The little I can remember of my O level maths was the dictum “show your working”. It is a primitive call for what we call an “audit trail”, allowing the marker to find out how wrong you were or whether you were right by accident.
This, as far as I can make out, is the principal value of historic analysis of fund performance. It is no more than a measure of the likelihood of the right decisions being taken in the future.
Which is why simple performance analytics that tell us the amount a fund has grown or fallen by, just aren’t enough. We need to know “the working” and that is why investment consultants can be helpful.
At the heart of the analysis is the search for pure skill or “alpha”, something that’s left over when luck runs out.
The recent analysis by my friends at Punter Southall Aspire is helpful because it shows both the answers and the working, though I’m sure that many rival investment consultants will argue that there are better ways of showing working than by a Sharpe Ratio. It is better to have a 95% solution that makes people aware of the answers and the working, than to have nothing.
The second – very important – thing that Punter’s work does, is excite debate about just why the managers of default funds are going about things in different ways and delivering quite different results. One of my colleagues, perhaps a little churlishly, complained that all Punter’s had done was what she’s been doing for some time.
Well Punters have got the credit , not just because they did the work, but because they took the trouble to present it in a way that captured the imagination of the press. Not only have Corporate Adviser led with the story, but the mighty Financial Times have followed up. So now the entire readership of the FT have the chance to ponder why there are huge variations in workplace pension default funds and whether, as Jo Cumbo asserts, investments chosen for staff amount to a lottery.
Jo is a member of her works investment committee and should be pretty pleased that the FT DC fund is showing tops (Zurich). If I were her, I would be feeling pretty pucker on behalf of herself and her colleagues. But what if your company were invested in the Standard Life default, would you be carefully incinerating copies of the FT in case somebody saw the table above?
Of course not, but you’d be asking questions as an employer and if you were also a member you would be questioning , as Jo’s article questions, who is accountable for the decision that has been taken on your behalf. Like the O level maths examiner, you’d want to see some working.
There is no legal obligation on an employer to choose the best workplace pension , but – as this blog is constantly banging on about, there is an obligation of good faith between employer and employee which manifests itself in the Scally judgement and all that has followed.
You can read all about this here; the employer has a duty to provide information to staff where that information is readily available. To date, performance data of the kind Punter Southall Aspire trialled, is not in the public domain. But we think it should be.
By “we” , I mean that large and growing body of pension people who think that transparency is the best way of conducting affairs, that proper disclosure of performance leads to engagement and that accountability about workplace pensions needs to be considerably better defined.
My personal view is that the default investment fund places an implicit burden on all participants in the decision chain, provider- IGC/Trustee- adviser- employer and member, to pay attention. We cannot have a breakdown in trust of the workplace pension system because we take our eye off the ball.
As I write, Dr Chris Sier is looking at fund disclosures with extraordinary detail. His aim is to make information available to fiduciaries which will show the working in extraordinary detail. This information would swamp most of us, which is why we have fiduciaries and why fiduciaries have advisers like Punters and First Actuarial.
It is only when demand for the services that we are talking about on this blog, exceeds supply, that the FT will bother writing articles. That it has, suggests that we ought to be getting down to publishing these tables regularly, more completely and with even better insights.
In the final instance, the only person who takes the risk of a DC pension going wrong, is the member. Surely we cannot make ordinary people accountable for other people’s failures?