The only meaningful measure of a pension’s “value for money” is its appreciation by those getting the money – the pensioners and future pensioners.
But those who offer pensions – providers, sponsors and fiduciaries are worried that the answers they get to a question “do you think you are getting value for money from your workplace pension”, may not solicit the response they want.
So instead of asking the question and publishing the response, we get statements from providers, IGCs, trustees and employers with the same message – that the pensions are doing their jobs.
Telling people they are getting value for money is not the same as offering it.
If the only meaningful measure of a pension’s value for money lies in the appreciation of it by the member, then we need a measure – a benchmark of what average value is, and a further measure of how much above or below that benchmark, each individual is getting.
Establishing what the benchmark for value for money is , is no easy business. IGCs , trustees and providers have struggled with this for several years.
The major stumbling block is that individuals want to measure value as the value they get for their money – effectively an outcomes based internal rate of return, while providers want individuals to consider value as the potential within their product to deliver better outcomes in the future.
When the IGCs went to a large group of members in 2017, they discovered that the only measure that most people consider important from their pension is its outcome, specifically their outcome. The research carried out by NMG showed conclusively that other factors relating to engagement were of very secondary importance.
It would seem that outcome based metrics for VFM have not been pursued, either collectively or at an individual level and members of trust based schemes and policyholders of contract based schemes are still as blind to the performance of their individual pension in 2019 as they were when the IGCs were established in 2015.
I fear that this is because of the fundamental conflict inherent in the fiduciary process. We are frightened that in telling people the truth , we risk frightening people away – or even courting litigation.
Earlier this month, NOW pensions were criticised by the Work and Pensions Select Committee for delivering worse outcomes than their principle rivals, NEST and People’s Pension.
We know that this is the case, NOW do not deny it. NOW took a bet at the time when the pound plunged , to hedge currency. The cost of hedging was felt in fund performance, the strategy didn’t pay off and NOW are vulnerable. Were we to measure the Internal Rate of Return of a NOW pension pot over the past five years, with a People’s pot or NEST pot, the NOW pension pot would show badly.
Employers participating in the NOW mastertrust are unlikely to want to share this news with staff for fear of “negative engagement”. Yet engagement – whether positive or negative – with pensions – is generally considered a good thing.
The trouble is this conflict between fiduciaries whose job it is to tell the truth and the prevailing opinion that we only give members of pension schemes good news.
Winners and losers
I was in a meeting last week where a trustee of a large occupational scheme asked me whether I intended to scare her members with AgeWage scores. AgeWage scores tell people how their pension pots have performed against an average pot.
I could only reply that our numbers tell the truth and so long as the comparator – the benchmark – is accurately constructed, the score will show how well or badly someone performed against the average saver.
This appeared to be both the right and wrong answer. This particular scheme, which is quite mature for an occupational DC plan, has a great diversity of investment options and historically did not provide a default choice – people had to choose and in choosing, they dispersed into a wide range of funds.
The suspicion is that were everyone in the scheme to get an AgeWage score, the distribution of outcomes would range from the very low to the very high. Some people would find themselves winners and others losers.
While this dispersion would not be so wide in a scheme like NEST where almost everyone is in the default fund, IRR’s are sensitive to the timing and incidence of contributions, especially when some of the contributions are exceptional or where there are breaks in contribution histories.
Many people’s actual experience of a pension scheme (in terms of outcomes), will be determined by chance, whether they bought into a fund at a high and get out at a low (and vice versa). Even for a mono fund scheme (like NOW) – where there is no choice, there can be radically different IRRS and – by extension AgeWage scores.
So here is the question…
Are we better off telling people how their pension pots have done – or not?
My answer is that we are better to tell people what has happened and is happening to their pension pot for three simple reasons
- It is transparent practice, and transparency is the best disinfectant
- It will create engagement and failing to engage is risky for members and policyholders – look at the chart below.
- It is a regulatory requirement that IGCs and DC trustees tell people the value they are getting for their money.
Engagement – a double edged sword?
The corporate risk of offering a DC pension is more than operational. There is a very real risk that disappointing outcomes can cause reputational damage to providers, sponsors and fiduciaries. If we don’t believe that, look what is happening in Australia where the Royal Commission is taking to task bad practice in some Super schemes to massive detriment to the plan sponsors and service providers.
If employers are led to believe that they have no responsibility for the outcomes of the DC plans they sponsor – and this is generally the view of employers – then we have a major problem brewing.
That problem is that people now have the right to information held by third parties about them. This is new and arrived with the Data Protection Act 2018 which gives people the right to their data in machine readable format.
If people are allowed their contribution histories , then theoretically they can work out the value they have got for their money, despite the wishes of third parties. Finding awkward truths have been concealed is a whole lot worse than publishing the truth. Compare the frank disclosure of Adrian Boulding and NOW at the Work and Pensions Select with the behaviour of the Super’s castigated by the Royal Commission. Now think of that a million times over.
The question is not whether we can afford to disclose – but whether we can afford not to.