WATCH OUT:  PENALTIES APPLY FOR ALL SORTS OF SWITCHES

Have you ever delayed cancelling a service contract because you’d have to make a penalty payment that would just cost too much?

Me too. I’ve delayed changing both broadband mobile and electricity/gas suppliers in the past because I was tied into those contracts – and would absorb too much of the savings I’d make leaving early. 

These are two of the most common contracts that Irish consumer want to change, but they certainly are not the most expensive to leave. 

Getting out of a fixed rate mortgage or investment policy can amount not to tens or hundreds of euro if you leave early, but thousands of euro.

In a recent survey, the price comparison and switching services company Switcher.ie found that about a third of us have no idea if an exit penalty would apply and 41% are unsure about the amount.

According to Switcher.ie, who investigated the actual cost of switching (see tables), energy companies, to give them their due make the switching costs “clear for consumers, with most suppliers charging a flat fee of €50 per fuel if a customer cancels within the minimum term, which is typically 12 months.”

It gets more complicated (as I discovered) when you try to switch out of a broadband and mobile phone contract and investigation “found that the majority of broadband and mobile phone providers will require customers to pay the monthly charge for the remainder of the term.”

Whereas a €50 or €100 (for dual fuel contracts) penalty might seem worth the effort if you can save up to €360 over the 12 months of a new, cheaper electricity/gas provider, the exit cost of moving your broadband and mobile packages – see below- can amount to up to nearly €300, which wipes out the advantage of the switch (not to mention the a sharp spike in blood pressure and hair loss, say legions of frustrated switchers.)

The combination of “costs involved, lack of transparency and understanding about exit frees” means that consumers will be at a serious financial disadvantage unless they make themselves more aware of what they are signing up to from the outset, say Switcher.ie. 

That should always be the case when buying big ticket financial purchases like mortgages and investment policies.

Anyone considering taking out a fixed rate mortgage needs to pay as much attention to the exit clauses as they do to the interest rate they will be charged:  breaking such a contract before the term is over can result in up to six months worth of penalty fees. (This might be waived if you switch to a higher variable rate. The only reason you would do this is if you were certain rates would go down over the remaining period of the old fixed contract.)

Unitised investment policies typically include exit penalties for the first five years of the contract and encashing early will often result in a capital loss of at least 5% in year one, falling to 1% by year five.  But many life and pensions companies also impose MVA’s or market value adjustment clauses which flatly decline to release your funds if there have been ‘detrimental’ investment conditions, say after a stock market crash.

Whether it’s a simple switch to a new electricity provider or an expensive mortgage. 

Read the contract. Then read it again.

Table showing early termination fee per broadband provider

Source: Switcher.ie - Data correct as at 22nd August, 2016. See table above – Early termination charge table based on broadband providers non-discounted basic entry level home broadband and home phone bundle. Comparison is based on a customer leaving the broadband provider with six months left on their contract. Magnet broadband bundle listed is a “no contract” package.

Table showing early termination fee per mobile phone provider

Source: Switcher.ie - Data correct as at 22nd August, 2016.

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.

LESSONS FOR LEO: THIS IS HOW CANADA IS TACKLING ITS PENSION CRISIS

Is Leo Varadkar our Justin Trudeau?  At least when if comes to sorting out the pensions mess

Trudeau is the 44 year old Canadian prime minister who after winning the Canadian election last October, appointed a former head of one of Canada’s largest private pensions and employment benefits companies to be his new Finance Minister.

The appointment of Bill Morneau to the FinMin job is regarded as one of the most radical – and progressive – appointments ever in a rapidly ageing and indebted western country.

Inadequate pension provision, as we know from our own experience is a deeply unpopular subject and something most politicians try to avoid tackling head on since just about every resolution to the problems besetting the three pension pillars – the state old age pension, private/occupational pensions and public sector workers’ pensions – involves some degree of financial pain.

Since government monetary policies (and too much regulation and red tape) are also part of the bigger problem of poor ‘safe’ investment returns, there just isn’t enough appetite for the kind of radical, structural reforms that are needed if today’s younger generation of workers will see any return from their compulsory social insurance contributions.

Trudeau, being one of the youngest PMs ever, knew that without further reform to the pension system generally, but to CPP in particular (which began in earnest in 1997) there wasn’t going to be sufficient retirement income for his generation to collect in 25 years time.  Minister Morneau opened talks in early Spring with the provincial premiers.

Next month, Leo Varadkar, our Social Protection and Pensions Minister is expected to announce that this government will introduced some kind of mandatory auto-enrolment pension scheme for workers who are not already in an occupational or self-employed pension scheme like a PRSA. (Personal Retirement Savings Account.) 

Company-based, such a scheme will result in every new worker being signed up with contributions made by the worker, unless they go to the effort of opting out, by the employer and the state. This money (and if the UK’s Nest auto-enrolment scheme is anything to go by) will probably be no more than a few percentage points worth of the workers’ annual salary at first, and increase gradually over a period of years. It will be actively invested in a tax-free fund of various assets and contributions will carry tax-relief for workers and employers.

Endless pension reports (including from the OECD) has been calling for such a scheme in Ireland for decades where private pension coverage has fallen below 47% of the working population. It needs to be done. But we also need to urgently reform the Irish state pension and the civil/public service schemes to also make them sustainable and fair.  Varadkar should be starting with the pension sectors that come under his and the government’s direct remit.

In Canada, just seven months into office, Morneau fashioned an agreement with the required majority of provincial premiers to start raising CPP monthly contributions. From 2019 for a rolling period of five years, contributions will rise by c$7 a month. By 2025 the annual benefit will rise by a third, from c$12,650 to c$17,478 and a typical worker earning $55,000 (the maximum income on which contributions are paid) will be paying an additional c$34 a month in contributions.

The Canadian Pension Plan is loosely modelled on the UK one and is two pronged to also include the Old Age Security pension. The latter’s benefits (about half the total maximum CPP payment of $12,650 are means-tested and anyone earning over $71,592 from private retirement income is subject to a clawback of OAS benefits.  Like here, many Canadians have private occupational pension membership or have an RRSPs, a personal pension plan.

Unlike here, however, Canadians can draw down their CPP from age 60, though at a lower rate of value than if they waited to age 65 (it will rise to 67 by 20123) or they can postpone drawing down their CPP until after age 65/67 and claim a higher benefit. 

These are the kinds of reforms we need for the Irish state pension, which isn’t adequately funded as it is, and will see a doubling of beneficiaries by 2050.  

But our system needs even more than just an increase in contributions, a clawback of benefits from retirees with substantial private income and a higher retirement payment incentive to encourage people to delay claiming their old age pension.

Faced with a bankrupt scheme by the mid-21st century, in 1997 the Canadians set up the CPP Investment Board to begin investing their workers’ state pension contributions to meet long term pension payments. Though still a hybrid part invested/part pay-as-you-go system, the CPP fund is worth $287 million and is projected to be worth $580 billion by 2030. It is the 10th largest sovereign wealth fund in the world.

We were there once too. It was called Pension Reserve Fund.

MICRO CREDIT: THE WAY FORWARD FOR CREDIT UNIONS?

Credit unions have been roundly criticised for not lending enough over the last several years. Beset by a blizzard of bad debts after 2008, like the banks, many of them were forced to reduce or stop lending altogether by the Central Bank, their regulator.

At least 100 have been merge to achieve some kind of viable  economy of scale, while a small number of completely unviable others have been forced to close (thankfully, without any financially loss to members.) 

A few weeks ago, the best thing to hit the Irish credit unions in recent times -the Personal Micro Credit (PMC) pilot – was rolled out from the 30 CU’s taking part, to the 330 credit unions across the nation.

What began last November in association with the Social Finance Foundation, Citizens Information Board and MABS quickly caught the interest of the targetted members: people in receipt of social welfare payments who might otherwise be borrowing from expensive moneylenders who can charge them of 290% annual interest.  

The ‘It Makes Sense’ loan has been well publicised since it was launched last month, but is worth returning to now, if only because so many parents are trying to find the hundreds of euro per child needed to equip and uniform their school-going children for the new school year.

Instead of borrowing, say, €500 over 6 months from the moneylender and paying back as much as €500 the ‘It Makes Sense’ borrower will pay a maximum of 12% (12.68% APR) interest from their credit union and a total repayment of €515.72. The weekly repayment will be less than €20.

What  makes this scheme so attractive to the credit unions is that the repayments are guaranteed as they are deducted from the borrower’s social welfare payment at source. There is no question of a default, so it is, effectively a risk-free loan.

The pilot’s €700,000 budget was well spent and the new permanent scheme will generate multiple amounts if the estimated 360,000 people who use official moneylenders – a large number of whom would be in receipt of social welfare benefits – take out the new loan instead. The organisers have claimed that moneylending activity in their areas has fallen considerably since the advent of the scheme.

To qualify for an ‘It Makes Sense’ loan you must be over 18 and a member of a credit union though the new loan is available immediately to people who only just join their local CU. (Normally there is a loan waiting period so that you can establish a savings record.)

You can borrow between €100 and €2,000.  Loan terms are between one month and two years but you must be either in receipt of the Household Budget Scheme from which the loan payment will be deducted, or if your social welfare payment is paid into a bank or credit union account, via a standing order or direct debit. Loan approval is within 24 hours of application.  The maximum deduction from your weekly benefits cannot exceed 25% of its value.

You have to wonder why a scheme like this, to break the dependency of so many people on expensive moneylender loans didn’t happen sooner.

But innovation isn’t something that happens very readily after a big financial shock like 2008; instead, as we have seen with the banking sector in general, the hatches are battened down instead and lending tightens as balance sheets are rebuilt.

The success of this micro-lending scheme begs the question, ‘can the Credit Unions find a way to attract mainstream bank customers who are also having trouble raising loans or will have to pay higher interest rates?’

Cracking that nut will depend on how much initial risk the CU is willing to take since working people, outside of the public service, have no income guarantee and therefore no repayment guarantee to offer. 

However, it isn’t beyond the realm of possibility to factor in a post-employment social welfare payment into a micro-loans for this cohort of borrowers. That is, in the event that the member borrower of an ‘It Makes Sense’ loan loses their job or falls ill and ends up in receipt of a social protection payment, that their repayment (however adjusted to their new circumstance) is then paid directly to the credit union.

Meanwhile, the credit union remains that most financially attractive – and ethical – source of smaller personal loans and is streets ahead in the commitment to local communities.

 Where the CU’s lose competitive edge to the banks in not lending mortgages and in not offering the same range of banking services (debit/credit cards, on-line banking) but these are inevitable if the movement is to survive…and prosper. 

A list of all the participating credit unions (more are being recruited every week) is on the League of Credit Union’s webpage www.creditunion.ie and the ‘It Makes Sense’ Facebook page @itmakesenseloan

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.

HOW THE BANKS ARE (STILL) BAD FOR OUR FINANCIAL HEALTH

The whole point of the banking system is for people not just to have a “safe” place to leave their money, but to have an affordable, reliable place from which to borrow money.

Once upon a time, about a million years ago, the money ordinary people and companies left on deposit was the source of much of the banks’ lending. Their profit was derived from earning more on the loan interest than they paid out to depositors.

But modern banking has evolved from a simple, profitable business to a very complex, complicated one in which not just the deposits , but the loans too, are leveraged many times over creating a huge waterfall of digital credit and money magicked up on computer keyboards with no basis in the old reality of hard work, productivity, earnings, profits, saving and investment.

All western economies rely entirely on this massive leveraging of artificially derived credit and debt. Phony money distorts prices; it leads businesses to borrow too much for the wrong reasons. It feeds asset bubbles as it artificially pushes up prices and the value of shares, bonds and property. It is also at the heart of the collapse of the western banking sector back in 2008 and why our banks are still amongst the most fragile in Europe.

Our banks, just like Italian, German, French and British banks, are still stuffed with bad loans and collateralized assets that are still worth less than when they were first purchased with magicked up money. 

The recent ECB stress tests showed that our banks will probably need another bailout if there is another serious financial crisis happens.  It won’t take much to tip western economies back into recession: growth remains sluggish pretty much everywhere; unemployment is still to high, people and corporations carry too much debt, their taxes are too high and incomes are too stagnant for people to demand the levels of credit needed to keep the ‘growth’ show on the road.

Fractional-reserve lending has been the scourge of modern banking for most of the past century but it began to spin out of control, along with Western government deficit spending (living beyond their means and accumulating large national debts) 45 years ago this month, when the last vestiges of the gold standard were abandoned by US President Richard Nixon. 

Deficit spending – economic methadone – is what keeps states, companies and individuals functioning. Could you survive without a cheap line of credit?

The latest stress test should come as a reminder to everyone, especially those readers who starting thinking (about two years ago) that the banks were “fixed” and that investing in them again might be a good idea, that they are not fixed. They remain damaged goods.

Brexit simply amplified what was apparent for many months:  the Irish and European banking sector remains weak due to legacy debt that was never cleared after the 2008 crash and that their earnings prospects are not good in moribund economic times.  Irish bank’s shares are worth half what they were this time last year, but even the great Deutsche Bank price is down 50%. The Italian banking sector is effectively bankrupt.

Under new EU banking rules however, bond holders, shareholders AND depositors (who already earn nothing) will all have to pay towards the cost of the next bailout. Honest bankruptcy was never countenanced in 2008 and probably won’t be the next time. There are no votes in the kind of (necessary) disruption that would create .

We can argue all day about the likelihood of another bank crash and its possible causes.  No one can know exactly when it will happen. But not even the great credit creators in the ECB can keep printing money from thin air forever, deny depositors any kind of a returns, or even inflict negative returns and get away with it forever…as the price of shares and bonds held by the super rich continue to soar.

Something will have to give. Or someone.

Until then, heed the time-worn warnings from 2008:  NEVER leave more than €100,000 in cash in ANY Irish credit institution or EU one.  Should there be a bail-in and you have more than that on deposit, you could end losing it.

The Irish Deposit Guarantee Scheme is in place, such as it is. But the fund from which compensation would be paid is, however, worth less than €400 million, a tiny fraction of the value of national deposits.

Meanwhile there is no pan-European deposit scheme to come to the rescue of any single country’s depositors should their DGS fund be unable to honour all its claims.

Remember Cyprus.

COMMISSION PAYMENTS: THE CENTRAL BANK WANTS YOUR VIEW

A guy goes to a solicitor with two casts on his legs: “I was hit by a bus as I crossed the street on a green light. I need your help. How much will it cost?  “Not a thing,” the lawyer replies. “My advice is free. The bus company will pay me for representing you.”

Another guy goes to his doctor with aches and pains. “I need your help, doc. How much will the treatment cost?”  “Not a penny. These drug companies will pay me every time I prescribe you a drug or treatment.”

Finally, a young person finds a college that waives all fees. “Wow, that’s great,” says the student. “Yes it is,” the admissions officer explains:  “The tobacco industry pays us generously every time we recruit a new student.”

Who in their right mind would ever engage the services of any of the above?  How could anyone expect worthwhile, impartial, independent advice, treatment or instruction in such circumstances?

Yet nearly every person who has bought protection insurance or an investment fund (maybe even a mortgage) in Ireland over the past three decades has probably dealt with a salesman or broker whose livelihood is provided not by you, their client, but by the product provider.

And if the size of that payment is not absolutely transparent, then you have no way to compare its cost to other similar products, or more importantly, to determine what impact the commission will have on the short, medium and long term value of their insurance cover or investment fund.

Let me be absolutely clear. Commission is paid out of the premium contributions you make to the insurer or pension/investment company. The size of the commission will vary by product and by product provider. (The relatively modest commission a motor insurance broker receives is not as eventful as the huge, on-going one some pension holders pay.) Some product providers pay more than others, but there is no central register of commissions so that you can easily compare them.

There is no such thing as “free advice”. The salesman or broker who takes commission may provide you with appropriate, cost effective advice but their payment is coming out of the insurance premiums you pay every month or year, or from the accumulated value in your investment fund.  And when other policy and fund management charges are added to high commissions, there will be a devastating, cumulative effect on the value of investment funds in particular.

Commission payments are not the only reason why financial services products, have a reputation for being complex, opaque, expensive and poor value, especially over the short and medium term.  But over the decades that I have been writing about personal finance, they have contributed to the poor financial outcomes so many people have experienced with investments and the lack of trust so many people have in the private pensions industry in particular.

The Central Bank of Ireland, which regulates the insurance and investment industry has finally decided to address this hugely important and serious problem, decades after calls to do so by yours truly, other financial journalists and one well-known consumer advocate, Eddie Hobbs who in the early 1990s exposed the scam that was the so-called endowment mortgage industry. (This spilled over to the shortcomings of ‘whole-of-life’ insurance, which so many MoneyTimes readers have experienced and continue to, to this day as they discover their increasingly expensive life policies have practically no value.

The Central Bank, in a ‘Discussion Paper’ published last week said it is seeking the “views on the risks and benefits to the consumer of the practice of insurance companies, banks and other financial firms paying commissions to intermediaries who distribute their financial products.
 
It is important that the remuneration structure for staff of both financial services providers and financial intermediaries is designed to encourage responsible business conduct, fair treatment of consumers and to avoid conflicts of interest.”

Commission remuneration is already banned or is being banned in other countries, including the UK. The conflict of interest distorts the client/adviser relationship and the crucial need to provide impartial, independent advice especially in the case of investment products. Even where there are disclosure regulations, too often they are paid lip service by the intermediary and not sufficiently policed by the regulators.

I will be making a submission to the Central Bank against commission payments. The deadline is 18 October 2016.

If you were missold, or had a poor financial outcome or experience in the purchase of an endowment mortgage, insurance policy, a ‘whole of life’/investment policy, a mortgage, an investment fund or pension, from which commission was deducted, you should make a submission too. (See consumerprotectionpolicy@centralbank.ie )

Or you can also contact me at my email address below and I will add your story to the huge archive of complaints that I’ve received – and kept -over the past 25 years.