To my mind , the only meaningful way that someone using a workplace or personal pension can test for value for money is by comparing the money they put in with the value they get out.
This is known as “outcomes-based” value for money testing and it is loathed by a proportion of the pensions industry as being “too simple”.
I’ve started pushing back on “too simple”, I want to know why value for money should be more complicated. I asked my friend Laurie Edmonds at a recent conference. Laurie thinks that what matters for outcomes is the amount of money we put into pensions, so he would like VFM to be a measure of how successfully a pension plan attracts more than minimum contributions. He wants it to be a measure of engagement
Should “Value for Money ” measure engagement?
Knowing and liking Laurie, I’ve really tried to see how this would work. But I can’t see how you can measure whether it’s the pension plan that’s creating the engagement or a whole load of other stuff, such as an employer’s willingness to pay more into a plan, the power of advice or advertising , in short the marketing budget committed to attracting money to this plan.
If VFM is about the attractiveness of a pension plan then we shift the value from investment to marketing which puts a lot of power in the hands of those with deep pockets. It is infact an untransparant measure as it implies that an advantage can be gained to an individual by spending their money getting more of their money.
Member engagement which encourages good behaviours, like making sure people get the best outcomes can mean ditching the plan that is promoting itself in favour of a more suitable way to build up or spend retirement savings. But if all “engagement” means is messaging to save more, then we could award high VFM scores to scammers.
For most people , the proven way to increase savings is through a gradual increase in contribution rates through payroll. This has nothing to do with providers and everything to do with employers and Government policy.
Ironically, the best way for a bad savings plan to offer value for money to its savers is to come clean about the poor outcomes it is giving and to nudge savers towards better products.
The kind of engagement you get by being honest is likely to be better than the spin that insurance companies (and others) have been selling us as “engagement” these past 40 years.
Should value for money measure risk?
A number of people ask me whether my AgeWage scores measure the amount of volatility in an investment fund.
It would be possible to show volatility in outcomes by doing an AgeWage test each day for a year and seeing how a particular individual’s outcomes changed from day to day.
If an individual wanted to achieve maximum consistency in terms of day to day outcomes, they’d push all their money into cash. But this would carry its own risks as the cash-out from real assets would be subject to market fluctuations. To achieve low volatility in outcomes you would have to accept lower returns from cash which you would only do – if you didn’t want a pension (an AgeWage) but money in your bank account.
If the measure of risk is “low volatility of outcomes”, then it is almost certainly the wrong measure.
The risk that AgeWage scores should be measuring is the risk of doing nothing as opposed to doing something. Whatever the score presented, the next step is to work out whether staying in the plan is riskier than moving to another plan.
A simple score cannot measure this risk. What is needed is an explanation of how a score came to be high or low – experts would call this an attribution analysis, ordinary mortals would call this advice.
If we want to measure value for money as a measure to help people to decide what to do going forward, we are kidding ourselves that we can do so with any rating system.
The best that VFM can do – is to measure the impact of returns relative to time-weighted money and use this as a springboard for a proper discussion of forward looking risks. Simply providing people with a measure of achieved levels of volatility in the past would be an expensive and fruitless process.
Should value for money be measured by a balanced scorecard?
Almost without exception, IGCs and Trustees are choosing to measure VFM by creating a series of measures, weighting those measures and then scoring the workplace pensions they are analysing in terms of this “balanced scorecard”.
This is fine as a measure of the VFM at a provider’s book level, but it informs providers and regulators, not individual’s. Knowing that the plan offers good value for money relative to whatever benchmark is chosen does not tell individuals how they have done and is consequently uninteresting.
Unsurprisingly, VFM assessments conducted by IGCs and Trustees are largely ignored. I have never seen a provider claim they have changed strategy as a result of one, regulators have yet to enforce action as a result of one (there has only been one FCA referral by an IGC and that has not resulted in so much as a public statement from the regulator).
The sad truth is that the balanced scorecard approach to VFM assessment is too bland , too general and too abstract to be noteworthy. It effectively consigns the work that IGCs do, to the appendices of our daily lives.
Can pensions be too simple?
It is a sad irony that the consensus within the pensions industry is that pensions are too complex, but that when an attempt is made to simplify pensions , the consensus is that a simplified measure is too simple.
If we cannot measure outcomes on a time-weighted money in , money out basis, then we are back to the twenty page explanations that we all know turn people off.
Ruston Smith’s attempt to produce a simple pension statement that told people what their pension pot was worth, what it was worth last year, the money that was being paid into it and the money that was taken out of it has been emasculated beyond all measure.
It seems that we can’t tell people how much was taken out of their pension for fear that they will stop contributing (see my criticism of “engagement as a measure).
Instead of giving people simple facts, as they’d get on a Tesco Till Receipt, Ruston’s statement is now full of narrative telling us how we should be careful about reading too much into the numbers.
And behind all the changes is the statement that anyone who wants to look further into their pensions should take financial advice.
So what started as an attempt to release people from complexity , ends up telling people that pensions are too complicated for them to get the information they want in a simple way.
Can rating pensions be too simple?
So long as we are obsessed with the risks of simplicity, we will never deliver it.
But whether we like it or not, people will take decisions on whether their pension pots are worth keeping, no matter what we do. After all, these pension pots are their money and they have the freedom to do what they like with the,
People want a simple answer to the question – “how has my pension done?”. They don’t want 10 different answers all starting with “that depends on…” nor do they want an answer that tells them about the performance of their provider/fund manager/comms team/administrator.
People want a simple rating of how their pension has done that is as matter of fact as Experian. They don’t want excuses, they want a rating.
Ratings cannot be too simple, they are what they are – a quantative or qualitative assessment of something compared to something else.
And when we can agree that providing people with a simple way of rating how their pension pot has done, then we can start moving forward to look at the complex things that go into deciding what to do next.
If you like what I am saying and support a system of ratings, please visit the following site and consider making an investment in www.agewage.com