In the Work and Pension Select Committee’s report on pension transparency, one demand has caught the imagination of the pension community
You can read Kim Kaveh’s excellent article here.
Professional Pensions ran the question on its Pension Buzz survey and asked its readership what the single definition should be . This is what I wrote.
“Value is what you get out, Money is what you put in and value for money is what happens in between”
The more you think about it, the truer that simple statement is – and the more universal.
VFM to most of Britain’s millions of consumers does not lie in the user experience of the product, nor the variety of fund choices, nor in the range of at retirement choices. It lies in the simple equation – “money in v money out”.
Will the pension industry adopt such a transparent approach?
Frank Field said that he thought the pensions industry incapable of adopting a transparent approach to what it does. Pension Age asked the great and good of our industry if we were, of course the great and good said Field was wrong.
To quote David Rowley
The Work and Pensions Committee has called on the government to compel all pension schemes to show how they are providing value for money, as it is ‘unconvinced’ the industry can rise to the challenge itself.
So just what is the big idea?
My idea is very simple; Every person or business saving money for retirement can benchmark its savings history by submitting a data file to me containing their contribution history and the current value of their pension pot (the NAV). In practice, they can delegate authority for me to get this information for them.
I will, with the help of a co-operative pensions administration community, get the information requested in digital format and will provide the following information
- The money you have put in
- The value you can get out
- What’s happened in the middle
The third bit’s the tricky bit, as I have to compare the value of your pot with the theoretical value of your pot if you’d been invested in the average or “benchmark” fund. I and my genius friends have created this benchmark fund with the help of Morningstar who set it up and who maintain it.
What we’ll tell you about what’s happened in the middle is
- The rate of return all your contributions have received after charges
- The rate of return your contributions would have got if invested in the average fund
- The score you have achieved (out of 100) when we compare your Value for Money with everybody else’s.
This is the big idea and this is how you will get the score.
The proof of concept
I have now convinced myself and my colleagues on the AgeWage advisory board that we can collect sufficient data to measure this number, thanks to brilliant organisations like Evolve, Royal Bank of Scotland and Scottish Widows for helping with bulk data. Thanks to Royal London for pioneering an easy way to get individuals their VFM score. Thanks to the FCA and DWP and tPR for being supportive and thanks to the other providers who are getting there!
The real proof of concept for me is whether the organisations that need to show consistent value for money metrics, will agree to use our VFM standard.
The Work and Pensions Committee has called on the government to compel all pension schemes to show how they are providing value for money, as it is ‘unconvinced’ the industry can rise to the challenge itself.
Like Frank Field, I think it unlikely that they will adopt a single VFM standard. I think they will continue to consider the feature of the products they have created more important than the outcomes of those products . I think they will continue to score on a Red , Orange and Green basis, the various aspect of the UX they think important while ignoring what ordinary people want to know – the value they’ve got for their money.
People will put up objections that my approach is too simple.
They will say I should be including volatility measures.
They will say that a simple system of scoring will encourage people to take bad decisions.
They will get angry with my scoring system, many already have. That is because it is too simple to meet their complicated needs. As one CIO told me, if pensions were as simple as you make them, I’d be out of a job.
Hard things can be made simple, but they will always prove controversial when they are.
I asked Frank’s question on twitter yesterday
Yes, that’s over simplistic. People need to give consideration in measuring VFM to among other things costs incurred in managing their money, investment performance (return and risk level), and services provided along the way. That said, we should be able to set a common measure.
— Scott Bamber (@ScottBamber7) August 5, 2019
If Scott – or anyone else can find a common measure for value for money which people can understand and find genuinely useful, I am happy to move to it.
However, in the five years I have spent trying to find a common measure to VFM, I have found nothing better than the measure I am using – creating the AgeWage score.
If you would like to be part of my proof of concept and have at least one DC pot I can measure for VFM, drop me an email on henry@agewage.com. It may take me a couple of weeks to get the data, but I promise me and my team will do our best!
Whilst liking your concept I still do not believe it is safe to give such a simplistic age wage score. Human nature dictates that someone getting a score of less than 50 would be inclined to move to a higher scoring fund. And this might be entirely wrong and dangerous for someone with an attitude to risk of “stick it under the mattress” since long term this type of “No risk” approach would almost certainly lead to a low Age wage score. And yet they would probably feel they were getting value for money if their score was the highest of all similar funds offering “no risk” investment.
Brian , telling people how their funds have done is not a discretionary activity, if people want the information they can ask for it, the Data Protection Act and GDPR see to that. I will only push on from the proof of concept I am currently conducting if the behaviours of my test group suggest that people will not self-harm. Personally I think that people are a lot less likely to self-harm than you suggest but that too is speculation! Bottom line is we need evidence of whether producing these scores is helpful – so please feel free to join in and give us your feedback
well I hear what you say, but I feel that the simple AgeWage score is an entirely inappropriate measure of value for money if adopted by the whole industry, since they would not necessarily offer the same access to further information that your team might provide. Also when or if your service becomes paid for rather than free to voluntary users one has to question the value of such a simple score
You are entitled to your view Brian but can you provide an alternative definition to value for money?
Not without being paid to do so !!! But I do feel that risk adjusted returns are more valuable than bald VFM as you are currently proposing. Just because something is harder to do does not mean you should go for the simple option. Although I do appreciate the need for simplicity from the members point of view
Well I appreciate your candour Brian
Well, no point in beating around the bush.
Hi Henry, We at DWA have been doing this for 4 years now across a range of MT and GPP that we monitor. While the net historic value added is indeed often a function of the risk taken, and whether that paid, we try to adjust for this by using a forward looking estimate that takes risk into account. We have most of the major MT, save a few which refuse to share their data. Something we are still working on though is the intangible benefits, for example if your money is invested in an ESG or Sharia fund and you value that aspect over and above the actual return. Kind Regards Dean
I sometimes think that one of the biggest challenges financial services face is the input and output are measured in the same terms. With most other products the input is money – the price – while the output is some utility – the ability to listen to music, to travel from a to be, to nourish myself, etc. But in financial services, the input is money and the output is also money. This tempts us into direct comparison of the outputs to the inputs to determine value for money in a way we’re not tempted with other products. So if I put £100 in and get £200 out and you put £100 in and get £150 out, its tempting to say I got twice as much value as you did. But what about other factors, like risk and ESG, etc. What about the 5 extra hours I spend on the phone because the web-site was down and the call center was under-resourced and under-trained, and the product literature which meant I didn’t actually understand what I was buying. The risk with a simplistic view of value for money is that it causes a ‘race to the bottom’.
I applaud what you’re doing and think some form of ‘all-in/after-costs rate of return’ should be mandated. But I think we should _also_ be having a broader conversation about what value for money really means.