How do Customers benchmark what’s good about their DC pension?

henry tapper

8 years ago

the way things were

For employer’s it’s all been about inter-operability

I’m returning to a question that has bothered me since the inception of auto-enrolment over six years ago. To begin with, it was a question for employers and could largely be answered in terms of compliance. When there is no money in or interest about a workplace pension, then the most important thing is what Andy Agethangelou calls inter-operability.

The inter-operability of workplace pensions between the central databases of pension providers and the payrolls of the million+ employers who now exchange data on a periodic basis, has dominated the conversation.

Conversations about the investment, charging and usability of these workplace pensions, as they impact members, has taken second place. This has been much to the frustration of some providers (particularly Standard Life) for whom the commoditisation of the investment process in favour of inter-operability and the cost of the pension to the employer, has been particularly galling.

Over the period of auto-enrolment, both Standard Life and Legal and General have moved the focus of the workplace pension onto investments with Standard Life Investment Management and Legal and General Investment Management the effective owners of new pension business. The sale of the Standard Life business to Phoenix and the marked winding down of L&G’s life operations has coincided with auto-enrolment moving into the highly unprofitable small schemes space.

In this environment, those organisations with newer , cleaner propositions – typically the large master trusts, have hoovered up most work with NEST and People’s Pension becoming the largest providers with over 6 and 4m member accounts respectively.

So far, it has been core metrics about employers signed up and membership that have mattered to master trusts and present and future “profitability” (for insurers), that has determined the performance of their workplace pension divisions.

This will change over time

But what of the 10m new savers?

The new savers are silent. They don’t have the financial clout to say much and as yet, individual accounts are not attracting much notice. We know from the Australian experience that this will change and people will start asking questions when their workplace pension pot balances exceed the value of their car, their salary and their house.

Prudent providers should be readying themselves for the advent of questions about how people’s pensions are doing.

It is not just the providers but their fiduciaries who should be turning their attention to this question. The trustees and IGC members should be able to answer that question in terms of the things that matter to members (not interoperability!). What matters to members is

How much have I got in my pot?
What value have I got from savings?
What am I paying for my pot?
Am I getting value for my money?

I don’t think you can answer these questions with performance charts, Ongoing Charges Figures or vague statements along the lines of “In our opinion XYZ is giving members value for money”. People will want things which are personal to them. Note that each of the questions has the word “I” or “my” in it. In a world of individual pots, collective answers don’t quite cut the mustard.

The statutory obligation to measure “value for money”

The insured/SIPP value proposition

As has been hinted at above, their are fundamental difference in the value propositions of the insured workplace GPPS and those of the mastertrusts. The big difference is that the former offer choice and the latter don’t, specifically choice on investments.

For this value proposition to justify itself, members must be shown to be exercising choice. If a Hargreaves Lansdown or True Potential SIPP offers an array of funds but only the default is ever used, then the value proposition of being a “self-invested personal pension” falls away.

As most self-selection is advised, a good proxy in the early stages of a workplace pension’s development is the availability of advice to members. Through the auto-enrolment period, the big three Scottish insurers – Royal London (formerly Scottish Life), Aegon (formerly Scottish Equitable) and Standard Life have all promoted workplace pensions through financial advisors. Indeed platforms like Pension PlayPen (being non-advised) have had little attention from these insurers.

Where advice is available, insurers are less responsible for the reporting of value of money at the fund level – this is an advisory function. But advisers find it very hard to be paid by employers for doing anything other than monitoring compliance on interoperability. It is hard to justify individual financial education or advice, if the sums advised on are individually so low.

Without commission – advisers are having to rely on individuals to consent to having their pots charged and individuals are reluctant to pay extra for services they are yet to value. The investment value of advice within workplace pensions is currently nugatory, but it will grow.

It is very much in the interests of the providers of workplace GPPs to monitor the uptake of advice, the impact it has on “self-selection” and the awareness advisers are creating of “value for money”.

To test the ongoing hypothesis that self-selection is helpful to members, providers should be looking at the individual experiences of those using the Default versus “Switchers and Self-harmers” i.e. savers who “trade” funds .

This analysis should give a feel for the impact of trading costs and behavioural finance issues.

According to noted analyst John Quinlivan

“The US data suggested that the delta between mutual fund returns and mutual fund holder returns was circa 220bp pa, CASS business school suggested that the UK equivalent was 120bp pa”.

The D2C value proposition (the master-trust version)

The questions around value for money are much less sophisticated for master trusts where diversification away from the default is not so valued and where the focus is more on a direct relationship with the customer. In the absence of a financial adviser, the direct to consumer providers and their fiduciaries (trustees) have to think of value for money as their principal selling point.

When promoting themselves to their non-advised investors in the USA, Vanguard suggest that people should be asking themselves the following questions

What’s the difference between a load fund and a no-load fund, and why does it matter?

Should I pay attention to independent fund ratings?

How do mutual funds—and the people who invest in them—make money?

What’s “total return”?

Why is the return Vanguard reported for my fund different from the return I earned in my account?

What’s “diversification” and how does it help reduce risk in my investments?

How risky is it to have most or all of my investments with one company?

Clearly these are not the questions that UK investors are used to being asked. It is unlikely that the majority of the 10m new savers auto-enrolment has created, will ever be asking these quesitons.

Organisations such as NEST and People’s Pension , NOW and Smart are going to have to find metrics to show to people that are relevant to them, both for fiduciary and marketing reasons.

Historically reporting to members has been on generalised lines

“Over the last 5 years our average pension member has….achieved…”

“Our average fund has returned x% above cash for the last y years

“Our average “retiree has had a return of x%…”

“Belonging to a pension scheme is important, not only do you get employer contributions and tax relief, if you had been a member on average you would have earned an x% pa return”

In my opinion, these kind of statements still don’t cut the mustard. People don’t want general information, they want stuff that is specific to them.

Whatever the value proposition, people will want to know about them.

With this in mind, I think the market should be developing to report individually on performance looking at the specific rates of return achieved by each policy.

Unless we are in a collective DC arrangement, the onus for pot management is ultimately down to each individual person who has a pot (or pots).

To treat people as part of a homogenous unit and report to them in general terms is no longer going to be good enough. People will want their own individual value for money reporting which answers the four questions

How much have I got in my pot?
What value have I got from savings?
What am I paying for my pot?
Am I getting value for my money?

Until we have found a way to answer these questions for each individual, I think trustees, IGCs and providers are failing their customers.

A working model for the future.