global Absolute Return Fund (GARS) 20/3/2012 to 31/3/2021

For detailed critique of why we never invested any clients with Absolute Return funds, see here 

Independent Custodians

 

We do not hold your funds in our own name. We have appointed highly regulated and respected custodians to provide safe custody and administration services.

The custodian holds clients’ securities separately and distinctly from its own assets.

As segregated assets, they are fully protected in the extremely unlikely event of default or bankruptcy of either the custodian or its sub custodians. In most markets, the custodian operates through omnibus accounts where client securities are held on behalf of clients in the name of the custodian or its nominee company.

This structure provides asset protection for underlying clients as the market recognises the custodian or its nominee as merely the account holder who holds assets on behalf of underlying beneficial owners. This beneficial ownership is reflected in the custodian's book of record.

Custody and reporting services include:

  • Execution and fulfilment of trades in investments on behalf of investment managers 
  • Fully segregated private/institutional client capital and income reporting and valuation 
  • Prompt handling and collection of all trade settlement and investment income to meet cash flow requirements 
  • Provision of dealing accounts in any major currency 
  • Contractual settlement date accounting to meet cash management and foreign exchange needs 
  • Accurate reports and valuations for client portfolios via online secure portals
  • Trade settlement in many of the world's markets through a single point of contact 
  • Transaction history and Consolidated Tax voucher for General Investment Accounts

Leading Edge Adviser Platform (LEAP) 

 

This is an exciting new entrant into the Irish Market and is an association between Conexim and Independent Trustee Company Ltd who have launched a connected Pension and Investment Platform known as LEAP. Founded by a group of experienced and highly respected individuals in the Financial Services Industry, they have developed a unique offering in Ireland. 

The financial services industry is constantly evolving and impending changes to regulation have brought platforms into the spotlight. Historically, a lack of automation, transparency and functionality has driven the need for the development of a diverse platform for the Irish market which is perfectly suited to the operational needs of our business and the portfolio requirements of our clients. 

Conexim 

Conexim was established in 2010 to provide an innovative investment platform and trading service for Advisors and trustees. Conexim is a wholly owned subsidiary of Irish Life. 

All on-platform assets are held with Pershing Securities International Limited (a Bank of New York Mellon company). Pershing’s global custody operations service as of end December 2020 had over $2 trillion in global client assets. The parent company, Bank of New York Mellon had over $42 trillion in assets under custody and/or administration as of end December 2020.

Benefits

  • Single fee for both Trustee and Custody of 0.30% for investment accounts and ARFs and 0.40%pa for pension accounts (0.50% for PRSAs)
  • No dealing charges for investment funds (UCITS)
  • Wholesale Foreign Exchange Rates (0.48% spread)
  • Wholesale dealing charges for exchange traded funds and securities (0.05%) subject to Pershing Minimum fees (€40)

Independent Trustee/Qualifying Fund Manager

 

The independent trustee is appointed by Revenue (Executive Pensions and ARFs) or the Pensions Authority (PRSAs) to oversee the Pension trust and ensure that it continues to qualify as an exempt pension structure.

We generally use Independent Trustee Company Ltd due to the preferential pricing available through the LEAP service.

The Independent Trustee operates a Trust Bank account which receives all payments into and out of the Pension. As negative interest rates now apply to trust bank accounts we generally recommend that clients sweep all contributions over to their dealing account with the Custodian for investment. This means that the client assets rarely rest in the Trust Bank account for any period of time.

How competitive is the LEAP service?


Analysis of typical all in charges in the USA

Analysis of Irish Pension contracts typical charges
Retail Products vs Independent Platform solutions

The following analysis of Irish Pension structures is based on a detailed analysis of the market conducted by Milliman, one of the world’s largest independent actuarial and consulting firms on behalf of the Association of Irish Pension Trustees Ireland.

Small Self-Administered Schemes (SSAS)

Of 17 APTI members surveyed who apply an Annual Management Charge (AMC) that is a percentage of the underlying fund value, the average percentage-based AMC for SSAS schemes is 0.58%, with responses ranging from 0.25% to 1.25%. 

We therefore believe that a Contract charge of 0.40% including an Independent Custodian Fee is extremely good value.

Personal Retirement Bonds (PRBSs)

Of 9 APTI members surveyed the charges applying to Self-Directed Personal Retirement Bonds (PRBs) the average AMC for PRBs is 0.63%, with responses ranging from 0.39% to 1.25%.

The estimated industry PRB charges range from 0.5% - 2.5%[1]

Compared to the Industry Average PRB cost of around 1.50% the total cost of the Portfoliometrix Service (0.55%+0.40% =0.95%) is extremely competitive and allows for the construction of totally independent whole of market portfolios without having to make concessions to any particular asset class.

Personal Retirement Savings Accounts (PRSAs)

7 APTI members provided details of their PRSA AMCs, at an average of 0.78% and responses ranging from 0.4% to 1.5%. In 2012, an estimate of the average industry PRSA AMC was 1.27%, though it should be noted that the percentage charge typically reduces for larger cases, and self-directed PRSAs are generally larger than industry average.

We are therefore confident that the LEAP charging structure of 0.50% which includes the Independent Custodian arrangement and no cost dealing in Institutional class investment funds is therefore extremely competitive in the Irish market.

Compared to the Industry Average PRSA cost of 1.27% the total cost of the Portfoliometrix Service (0.55%+0.50% =1.05%) is extremely competitive and allows for the construction of totally independent whole of market portfolios without having to make concessions to any particular asset class.

Approved Retirement Funds (ARFs)

10 APTI members provided details of charges in relation to Self-Directed Approved Minimum Retirement Funds (AMRFs). The average AMC for AMRFs is 0.59%, with responses ranging from 0.4% to 1.25%. Finally, 10 members provided details of the charges applying to Self-Directed ARFs. The average AMC for ARFs is 0.62% and responses ranged from 0.4% to 1.25%.

Compared to the APTI Average ARF cost of 0.62%, we are therefore confident that the LEAP charging structure of 0.40% which includes the Independent Custodian arrangement and no cost dealing in Institutional class investment funds is therefore extremely competitive in the Irish market. 

Furthermore, the total cost of the Portfoliometrix Service (0.55%+0.40% =0.95%) is extremely competitive and allows for the construction of totally independent whole of market portfolios without having to make concessions to any particular asset class.

About the Association of Pension Trustees of Ireland 


The Association of Pension Trustees of Ireland (APTI) is an industry body representing Irish pension trustees, comprising of 41 member companies. Its members are experienced pension professionals who operate to high technical standards. Members of APTI are appointed as Pensioneer Trustees by the Revenue Commissioners, which gives them approval to manage and administer Self-Administered Pensions and their investments. APTI was founded in 2004 to provide a structured platform for communications with the Revenue Commissioners and The Pensions Authority regarding the administration of Self-Administered Pensions. These interactions have expanded to incorporate all areas of the Irish pensions landscape. APTI seeks to share its perspectives and experience to ensure that all pensions-related topics reflect its deep domain knowledge and latest thinking.          

About Milliman 


Milliman is one of the world’s largest independent actuarial and consulting firms, serving clients for 70 years in Europe, North America and Asia. With offices in 60 locations, Milliman has over 3,200 employees worldwide. Milliman’s Dublin office has provided actuarial consulting services to a range of blue-chip insurance and financial services companies for over 20 years.

[1] Report on Pension Charges in Ireland 2012, Department of Social Protection; http://www.welfare.ie/en/downloads/pensionchargesireland2012.pdf


Investment Fund Managers


Whilst the total pension administration charges exclude fund management charges it should be noted that the underlying funds in our client pension portfolios are generally UCITS funds and we can provide audited annual accounts and transparent Ongoing Fund Charge (OCF) where Irish Unit Linked Pension funds are not required to do so.

The typical OCF for a portfolio is typically in the region of 0.27% to 0.38% due to our ability to access the lowest cost Institutional share classes. For example, the minimum investment in the Vanguard Global Stock Market Index Institutional Plus fund which is used in our client portfolios is €200M and the OCF is currently 0.11%pa

Comparative Size in Billions of Euro as at the end of 2017

Discretionary Investment Managers 

 

Where we outsource to a Discretionary Investment Manager to improve portfolio efficiency we generally appoint Conexim who are authorised to provide discretionary portfolio management, subject to applicable statutory restrictions. 

Conexim shall act in the best interests of the Investor at all times and exercise its discretion in order to meet the Investment Strategy of the Investor, as agreed with the Financial Adviser and documented in the Addendum to the Investment Mandate.

Conexim shall have full discretion to manage the Investor’s portfolio and shall not need to obtain instructions from the Financial Adviser or Investor before entering into a transaction on behalf of the Investor in accordance with the Investment Strategy. Conexim will invest in and switch the investments within the portfolio.

Conexim may make use of the services of its staff, or those of its affiliate companies, or those of other Authorised Firms, including within the PortfolioMetrix group, to execute certain administrative functions in the course of rendering services to the Investor. Conexim may assign or delegate all or part of the portfolio management services provided under this Investment Mandate to any Authorised Firm with the appropriate regulatory permission.

Conexim remains at all times fully responsible for the implementation or otherwise of any advice it receives from Global Wealth.

Conexim will issue you with another statement of suitability based on the capacity for loss information that we provide on the investment mandate

 

PortfolioMetrix Asset Management Ltd

Conexim delegates certain administrative functions to PortfolioMetrix Asset Management Ltd which is authorised and regulated by the Financial Conduct Authority (FCA No 564162) 

Fermat Point Ltd trading as PortfolioMetrix Ireland is the distributing partner for PortfolioMetrix Asset Management in Ireland. PortfolioMetrix provides professional discretionary portfolio management services to financial advisers and private wealth managers including Global Wealth.

We therefore wish to disclose that there is a potential conflict of interest between the two trading names of Fermat Point Ltd. However, Global Wealth is required to conduct a fair analysis of the market (see below) and will only introduce you to the PortfolioMetrix Asset Management Service where it is suitable for your requirements. In every respect Global Wealth will provide advice which is both suitable and appropriate for you.

In order to minimise the impact of this particular conflict, arrangements are in place which means that Fermat Point Limited t/a Global Wealth does not receive any additional benefit from any commission/fee or receive any other monetary benefit in relation to any recommendation which includes Portfoliometrix services.                  

For the avoidance of doubt, Global Wealth reduces its fees to reflect the additional payment arising from PortfolioMetrix Ireland.        


Compared to almost any other option in Ireland, that has proved to be a successful investment strategy