Here’s a question: if you take out a pension product or investment and you’re offered an allocation rate of 97 per cent, 102 per cent or 105 per cent, which rate would deliver the cheapest outcome?
Tricky, isn’t it? That is why the Financial Services Ombudsman awarded €3,000 to a retiree earlier this week in a complaint against a broker about how fees and commission on an approved minimum retirement fund were disclosed.
An issue arose because the saver was told an allocation rate of 98.5 per cent applied to their fund, but they didn’t understand where a charge of 1.5 per cent of the fund came from.
An allocation rate means the proportion of the investment that is actually invested. But it isn’t as straightforward as a 95 per cent rate meaning that 95 per cent of the fund is invested. Rather, the rate applies after charges and commission are deducted.
For example, a 100 per cent allocation rate with fees and charges of 5 per cent means that just €95 of a €100 investment is invested. Similarly, with a 105 per cent rate, 100 per cent of your money will be invested because a 5 per cent commission charge also applies. Working out which is cheapest in the long run is not always immediately obvious.
‘Disguise’
Unsurprisingly then, the use of allocation rates has long annoyed those advocating for consumers.
The Pensions Council mentioned this back in 2016, when it referred to "practices that tend to minimise or disguise the true impact of charges", pointing to charges such as a 103 per cent allocation, which is "likely to, and may be intended to, disguise the true charges of provider and intermediary".
It is a wonder, then, that action hasn’t been taken to do away with such rates. Wouldn’t a better solution for consumers be to have 100 per cent of their money invested, with charges and commission calculated as a separate fee? A percentage will do, but a euro figure would be ideal.
The Central Bank had the chance to do just that in 2019 when it brought in new rules aimed at improving transparency on how much brokers earn in commission on the sale of financial products.
It failed to grasp the nettle, however. So we’re likely to see similar cases brought to the ombudsman for some time yet.
