Accounting for bonus units for a switch cost comparison
AndyRichards
Member
Hi All,
Was wondering what your approach was for comparing costs where bonus units are involved.
E.G. A pension has an ongoing charge of 1% but has bonus units equivalent to 0.52% p.a which are added to the plan on a monthly basis.
Would you say that the charge is effectively 0.48% net or would you say that the plan has a charge of 1% and the bonus units are a guarantee that the client will be giving up?
Thanks in advance 
Comments
Like a discount you mean yeah? I'd go for 0.48% per annum.
I guess it's not strictly a discount as they're adding units back into the plan instead of reducing the charge.
The overall charge is still 1% but they add extra units to the plan each month, similar to a guaranteed growth rate I guess?
Is net position of the "bonus" a reduction in charges to 0.48% though.
If the 1% isn't taken then the "bonus" isn't added - so it effectively a refund of charges.
This is a common practice for discounting charges when there is a single fund class with a flat AMC for all investors. Bonus units effectively replace 0.52% of the 1% charge.
This is how Royal London's Pension Portfolio operates, although it doesn't use the same terminology.
I'd say that the effective cost of the plan is 0.48%. But check that the bonus units are permanent and fixed, otherwise it'll need more calculations.