Are these charges reasonable for a discretionary investment service?

OldMusicGuy

My son has just started work and his employer has set up a SIPP through Parmenion. This is a discretionary managed service and I could only find one thread on this on MSE. The charges seem high to me - they will deduct 3% of his monthly contributions as an initial fee, charge 1% annually on the value of the fund as an adviser fee and .43% for fund and other ongoing charges. This seems high to me, but I do not use these types of services. What do the more informed folks on the forum think?

I presume he has no choice in the matter as his employer has set up the scheme and if he wants to get the employer contributions he will have to swallow these charges and accept the Parmenion scheme. But if the charges seem high, do you think he has any grounds to negotiate? He has no initial starting pot, the only contributions will be 10% of his salary plus 10% matched by his employer.

Any thoughts welcomed.

Aegis

Parmenion is one of those companies with a very wide range of solutions. Looking at the costs quoted, the likelihood is that one of their low-cost passive portfolios is being used, as these charge 0.3% as a platform cost and the funds then represent the rest, in this case 0.43%.

The adviser charges seem high at 3% plus 1%, and it might be worth checking to see if it's possible to do anything about this if your son doesn't need any advice. That said, as this is set up by the employer, it is quite likely that he won't have a say in the matter.

Whilst his portfolio is relatively small, the charges won't be so bad. At 10% matched contributions, he is getting an excellent deal from his employer. With a total of 20% gross salary contributions, 3% initial charge reduces that to 19.4%, which is still an excellent deal for only 10% gross salary deduction. The annual charge is the one to watch as the pension increases in value, but your son could always see if he can transfer the pension out periodically if he doesn't benefit from the charges.

dunstonh

The adviser charges seem high at 3% plus 1%, and it might be worth checking to see if it's possible to do anything about this if your son doesn't need any advice.

Remember that this is a new pension. So, the adviser cannot charge that 3% for any more than 24 months at the maximum. There is no mention of monetary amounts. If it was say £100pm gross, then that is £3 per contribution and if taken over the maximum 24 months, then its £72. So, we really need context of the amounts involved before saying if its high or not.

bowlhead99

Your son has a scheme with a very high matching amount from the employer relative to the bare minimum they could get away with as pension contribution under the law.

You are right, that if they selected an advisory group with lower fee to the end user, *and* were still willing to put in 10% of his salary into his pension, he would get more net of initial fees in his pension. However, perhaps they are a relatively small firm where they are not giving the adviser/manager a lot of business and the 3%s of contributions across the staff accounts don't actually add up to a huge amount of money; and the adviser/manager doesn't want to work for less.

Or perhaps the CEO /CFO of your son's employer is friends with the manager group and really rates their services, or gets a kickback from using them. It's difficult to speculate on why they use that group and why they charge what they charge.

What is clear is that most employers with a reasonable number of staff don't want to work with a hundred different pension providers to send out the contributions each month just because the staff come up with a hundred different pension providers that they personally would prefer to use. And I am sure your son with his pot of money starting at £nil has absolutely zero negotiating power with the wealth manager because he's hardly a big customer with his existing pot of £0.

So basically unless he's been given multiple options and choices from his HR department, he will have to either take that deal and all the free employer cash, or decide not to participate and not take all that free employer cash which is a monster proportion of his annual salary.

I would look at like this:.

At the moment he makes a contribution of 20% of salary a year and gets an initial fee of that amount of 3% (I assume it's 3% on employer's and employee's contribution combined, rather than just on his employee piece? Worth finding out.).

So the one off fee he pays on that entire contribution is 3% of 20% of an annual salary. Or in other words he loses 0.6% of annual salary to the initial fees. So, by taking the deal, he could look at it as if his own 10% contributions were made fee free, but the "10% of salary free from employer" piece is only worth 9.4% because of the entry fees from joining the scheme.

As an alternative, he could say to his employer, "hey, thanks for the job and high pension contribution, but I've been thinking, could you pick a different firm please, without any costs to us employees? Maybe by bearing the costs of advice or management yourselves?"

"Sure thing," they reply - "we'll use these other chaps instead. Unfortunately, the service from this other pensions group now costs us more money. So, we'll reduce our employer contribution to 9% of your annual salary. Happy now?"

OldMusicGuy

Thanks dunstonh and bowlhead. The monthly total contributions (employee plus employer) will be 366.67, so you are right that 3% is not a massive amount, especially if it is limited for 2 years (which I did not know). That makes it in the order of £300 ish over two years, assuming he gets a pay rise in year 2.

I was slightly surprised to see this type of scheme used but the company is very small and the CEO works closely with a firm of accountants that also offer financial planning and pensions advice so they likely use Parmenion. Thanks for setting my mind at rest on this.

dunstonh

The monthly total contributions (employee plus employer) will be 366.67, so you are right that 3% is not a massive amount, especially if it is limited for 2 years (which I did not know).

Since Jan 2013, advisers could only take an initial charge for the cost of advice over 12 months. It was relaxed to allow upto 24 months a few years ago. However, most still do it within 12 months. Personally, I tend to use 6, 10 or 12 months depending on the fee I am looking to collect.

It may well be worth checking the end point for the 3% initial to be on the safe side. Non-advised sales do not have the restrictions that are placed on advisers. So, a non-advised case could have 3% charged ongoing. However, Parmenion is not normally associated with non-advised solutions.

I was slightly surprised to see this type of scheme used but the company is very small and the CEO works closely with a firm of accountants that also offer financial planning and pensions advice so they likely use Parmenion.

It is certainly an advanced option and one you wouldnt come across often in the workplace.

bostonerimus

It's good that the employer gives a 10% contribution. However, they should be far more diligent about controlling the costs in their plan. Maybe your son should talk to the benefits section of his company and ask why they have chosen a pension provider with high fees and whether they can be negotiated down or a new provider chosen.

Aegis

bostonerimus wrote: »

It's good that the employer gives a 10% contribution. However, they should be far more diligent about controlling the costs in their plan. Maybe your son should talk to the benefits section of his company and ask why they have chosen a pension provider with high fees and whether they can be negotiated down or a new provider chosen.

In this case the pension provider, Parmenion, is a very low-cost offering for what you get out of them. The bulk of the cost here is actually from the person who has been employed to set up that scheme, so it's the advice that is expensive, not the provider itself.

OldMusicGuy

There is no "benefits section" in this company I am afraid, it's three people. My son is employee #3. The CEO works closely with an accountancy firm that offer a lot of business and other advice, so the pension offering comes from them. Parmenion markets themselves to advisers like this accountancy firm. I don't think negotiating a different provider is an option to my son, the most junior employee (it's his first job!). The 10% match offer is great and I have convinced my son to put in 10% of his salary to maximize that (good on him). The company offers 11 funds that are a little too UK-weighted for my liking but there is at least a choice of different risk options. Certainly no major issues for someone starting out with pension savings though, and the other posters have set my mind at rest that the charges aren't excessive.