Performance measurement is a deeply unpopular science. If there is one phrase that financial services has given to popular parlance it’s that
“Past performance is no guide to the future”
This worthy sentiment would ring hollow to the person transferring his workplace pensions from a Legal and General to a Standard Life default. Over 11% less in the pot one year later!
Past performance is a pretty good guide to the past and it’s what matters in the present. As I live in the present and not in the future, I am kind of happy my employer chose L&G and not Standard Life three years ago!
Have I got any idea whether the outperformance of LGIM was due to luck or judgement. According to these risk adjusted numbers (information ratio using CPI+3) then it looks like the 2016 number is no fluke.
i might have got even luckier with NEST (but of course wouldn’t have been able to transfer my existing pot because NEST couldn’t take my money ).
I don’t expect many people know how to work out an information ratio but it’s pretty easy to interpret; a positive information ratio suggests that you are adding something and an IR of more than +1 means you’re adding a lot, for the risk you are taking with other people’s money.
Information ratios suggest a manager is adding some real value by judgement and not luck and that is a guide to the future.
The trouble with all this is that the numbers are over too short a period to build up a real picture. For all we know, Standard Life’s bad three years could be reversed by 2020 and i may be eating my L&G hat!
Which is why we need to build a reliable standardised system of measuring past performance of workplace pensions and this is going to be immensely challenging. Let’s just list out the challenge….
- The charges for investments are generally bundled into the price of the contract/membership. Unless you are L&G, you do not get a split of the price for investment and for the rest of the services in your contract.
- Default investments aren’t the same over time; NEST and Zurich have three stages of the lifestyle, most others have two. Establishing a composite return is not impossible but it’s hard.
- The true cost of a default investment can be much higher than you think (and may not be included in your plan charge (AMC)). The true cost of an investment should become clearer following great work by the FCA on transparency.
- Investment performance is quoted gross of fees so even if you know what you are paying, you are still going to have to adjust your performance for the fees you are paying.
- The information sources are not always consistent (note the defaqto/NEST/Morningstar/ONS sourcing above.
- The means of calculating are sensitive to all kinds of minutiae and need to be consistent to be meaningful.
- Unless the sources of information are impeccably independent, there will always be allegations of bias. We need the FCA (or similar) to provide oversight.
The rules surrounding financial promotions play down the value of past performance, but in the final analysis it is the past performance of your investments that determines the success of your pension.
We are in danger of ignoring what really matters- the investment return – and being distracted by a lot of soft factors (from platforms to dashboards). The IGCs need to take note of performance and ask some serious questions about arbitration.
They need the tools to do so, we intend to make sure they have them.