Today was a special day: somehow faith decided that I should meet yet again (after some years that I decided it was a complete waste of time) a private pension broker and let him try to talk me into subscribing to a private pension scheme.
The story is that I am kind of a mentor to a young guy who’s in his first year of studies and he wants to learn to be an insurance broker at a major insurance company. As part of his admission process he needs to invite a few interested friends to participate at a sales pitch.
Since I want to help him, even though I would not recommend this path to him, I accepted to be one of these guinee pigs.
The last time I talked with insurance brokers in person about private pension funds I actually signed a contract. Little did I know back then what 1.5% yearly TER means and what hidden costs I sould look out for in the small writing of the contract. Oh boy… Now I ended up still owning those contracts untim I’m 60 or so and watch the poor performance of them each year being unable to do anything with that money until it reaches maturity.
Today, talking to the broker felt like drinking a Tokaji Aszú accompanied with some foie gras on a nice, crispy piece of bread and even some Roquefort melting on the back of my tongue before I flush it down with that beautiful sweet syrup. Hmmmmmh! Try it!
Allright. The situation was this: a more senior insurance broker was leading the sales pitch, my friend, the student sat on his right side listening (and learning). Myself on her left side.
After a quick overview of the 4 pillars of the Romanian pension system, we quickly reached pillar 3: private pension contracts. Basically Unit-Linked stuff.
Long story short, you pay in it monthly whatever you decide to and the insurance company will invest it into:
A. “Aggressive” a more aggressive mutual fund with more stocks or
B. “Chilled” a more conservative mutual fund with more bonds or
C. some combination of the two. (I made the names up btw.)
Nice and easy. I have a few questions though…
The conversation, in a nutshell went along the line of…:
“Me: can I put the contributions against my tax?
Broker: up to 400€ a year.
Me: what do you invest the money in in the “Aggressive” fund?
Broker: (after seeking through different documents for about 5 minutes) Well, this fund invests about 30% in stocks and the rest in safer instruments like treasury bonds.
Me: I see…, and where is the money invested in the case of the “Chilled” fund?
Broker: in that case, only about 20% is invested in stocks, the rest in safer instruments. But here we guarantee your contributions.
Me: minus the fees…?!
Broker: yes, minus the fees.
Me: What are the fees, I ask.
Broker: well, you pay 1.5% of the payments are going to the insurance companies as fees.
Me: do these funds have any management fees?
Broker: yes, (she had to look it up), about 0,166% from the the money in the fund is the management fee.
Me: per year?
Broker: per month…
Me: so that is about 2% per year…
(and I swear I didn’t make this up!)
Broker: yes, it would be nearly 2% per year but you don’t need to worry about this because it’s taken out of the fund. From you, we only take the 1,5% one time from your contributions.
Me: Hmm…are you sure I don’t need to worry? I think that is basically also from MY money.
Broker: no…it’s from the fund. It would be unfair to take the 2% as well. It would be too much. (yes, that’s what she said!) But I’ll ask my colleagues and let you know.
Me: So, let’s say I contributed 10.000€ by the time I’m 60 years. You take 150€ in fees in all these years and let’s assume that the fund’s performance was 0% alltogether, it basically didn’t move. How much money can I get out at my 60th birthday? Do I have 9850€ or much less because of those 2% fees every year?
Broker: You should have 9850€ but I’ll ask a colleague to make sure…”
…let’s stop here folks. The conversation was a bit longer and these were not the exact words. The details and the numbers were pretty much correct though.
I didn’t want to go into boring details like the alternatives I had of investing directly into the exact same instruments myself rather than through them. Nor did I ask here whether she knows the difference between active and passive funds. I am not an expert in these things, I know that, but I think I got the main ideas of all this and it’s pretty shocking that a qualified insurance broker is so poorly informed and gave me such false information.
For those who don’t understand what’s wrong with this product and don’t know much about alternatives, in a nutshell:
– you can invest directly and very cheaply in a much more diversified (MSCI World, MSCI Emerging Markets) passive fund for 0.10-0.20% yearly fee. Just google ETFs.
– the 1.5% fee that’s take off from your contributions doesn’t seem much, over the year it adds up. This is money that’s not compoundung, it’s not working for you right from the start. ETF’s do have a small fee to purchase (so do stocks) but it’s much much less.
– 2% yearl fee (Total Expense Ratio) it’s simply stupidly high. Basically nobody can guarantee that performance of your pension will go up, but thos fees are taken for sure. In 10 years, a 2% yearly fee eats up about 18% of your portfolio.
I also understand that Insurance companies want to make money but hey…this is a bit over the top! And, btw, this company has a massive market share in the private insurance business in Romania. This means hundreds of thousands of people, probably even millions insured this way.
Guys, we need to get out there and teach as many young people as possible about index funds. We need to teach them about how private pension funds work. So many of us have experience at this. For every young person we properly teach, such “finance-sharks” will contract one person less.
What are your experiences with insurance brokers? Did you sign private pension contracts? How are they subsidised in your country?