Charges against member accounts - combination of per member and percent of fund

Some AAM readers may be interested in listening in on my interview with Pat Kenny on Newstalk this morning (around 10:20).
The subject matter is my letter of Thursday last to the Irish Times (see attached)

starts at 1hr26m50s

I missed this... [from LinkedIn]

Thanks @redstar
AAM readers may also be interested in the follow-up post on LinkedIn this morning:

Colm Fagan 6 December 2024:
My interview with Pat Kenny yesterday (5 December) wasn't very informative for listeners. Pat and I wanted to talk about different things - never a recipe for success!
I'll list briefly what I wanted to talk about:
1 The AE scheme proposes to discriminate against small pension pots, which is prohibited for commercial providers. That must change, causing a further delay to the start date.
2. Contributions in the first 10 years alone will exceed €20 billion, making it one of the biggest projects ever in the state, yet no independent cost benefit analysis has been completed, not by the ESRI nor by anyone else.
3. The scheme’s fundamental design is exactly the same as for an individual buying their own pension. That is the most inefficient way of doing it. There must be a better way.
4. Almost 30% of NEST contributors drop out each year. The Irish scheme is modelled on NEST. If Irish dropout rates are the same as NEST’s, less than 30,000 of DSP’s projected 800,000 joiners will still be contributing after 10 years. That would be an abject failure. There are special factors in both countries so we don’t know what the reality will be. The ESRI, which employs behavioural economists, should be asked to check.
5. What if the ESRI concludes that the scheme is not fit for purpose? John Maynard Keynes comes to mind: “If the facts change, I change my mind; what do you do, sir?”

I have heard that none of the pension providers are interested, so they have to sweeten the deal. The whole scheme will be a cross between PPARS and the Childrens Hospital. The basics are wrong, the running costs will be huge. There is no common sense. They could slice a big chunk off the costs with the stroke of a pen by getting Revenue to handle the collection of contributions.

Brian Woods’ comment on Colm’s post on LinkedIn.
“This has been a debacle ever since the strawman in 2018. That proposed that 4 providers would compete in the retail market. Worse, for the 99% who don't express a preference they would be put on a carousel between the 4!! The proceeds would be tax free ala SSIA. The charges would be capped at 0.5% AMC. Then the Pensions Council got an independent evaluation of Colm's proposal but then rejected its confirmation of Colm’s claim of double value for money.
Now that we have the Act, more practical gremlins are crawling out than would be found under a large rock. For sure, some of these gremlins will be ironed out by pragmatic common sense but the dead cow on the line is the ideological insistence that higher rate taxpayers would get half the State incentive that they enjoy on conventional schemes.
As for any DSP analysis we haven't seen it, but we do know it is based on the ridiculous projection that 90% of those auto-enrolled will stay the course.
The PK interview did finish by emphasising the need for a pause for a root and branch assessment by the likes of the ESRI (I personally would prefer the Millimans of this world) as Colm has been proposing and Michael McDowell pressed for in the Seanad debate on the Bill.”

Hi @Duke of Marmalade.
My only disagreement with Brian is his suggestion that an outfit like Milliman rather than ESRI should complete the review. My view is that this is a job for an economic consultancy rather than an actuarial one. Their behavioural economists are best placed to opine on such issues as whether Ireland is likely to see NEST-like dropout rates of close to 30% a year, etc. They can also look at the macro issues deriving from the fact that this is a form of sovereign wealth fund. The problem up to now - worldwide - is that AE has been viewed (incorrectly) as a collection of individual DC pensions. An actuarial consultancy would likely fall into the same trap.

Towger said:

There is no common sense. They could slice a big chunk off the costs with the stroke of a pen by getting Revenue to handle the collection of contributions.

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This is an absolutely staggering unforced error despite plans kicking around for half a decade.

I mean there is literally already a state body which interfaces with every single employer in the country. Revenue is already set up to collect PRSI, income tax, USC, ASC, public service pension contributions, LPT, etc. how anyone thought auto-enrolment contributions couldn’t or shouldn’t be handled by Revenue is beyond me.

Dr Strangelove said:

I mean there is literally already a state body which interfaces with every single employer in the country.

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Revenue also do their own enforcement.
NAERSA will have to employ their own teams of people to travel the country ensuring compliance, dealing with liquidators, court cases etc etc. All duplicate work to what Revenue perform on a daily basis. This is a huge man power cost, which will be paid from the employees contributions.
You can be sure if an employer is not paying Tax, USC and PRSI etc, they are also not paying Pension AE.

Towger said:

They could slice a big chunk off the costs with the stroke of a pen by getting Revenue to handle the collection of contributions.

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That's really an excellent point.

Colm, do you have any contacts in ESRI to ask them to conduct their own research and report, regardless of any official Govt request

Hi @TheJackal
I don't really have any personal contacts there. I sort-of know Alan Barrett, the CEO, but I think he would say that completing a root and branch review is far too big for them to take on without a guarantee of government paying for it.

Given the sums involved, both in terms of contributions (by employers, employees and state) and the cost of administering the scheme (NEST is already down well over €1 billion on costs less recoveries from member accounts), it's a complete mystery why ESRI haven't been asked to complete that evaluation, especially since the Pensions Council commissioned an independent report (presumably paid for by government) which concluded that a different approach could deliver higher pensions for half the cost.

Good interview here with Paul Todd, COO of Nest Invest

-Nest finally breaking even, so not drawing down loans from from UK Govt anymore, and can now begin to repay this debt (goal is mid 2030s, started Oct 2012)
-1.8% contribution charge for members until that load is repaid
-Plus AMC 0.3%

So the UK will take 25 years to pay off the loan to set up their AE scheme and they have 30m members.

We're setting up the National Automatic Enrolment Savings Authority to run our scheme. That 0.5% AMC goal looks impossible and will we have a contribution charge for members too?

And in my naivete I presumed that the scale involved would lead to 100% allocation / 0% contribution charge and AMCs as low as you see on US funds, like down as low as 0.20%.

I was/am wrong.



I think PRSAs are available from Royal London Ireland with AMCs as low as 0.40%, and possibly 100% allocation on some contribution amounts.

I still can't fully understand why the economies of scale of AE doesn't translate into lower fees.

NEST lad said they'd drop the 1.8% contribution charge once loan is repaid and then also look at reducing the AMC 0.3%. But they might just keep the profits to buy assets at scale, similar to Candadian pension funds

So looks like those who enter AE in UK anytime from 2012 to 2035 will be the ones screwed by fees, and those entering after will do a lot better

Hard to see how we won't have the same issue in Ireland. The Irish Govt might write off our few billion of a loan to get it to profitability

TheJackal said:

The Irish Govt might write off

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I think you mean the Irish Taxpayer