Maximum AE charges will be 60c per week fixed plus .09% AMC - you heard it first on AAM

[Duke of Marmalade]

This was the most striking reveal of Tim Duggan at last week's DSP.
They are still finalising the charging structure but he tells us that:
There will be two charges:
a fixed charge of 50c/60c per week (c. €30 p.a.)
an AMC not exceeding 9 bps (.09%). (He actually says low single digits but I think he meant "low i.e. single digits")
It was the AMC max that bowled me over. Mr Duggan stated that it would be "phenomenally low" compared to the market. He's right there. Even the best company schemes with over 50 members would charge 50 bps or more AMC.
The Regulatory Impact Assessment said it expected the average gross pay of AE members would be €35k. Taking this as typical I projected what a standard rate taxpayer would accrue compared to a very competitive company scheme (charging 50bps AMC).
Comparing like for like and allowing for the scheduled build up of contribution rates I calculate that a 23 year old AE entrant would have a 9% bigger fund at retirement that their counterpart. And that is before allowing for the extra incentive in the 1 for 3 top-up - that would bump the superiority up to 13%.
When the situation matures, and the contribution rate is 6% throughout, the combined superiority of AE over the best conventional would be over 14% for the standard rate taxpayer.
For the 40% taxpayer of course the State incentive in AE is only half what it would be with tax relief and the "best" company scheme would be 4% better for this constituency. But the break-even situation for the 40% taxpayer would be 55 bps AMC for a company scheme.
@Itchy @nest egg @TheJackal @faketales @LDFerguson @Towger

 

[Protocol]

Who will earn these fees? NAERSA?

That AMC is below the 0.20% I have seen on some large ETFs.

Although on checking now, I see some ETFs at 0.10%

But how is 0.09% possible in a small market like Ireland?

 

[Protocol]

I watched the video. It is clear that the AMC will be <0.10%.

This is great.

But I'm surprised that it is so low, lower than the UK NEST fees, see below.



UK AE NEST fees

We have the same low charges for all members. This stays the same whether a member is contributing or not, whatever fund they’re contributing to, and no matter how much is in their retirement pot.

These charges are made up of two parts:

• a contribution charge of 1.8% on each new contribution into your pot
• an annual management charge (AMC) of 0.3% on the total value of your pot each year

 

[Duke of Marmalade]

But how is 0.09% possible in a small market like Ireland?

As an aside it is quite staggering that the charges have not been decided yet, with brokers actively advocating "AE avoidance " strategies.
I think the DSP are in some philosophical bind whereby they feel they can only charge the punter the "cost" of the service. Duggan made much of the investment management coming in way below the 10 bps that was specified in the RfT. But we know investment management of a fund this size is single figure bps but market convention is to charge AMCs a multiple of this to cover all costs (and profit). A high quality company scheme would have no contribution charges and fixed charges simply are not a feature of the Irish pension landscape.

 

[Duke of Marmalade]

Developing that last point. The novel (for Ireland) introduction of fixed charges really does seem like a fetish. Administration is broadly a fixed cost so the DSP must feel they can only level fixed charges for this (something to do with loaves of bread).
But what about the commitment to keep the sum of all charges below 50 bps AMC? The below graphic is a tad churlish for in general it is impossible to criticise this unbelievably competitive charging structure.
I took the AE average gross pay of €35k and projected the effect of the fixed charge over the 10 years of building up to the 6% contribution rate. This is what the fixed charge build up would be in AMC bps terms. It would be Year 5 before this (combined with the investment AMC) would be less than 50 bps.

 

[gaelic_oc]

From the video, I could hear Duggan say "All of the bids *significantly* beat .1%". Which makes me think he might actually have meant low single digits basis points for the AUM charge.

But how is 0.09% possible in a small market like Ireland?

Perhaps it's possible because whatever company gets the contract is pretty much guaranteed to accumulate many billions of AUM over the coming years/decades.

0.05% of €50 billion would be €25 million in AUM fees collectable per year. And 50c per week times 600,000 workers would be €300,000 per week to cover the admin.

So not so small when you look at it that way.

 

[Duke of Marmalade]

0.05% of €50 billion would be €25 million in AUM fees collectable per year. And 50c per week times 600,000 workers

Maybe you picked up that 600,000 from the clip. Actually the clip follows a segment where he was singing the praises of Tata (who will be doing the admin). I remember him saying they were gigantic with 600 million employees world wide. I was still turning that number over in my mind when he made the clarification that he meant 600,000
They are basing their projections on 800,000 eligible for AE with 10% opting out i.e. 720,000 staying the course.
No surprise that they will be getting investment management for single bps. Big surprise that they are passing these "wholesale" costs through to the punter.
The admin charges would be over €20m, which they have indicated in replies to Parliamentary Questions will easily cover the costs.

 

[Dave Vanian]

Perhaps it's possible because whatever company gets the contract is pretty much guaranteed to accumulate many billions of AUM over the coming years/decades.

0.05% of €50 billion would be €25 million in AUM fees collectable per year. And 50c per week times 600,000 workers would be €300,000 per week to cover the admin.

So not so small when you look at it that way.

I had to dig out the "big" calculator and I hope I didn't miss a zero, but to get €50 billion from 600,000 members would mean each one had an average of €83,333 in the pot.

If the average pay of an AE customer is €35,000 and it will take 10 years before the scheme even gets up to full contribution rates, it will take a LONG time before the €50 billion figure is even possible. And it's only possible if all 600,000 choose to stay enrolled, contributing for decades, don't retire, die or leave the country, don't move into a higher tax bracket in a new job and join a conventional pension scheme etc. etc.

whatever company gets the contract is pretty much guaranteed to accumulate many billions of AUM over the coming years/decades.

I know we're both only speculating but I would speculate that the take-up will be far, far lower.

 

[Duke of Marmalade]

The RtF for the investment management contract indicated a FUM of c. €20bn after 10 years, I think. The fact is there is very little to passive investment management. I felt like making a bid myself using my laptop.

 

[Duke of Marmalade]

99% of folk do not make an investment choice - happy with the default offering. If these charges are maintained, in time every standard rate taxpayer will be in AE. In fact existing standard rate taxpayers already in a scheme will be pretty peeved anyway that they are not getting the 1 for 3 top-up (a third better than tax relief) the fact that My Future Fund AMC is a mere fraction of what they are paying will add insult to injury.

 

[Brendan Burgess]

Is this the full charge which customers face?

Is the administration separate?

While it costs very little to administer a big static fund, surely it would be very expensive to have 600,000 customers with money being deducted every week. They would have a lot of questions and complaints.

They could not be managed for 0.1% a year.

 

[Duke of Marmalade]

Is this the full charge which customers face?

They could not be managed for 0.1% a year.

The charges will be 50c or 60c per week fixed per member for admin plus at most .1% for investment management, though I don't know how the .5% cap will work. We know that 0.1% is adequate for investment costs because of the RtF process.
As to admin costs the TCS contract costs €100m for 10 years. Replies to PQs say that NAERSA costs will be of the same order. So let's say all in €20m per annum. That would be €28 per annum each, so 50c - 60c a week just about meets those costs.
As I said it seems to me that there is some internal rule that they should not seek to make profits out of charging for services.
As a thought experiment, say they decided to charge for the costs of administering the Social Insurance Fund on top of the PRSI contribution, they would find it very difficult to charge 5 times the actual cost.
But what about the sunk costs? NEST with a scale about 5 times our AE has an accumulated loan to the British Government of £1bn after 13 years.

 

[Duke of Marmalade]

If the average pay of an AE customer is €35,000 and it will take 10 years before the scheme even gets up to full contribution rates, it will take a LONG time before the €50 billion figure is even possible. And it's only possible if all 600,000 choose to stay enrolled, contributing for decades, don't retire, die or leave the country, don't move into a higher tax bracket in a new job and join a conventional pension scheme etc. etc.

They claim to have negotiated low single figure bps for investment management and this is what they are recharging, so to that extent they are indifferent as to how big the funds get (except for this 50 bps cap on all charges).
Take NEST as an example and it is typical of similar other UK schemes. Nobody stays in NEST for any length of time. After 13 years they have 3.8 million members actively contributing but another 10 million members who once contributed but are now "deferred". This is the nature of the beast. It is not so much that people "die, retire or leave the country", it is that they change jobs and are unlikely to be moving from a NEST company to another NEST company. We might be different as My Future Fund is a State monopoly.
NEST accumulated funds after 13 years are £50 billion. Its metrics are about 4 times that of My Future Fund so that would indicate somewhere between €10 billion and €20 billion after 10 years.
But you are right, the real elephant in the room is the discriminatory treatment of 40% taxpayers. If that is not addressed I can't see any such folk in My Future Fund after 10 years.

 

[Protocol]

NEST accumulated funds after 13 years are £50 billion.

Why are the NEST fees so much higher than our planned fees?

Is our 60cent fixed weekly fee greater than their 1.8% contribution fee?

How can we manage 0.09% AMC while it's 0.30% in the UK?



UK AE NEST fees

We have the same low charges for all members. This stays the same whether a member is contributing or not, whatever fund they’re contributing to, and no matter how much is in their retirement pot.

These charges are made up of two parts:

• a contribution charge of 1.8% on each new contribution into your pot
• an annual management charge (AMC) of 0.3% on the total value of your pot each year

 

[Duke of Marmalade]

Why are the NEST fees so much higher than our planned fees?

Or why are My Future Fund fees so much lower than NEST's? This is a completely new development as up to now folk like me and indeed the DSP and its Minister have "benchmarked" MFF against NEST.
In the UK AE charges must not be greater than 75 bps AMC. But they do have a concept of "equivalent" contribution charges or fixed charges. This is the current situation over there:

The Strawman envisaged four commercial retail providers competing for AE and it was stipulated that charges could not exceed 50bps AMC. There was big pushback by the industry against this cap and indeed it is difficult to see how it could be justified vis a vis the UK's 75 bps.
In the event the DSP threw the idea of commercial competition out the window and went for a State monopoly.
Very conspicuous in any communications since then has been the absence of any reference to the charges - until last week that is.
It seems that they have had an epiphany - why should they level commercial style charges? 50 bps is about 10 times the cost of managing the assets - they must see it as misleading and open to challenge. So they are simply going to pass through the wholesale investment management charges to the punter.
The other aspect of commercial AMCs is that they cover much more than investment management - they cover all admin costs as well. The DSP have decided that this is too loose and that admin costs should also be passed on on a look through basis which as Duggan explains leads essentially to a fixed charge.

Is our 60cent fixed weekly fee greater than their 1.8% contribution fee?

For the average €35k punter the 60c weekly fixed charge is equivalent to a contribution charge of 2.97% in years 1 - 3; 1.49% in years 4 to 6; 0.99% in years 7 to 9 and ultimately 0.74%.

How can we manage 0.09% AMC while it's 0.30% in the UK?

As I have surmised above My Future Fund appears to be charging on a look through basis to the "wholesale" costs. The mystery is really how does NEST have an accumulated loss of £1bn after 13 years with its economies of scale and those heavily loaded charges?

 

[Duke of Marmalade]

Headline in Sindo article:

This is referring to the fact that the 1 for 3 top-up is worse than 40% tax relief.
It is based on the erroneous statement that the 1 for 3 top-up is equivalent to 25% tax relief, cited by many including the DSP and its Ministers.
1 for 3 top-up is equivalent to 25% tax relief for a taxpayer subject to 25% tax, of which none exists.
1 for 3 top-up is equivalent to 26.67% tax relief for standard rate taxpayers and equivalent to 20% tax relief for 40% taxpayers.
So the correct headline should have read "worse off by 20pc".

Anyway, that aside the main thrust was to encourage employers to set up a scheme to avoid AE.
Conspicuously absent was any reference to charges. in fact the AMC on a company scheme will need to be less than 0.55% to be superior for the 40% taxpayer.