Yesterday I was reading the corporate accounts of MoneySupermaket.com. Last year, as well as generating nearly £400m of turnover and making over £100m in profit, MSM were given personal information by over half the UK adult population. 25m people volunteered their details digitally to an organisation they know little about but trust implicitly.
Without getting my nose brown, I find that implied trust fascinating. So should those in Government and industry who are looking to restore confidence in financial services.
I don’t suppose the numbers for Go Compare, or Compare the Market are much smaller, Confused, Uswitch and Utiltitywise all have parts of the market.
But on not one of these sites will you find pensions compared in a meaningful way. Why not? What is so different about pensions that makes it hard for people to compare a pension apple with a pension pear?
Why can’t we compare our apples?
If you go to a supermarket , you can choose between many brands of apples. Cooking and eating apples are on different shelves, as well as price you can see the price per 100g. On most products you have labelling which tells you where the apples are from, whether they are organic or not and you can even find out whether the packaging is multi-purpose. Shoppers can make informed decisions about apples.
Apples and pears
Of course the decision as to whether buy apples or pears is a tougher one, it depends on personal taste and – as we all know – there’s no accounting for that!
Anyone who thinks that buying behaviour depends purely on the disclosure of product information should be forced to watch boxed sets of “Open all hours”.
But disclosure should be about helping people to make complex decisions easily.
Here for instance is how I consider my decision to invest in the LGIM Future World fund via my Legal and General Workplace Pension.
It’s not the very best choice I could have made- but it’s right up there and I know the value of my decision was right when I compare it with the fund I was in before.
I used to be in the Multi- Asset Fund, it was not such a valuable fund to me (although it was half the price), there was more value to me in the more expensive fund.
These numbers are based on my subjective scoring and not on hard data. But there is no reason why we could not analyse the MAF apple with the Future World Pear using generally available data.
- we know the cost of each fund and we know the slippage on each fund which generates “hidden cost”
- we know the performance of each fund and the amount of risk taken by LGIM to create that performance. We have measures to calculate risk adjusted performance.
- We know the cost of the Legal and General contract and the drag it produces on performance.
It is not very difficult to create a VfM score for either fund within this contract.
So how does it work for the whole of market?
But what about my Fidelity managed company pension which I had with Gissings? Or that 226 policy I took out with Allied Dunbar, or that protected rights pension with NPI?
How can I get a value for money score on these pension pots?
The answer is “with great difficulty”. I had to make decisions on the funds I was in, the contracts I was in and the cost of getting out of those funds and contracts. For instance, the cost of getting out of my Allied Dunbar 226 policy reduced from 14% of the fund value to 1% of the fund value on November 11th 2016 (my 55th birthday). Since that difference was material (several thousand pounds), I needed to have the information to hand before I jumped out of the plane.
Because pensions are so complex, so diverse, so scattered and (by at large) abandoned by the people who set them up, the general public have no information with which to take decisions. Consequently, people do nothing – they do not even try to manage their own money.
The ball is in our court.
In the one conversation I have had with Martin Lewis, we discussed why he couldn’t help people compare pensions. Our conclusion was that not just was it too hard for him, it was too hard for the pensions industry.
That was a few years back. In the meantime we have had a series of things happening that have helped us to a point where I think something can be done
- The Retail Distribution Review drew a line in the sand over commission.
- The OFT ruled that workplace pensions needed proper governance
- Auto-enrolment delivered up to 10m new customers to workplace pensions
- The FCA started a market review of financial advice
- The pension freedoms came along and with it a new level of engagement in pension
- The asset management market review – the CMA referral the establishment of the IDWG and new disclosure proposals from the DWP make the collection of data about our pension policies – a practical possibility.
I am not saying we are there yet. But I do think that if I were to go back to Martin Lewis and have that same conversation today, I would come to a different conclusion.
Perhaps I’m a dreamer. But I dream of those 25m people signing up to a pension comparison service that delivers them without cost and obligation – with a series of value for money scores on their various pension pots that enables them to take decisions. I would like people with many small pots – with one big pot – from which they can manage their retirement income, or at least exchange the money for a big annuity or even a CDC pension.
This my blueprint for pension consolidation and anyone who wants more info, can contact me at henry.tapper@pensionplaypen.com
Nothing wrong with being a dreamer. But what would the business model be, behind such a site?
The comparison sites you mention spend vast sums on marketing to win customers, then earn money from insurers. I don’t think that translates easily to pensions. Would the member have to pay something to consolidate pots (as the act of consolidation incurs costs)? So could this compare and consolidate site manage that transaction and be rewarded for that?
As an aside, I don’t like the established insurance comparison site business model. Too much personal data being loaded into a software machine which then instantly disseminates the data to multiple insurers (for the purposes of producing a quote) much of which is unknown to the consumer. Not saying that would apply to a pension comparison site. My point is that the consumer insurance comparison site model is not good for consumers wrt their data. Especially if its highly sensitive medical data relating to life insurances etc.
There is no business model yet – what would it look like? I guess that it would require 100,000 + pots being transferred with aggregators paying fees to get the money. The cost of acquisition would have to fall to make this work – and it’s currently too high. MSM aim to “achieve savings for customer and product providers” (while making money for their shareholders). I guess the business model would have to do all three from the economies of disintermediation.
It is expensive and time consuming work. Have you tried dealing with the likes of Phoenix and the other pension consolidators recently. The fear of being sued (pension misseliing) is also very much likely to keep MSM et al avoiding such risks.
Yes – hopefully we’ll get some help from their very good IGC
Apples and Pears
The challenge is how to describe a complex set of dysfunctional rules simply, however, I can’t imagine how the discretion a trustee has in determining the resulting benefits would be presented especially when the promised benefit seem to only move in one direction
Oh dear! Not sure this is a very good idea. Comparison websites work when the data being sorted is predictive of outcomes: eg you get annual insurance cover with this scope and it costs this much in annual premium and other differences (such as financial strength) don’t affect outcomes. Non-objective inputs such as service standards might affect outcomes but in that case it can often be addressed by review data, like Tripadvisor. But when applied to investment products, not only is performance not a predictor of outcomes but the rules are about to change to ensure that past performance is substituted by possible performance – ie probabilities not actuals. So for the right (albeit counter-intuitive) reasons you won’t have a basis for relating performance and cost, only risk and cost which is a pretty meaningless connection to make.
The exercise might look valid when pensions are assumed to be a product but they are rightly increasingly seen as a process, implemented via any number of different products and ideally across both pension and non-pension wrappers. So consolidation is helpful when it is the work surface on which total (holistic) savings and spending is planned. The added value comes from far more useful things you can do with the information than just selection. The only selection that matters is the provider of the work surface and the algorithms that power it.
Hmm – pensions far too complex to be left to ordinary people to sort out! Well – we will see about that!