The pen may be mightier than the sword but the spreadsheet trumps both.
Last week, JLT published some projections which showed that if the performance differential between lousy and top pension providers continued – you’d be able to buy a reasonably priced house at retirement, just by making the right choice.
The point’s well made, if you’re aiming to get employers to pay attention to the pension (which JLT were). I prefer to offer people a 25% lifetime wage rise for every 1% they can get themselves from their workplace pension. My version actually focusses people on the job in hand, but heh! – we’re all swimming to the same rock.
JLT and my point is the same, fractional difference in performance of a workplace pension default investment multiply over time to the difference between a good and bad outcome. While the “member experience” may put extra fuel in the car, it’s the engine’s performance that really counts.
What we need is a way of looking at a whole load of different approaches to managing pension investments and find out which has worked so far (past performance), how much luck was involved (risk adjustment) and whether the price paid for risk adjusted past performance was worth it (value for money).
Words cannot do this, only numbers can.
The trouble is that we currently don’t have the numbers. We have no single database that stores the actual returns for different cohorts of workplace pension savers -even since the start of auto-enrolment. We have yet to even have the debate on how we create a common method for analysing that performance for risk, and while Dr Chris Sier and his team are close to establishing a common template to tell us how much we are paying for the management of our assets, we still don’t know what the platforms on which our money is managed , are paying in fees.
These are very serious deficiencies and it’s now nearly four years since the Office of Fair Trading called for a common system of value for money reporting. Imagine having to wait four years for the next version of the iPhone! With billions flowing into workplace pensions even at current rates and with the minimum contributions quadrupling over the next two years, we need to get on with a way of comparing workplace pensions by their likely outcomes, and that means comparing value for money (not a crude analysis of recent past performance).
So let’s see how this works.
Currently there is no database that captures both master trust and GPP default fund performance. Financial Express collates gross returns from the insurers but has no mechanism to capture trust based arrangements like NEST, NOW and other master trusts.
That is why the recent attempts to give snapshot performance figures first by Defaqto and more recently by Aspire, have been incomplete. A sustainable system does not rely on a third party to collect data but takes data from the source using a common template. As yet, no attempt has been made to do this (certainly for public consumption).
That is why I am hassling the data managers I know to be working on the cost and charges template, to consider the collection of performance metrics as well. Without perfect data on the gross returns funds have offered us, how can we get to “value”.
Similarly, without an understanding of the costs of managing the fund – (the drag on fund performance knows as the transaction cost) and the fees charged to operators (written down in investment management agreements), we have no idea of the “money”. I have written again and again that the AMC that is declared to members relates to the operator’s price of offering a workplace pension, I am interested in the fund manager’s price to the operator – for running the investment fund.
So the two key numbers – the performance and the true cost figure, are not available to us. However we can be reasonably sure that the market has got this in hand. If the Sier committee, as I believe it will, creates an environment where these numbers can be readily asked for, we will await only the regulatory measures to get this information ourselves.
In the meantime, we can have a meaningful discussion about how to better analyse “value” – risk-adjusting past performance to give us a forward looking measure that separates performance achieved by luck from that achieved by good practice.
Just for workplace pensions?
IFAs who are involved in wealth management may have spotted in this article a methodology that could equally be applied to the performance of model portfolios, DFMs and the other options put forward to manage wealth.
Of course workplace pensions are easier to measure, since they are simplified – offering only one default and fulfilling only one purpose, the accumulation of capital necessary to fund retirement.
But the method I am describing is simply a way of measuring financial outcomes, which – for financial services, is what governance is all about.
I don’t think that the Vfm methodology I am describing should be exclusive, I think it should be adopted by those managing the mightiest occupational schemes to the smallest SIPP.
We need to measure value for money to hold those who manage our money to account. It is called governance and whether that “we” is an IGC, Trustee, IFA, EBC, employer or ordinary punter, “we” should be able to see value for money scores that we can trust, compare and act upon.
We don’t have such a system of benchmarking yet but I am determined that we will. When we have vfm numbers for outcomes, then we can look at the costs of the member experience and the value we are getting from our operators, but that is much more to do with words. For now we should be staying close to our laptops.