Following Julius Pursaill’s excellent piece on value for money yesterday, I’m following up with some practical thoughts. The blog yesterday triggered a meeting with an IGC chair who probed me on the vfm scoring system that has been troubling me for the past two years.
I am not clear in my mind that the primary driver of outcomes for members of DC workplace pensions are
- money in
- money out (costs and charges)
- investment performance
I will put to the side the means of converting pot to pension (though this is critical- it cannot concern us here).
Julius’ contention is that vfm should not be concerned with “incomes” but “outcomes”. The amount that is paid into a workplace pension is a function of marketing – employer and employee engagement – it is a measure for us to be concerned about – but it is not the vfm measure. Julius is right to isolate outcomes as being “what happens once the money is in the workplace pension”. That is what people want to know.
This means isolating the investment element of the total charge and focussing purely on that. This is what some workplace pensions (L&G and Hargreaves Landsdown) do. I know that I pay 0.13% for my L&G multi asset fund (and thanks to some tough negotiation by my employer 0.18% for everything else. But if I was invested in NEST, or Peoples or NOW or Standard Life I would not know what I was paying for “everything else” nor what proportion of my total charge was dedicated to investment.
I am arguing, and this is radical, that the vfm analysis be carried out on the investment element of the workplace pension and then a separate analysis be done on whether the non-investment based charge is worth paying. An overall vfm estimate must be holistic (eg take into account both vfm scores).
Of course we now know that my L&G fund costs not 0.13% but 0.19% (the difference being L&G’s estimate of transaction costs). This means I am paying in total 0.37% of my fund (about £120 per month) in management for which last year I got about £5,300 pm of growth.
Such a simple equation is not good enough. While L&G estimate that my management costs will remain pretty static, that growth could accelerate or decline according to markets, it is not in L&Gs gift to guarantee any level of growth. However, they can narrow the risk of loss through risk management which I would value. So a simple measure for me to value my growth is a formula which measures the absolute return and adjusts it by the amount of risk protection offered by L&G. Now I know the cost of this risk adjusted return, I am in a position to know both the value and the money of my investment with L&G.
Knowing the investment vfm is only part of the story. What am I getting for that 0.2% per year which doesn’t relate to investments? I would like to see a simple apportionment of this figure that showed how much went to L&G as profit, how much covered it’s corporate overhead, how much covered the cost of administrating my pot and how much subsidised the cost of dealing with my employer. If any money was spent on engaging me (L&G has just revamped its member website), I’d be interested in knowing that too.
I appreciate that this level of disclosure would be very tricky for insurers, as it would expose them either to charges of profiteering, or of running pensions at a loss. The former (where the insurer’s profits are considered too high) could put pressure on their margins, the latters might put investors (and indeed shareholders) off.
But it is this level of scrutiny that is needed to keep insurer’s (and indeed the providers of master trusts) honest.
Death to the NDA
Why my proposals are radical, is that they would require disclosure (at least to the IGC) of the fund management costs to the insurer – aka “the pay-away to fund managers”.
Currently these costs are under “non-disclosure agreements” (NDAs). NEST has an NDA, so do Peoples, they will not tell you what they are paying your fund managers with your money. They argue that this is to preserve the brilliant deals they have negotiated with those fund managers. I say that these NDAs serve no such purpose, they are there to protect both the providers and the fund managers from margin pressure and these NDAs should be banned by the FCA.
Once they have been banned, I would expect the IGCs to disclose the costs fund managers are charging your provider. L&G tell me that they pay to LGIM (their fund manager) what I pay for the fund. I’m not sure I believe this, I want the IGM to test it!
But at least I know the ball-park with L&G. As for People’s , I’ve no idea what they are paying to State Street, nor what State Street’s hidden costs are, nor the investment administration charges within the People’s Pension for moving money around (life styling ) nor any cost or B&CE reinsuring SSga funds.
And because I have no idea, I cannot assess what the balance of People’s 0.50% AMC is actually paying for. I got into trouble with People’s management earlier in the year for assuming it was paying them huge bonuses. Well I may have been wrong about that, but until they lift the NDA on their fund managers, tell me what their hidden costs are and apportion the AMC, I am entitled to fantasize as I like. The ball is in your court, Patrick, Jamie, Roy and Darren.
I say exactly the same to NEST, Now and all other workplace pension providers who will not tell me the absolute cost to the provider of paying fund managers.
So what if we get this new transparency?
The current round of IGC reports shows that – when pressed – insurers can reveal their costs. Master trusts and SIPP providers are no different.
Once costs are revealed, we need a way of organising the data so that people can make sense of it. It is not hard – once the template has been delivered- to have accurate cost disclosure figures delivered to IGCs in stunning detail. I do not propose that that detail be disclosed as a matter of course to members- members can have it on request. But I think that the aggregate cost data, together with absolute fund performance and risk adjusted fund performance can be published in the form of league tables.
Personally I would like an (objective) investment vfm score created from accurate data by a credible data management and analyst. I would be interested in a (subjective vfm) score created by the IGC on the balance of the overall costs of the workplace pension (including the actual costs born by employers- which impact the contribution rate). But this subjective score will need to be accompanied by a proper cost benefit analysis of the non-investment costs of the AMC, of member charges and of employer charges (which restrict employer contributions to member pots).
Until this quality of information is available through IGC and trustee chair reports, I will not be comfortable with the level of provider disclosure within workplace pensions.
Is this going too far?
The financial services we buy are the least tangible products we purchase. In order to understand what we are buying, either we – or our fiduciaries – advisers, employers, trustees and IGCs need to be absolutely clear about cost and value disclosures. We cannot have any fudging as we have no other way to judge what is going on. We cannot inspect our pension as we can inspect a house, we cannot drive our pension as we drive our car, we have no measure for what is going on other than this data.
The burden of proof is with the financial services providers. We see the flash offices and read about the big salaries and bonuses. We need to know that these are justified by the value these organisations are delivering to us the consumer.
I am glad to say that – at last – I am seeing movement on all fronts to full and proper disclosure. Julius Pursaill’s article would not have been written five years ago as there would have been no one to read it. I hope this blog is read by those who are taking the decisions on disclosures and that it is properly considered. I know I am right and will not stop until we get rid of the NDAs, get full disclosure of hidden costs and get proper league tables that compare the value for money of all the workplace pensions that we use.
It is not “if”, it is “when” – I do not expect to be waiting in April 2018.