Negative interest means more headaches for pension funds

Check out personal finance columnist, Jill Kerby's latest installment of Money Times...

We have enough pension problems in this country without adding negative interest rates to cash holdings in our funds, but that is exactly what is now happening.

Last week, Bank of Ireland became the first bank that holds cash for pension fund trustees to announce it would charge 0.65% interest for this service.

And this spells big trouble for retirement savers, whether members of occupational schemes, or with private pensions or post-retirement Approved Retirement Funds (ARFs) who have a portion of their savings in deposit assets (usually along with holdings in stocks and shares, property and bond funds).

The reason, of course is that cash hasn’t been king for a long time – since 2008 and the last great financial crash. Just before then, someone with €100,000 in cash in a bank deposit account could easily achieve a c4.5% annual interest rate. It was subject to DIRT tax if you weren’t exempt, but DIRT was just 20% then. Anyone with some of their retirement cash savings held in a pension fund was probably getting an even better return, (which was just as well since pension funds are subject to all sorts of ongoing fees and charges).

Nevertheless, the idea behind keeping some savings in deposit account funds in your pension – at least back in the days when Central Banks didn’t drive interest rates to zero in an attempt to save the bankrupt banking industry and ‘stimulate’ lagging economies with cheap loans – was, theoretically to provide some asset balance to a retirement portfolio. Should there be a dramatic fall in equity prices, for example, the pension holder could count on the other assets to hold firm.

Older pension fund members have experienced recessions and periods of serious volatility before and many are wary of the markets. They remember the 1987 Wall Street Crash, the 1990-1991 Iraq War, the 1999 NASDAQ crash (that badly affected the Eircom public sell-off here) the immediate post-9/11 period and the 2008 financial crash, triggered by the massive mortgage leveraging and debt crisis that originated in the United States.

Nervous of the great swing in prices on the stock markets and badly advised by the high cost pension providers and their mainly sales-commission remunerated intermediaries, many pension holders have had poor outcomes after years of regular saving. So they resorted to switching some of their pension savings into cash assets, thinking they were more ‘safe’ (often on the ‘advice’ of their sales brokers). Too many who retirees who took out ARFs – the vehicle that allows a retiree to continue to invest their money until they are ready to start drawing it down – also left it in cash, despite high, unnecessary ‘management’ fees and all the other charges.

The 0.65% negative interest that Bank of Ireland is now imposing on pension cash may not sound like a lot, but if you have, say, half of your €300,000 pension value in cash, that is a €975 annual charge, on top of all the other pension fund management charges, policy and administration fees and very possibly, trail commission to the sales broker. It all adds up and unless your fund is achieving a decent return every year, you could end up with insipid or even negative overall return.

Many, but not all pension fund values have recovered the dramatic losses that happened in March as the Covid-19 pandemic took hold.

It isn’t just pension fund holders with heavy cash holdings who are looking at the loss of value; so are credit union members: the CUs are already charged between -0.5% and -1% interest by their banks, where they are legally obliged to leave a proportion of their members’ cash.

Is it any wonder that credit union dividends are so low, if they exist at all?

Bank of Ireland insisted that it has no intention of charging negative interest rates to its regular deposit account savers. Yet with corporate, credit union and now pension fund cash funds subject to negative rates and no sign of the European Central Bank raising its -0.5% rate, we need to take that statement with a proverbial grain of salt. German, Swiss, Swedish, Danish and Japanese banks have been charging negative rates to all their customers with large deposit holdings of c€100,000 to €1 million for at least five years.

Seven out of 41 German retail banks surveyed this year now charge negative rates to retail savers with less than €100,000 on deposit.

So what should you do if you – foolishly, perhaps – filled your pension fund or ARF with near-zero interest bearing cash? You should contact your pension trustee, and/or fee-based financial adviser for a pension review.

When I called my financial planner last week, he put me at my ease: “This doesn’t affect you. We don’t leave any cash in pension or ARF funds. It hasn’t been a good option for many years.”