Must we remain in darkness about our retirement money?


pot follows member 10

The two comments on this thread from David and Matt, show the two ways that pots could follow member. David’s solution is the solution that Hargreaves Lansdown want our Government to adopt. Matt points out that it could force good money to bad in contradiction to what I call “financial gravity” – where bad money flows downhill to the most efficient pool.

As most people will know, I work a lot with payroll organisations who work for smaller employers offering them employee benefits – where employee benefits firms cannot reach. Sage for instance have recently introduced a number of benefits that members can access via payroll; pensionsync are keen to do the same.

What payroll has is the currency of the age “data” and that data can be used (even in a post GDPR world) to the good of employees.

Payroll is key

Whether a super streaming system is introduced, or whether employees are offered informed choice, it is hard to do it manually. There are more than 1m employers in the UK offering workplace pensions and only a small part of the IFA community offers advice in the workplace. There are still around 80 workplace pension providers, they do not operate to the common protocols, David mentions as statutory in Australia.

In short, we can aspire to the HL system of super-streaming, but in the meantime must make such information available to staff as to allow them to make informed decisions on their previous pots. Let me show you what I mean.

Let’s suppose that I licensed to payroll, a system that allowed an employee to compare the workplace pension he or she was in, with the rest of the market, it could look like the screen on the left.

ppp screen 2

And let’s suppose that the person looking was going to another employer who had a Legal and General workplace pension on worse terms, the comparison could look like the one on the right. Same product – worse terms.

the employee would be foolish to transfer from a personal pension with a “76” score to one with an inferior score of 72. Financial gravity would keep him where he was.

Looking at the comparisons (all completely fictional btw), if that person then went to work for Standard Life, and if his “good to go” product was rated at 78/100 (see bottom of left hand screen), he might consider transferring his L&G benefits to Standard Life. That’s financial gravity in action.

There are some snags with this.

The first snag is that the system of rating does not exist (yet). As readers will know, I am working on this. We are close to having an algorithm I hope to test in the FCA’s sandbox. The basic components are here.  We need to know the fund costs and the contract costs to know the money and we need to know the performance and the volatility to assess the value. There are other things that go into the score, such as the user experience, governance and engagement with responsible investment – but let’s keep things simple for the moment.

VFM scoreThe snags are all around the scale of the problem. The Pension Genome is huge and inaccessible. It’s one thing analysing Standard Life, Legal and General or even Hargreaves Lansdown’s, it’s another analysing those 40,000 small occupational DC funds in the UK, or the £400bn of money in what the FCA calls “non-workplace pensions”.

Mapping the Pension Genome to get VFM scores for everything is a major undertaking and a bit of a snag!

Commercial considerations

The Hargreaves Lansdown system and a VFM system could both work. If you employed the HL system, then there would need to be member engagement to ensure good money didn’t flow to bad and then a system of VFM scoring would be needed.

Perhaps HL could instruct an independent firm to do that work for them. Then there might be a commercial model that would allow  providers to participate in a system where money flowed to them by financial gravity (if they offered VFM).

But what of those organisations who would not fare so well out of VFM scoring? What of organisations who have consistently low VFM scores. Could they “gate” their community and refuse to participate in something that threatened the embedded value of their book?

That question is one for the Pension Regulator and the FCA. In my opinion, such behaviour would be looked at dimly by any Regulator who included “treating customers fairly” in its rulebook.

When people like Andy Agethangelous and Dr Chris Sier talk of “sunlight being the best disinfectant”, this is what they mean. If we can get to a point where VFM scores, coupled with the kind of technology, HL are advocating, are in place in our workplace pension system, then we can expect to get a disinfected pension system recognised by the public as working for them.

Till then we will be  like Malvolio and Feste the Fool, debating ignorance and madness in Pythagorian abstraction.

Fool and malvolio

We sense this will end badly for Malvolio and so it does, he cannot grasp what is going on and is consigned to his dungeon by Feste

Fare thee well. Remain thou still in darkness. Thou shalt hold the opinion of Pythagoras ere I will allow of thy wits, and fear to kill a woodcock lest thou dispossess the soul of thy grandam. Fare thee well


Our question is whether we will suffer the same fate!


feste and malvolio

The principal/agent problem

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in advice gap, Payroll, pensions and tagged , , , , , . Bookmark the permalink.

2 Responses to Must we remain in darkness about our retirement money?

  1. Dave C says:

    I’ve sat and watched for almost 15 years now and good money is still thrown after bad in pension comms trying to force people to understand complicated pensions.

    AE sounds like it’s already failed because it’s baffling.
    I thought AE was an individuals DC pot that they could do what they wanted with.
    Now people are proposing making it more complicated so it’s better?

    The industry needs to step back and let consumers have some freedom and they will naturally feel empowered, be engaged, and the market will find its own groove.

    But simplification for consumers is a juxtaposition when the pension industry thrives on complexity and fees!

  2. henry tapper says:

    We are trying to make the complex simple

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