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!
