Value for money? Let the saver decide


Earlier this year AgeWage ran a series of snap polls which proved popular enough!

VFM poll.png

We have spent the past six months asking people what they want to know about their workplace pensions and they tell us that once they’ve found them and found out what they’re worth, what they want to know is whether they’ve had value for their money. This blog looks at how the value for money assessment has evolved since the OFT demanded IGCs be set up to tell people the VFM they were getting.

It’s not gone well has it?

People outside of pensions think that people in pensions are making a meal of value for money.

If you look at the various definitions of value for money or “moneys worth” used in this blog- you’ll see they are very simple – and can be universally applied.

If you look around the practical ways value for money is assessed, you find examples which simplify complicated things into formulae that people understand.

This is what’s behind Frank Field’s frustration when he complains in a recent paper on transparency that

We repeatedly heard in evidence that there is no clear definition of what good value for money means for pension schemes. Perceptions of value for money will vary depending on the perspective being considered and attitudes to risk, return, costs and other factors

He ends up calling for an

“agreed definition of what is meant by value for money in the pensions industry. Although individual schemes will need to vary their value for money goals, without agreed definitions it is not possible to make effective comparisons”.

In practical terms he questions whether what we do at the moment works and he calls for an immediate review of Value For Money practices

The review should assess whether or not this requirement leads to better scheme focus on achieving value for money and better communication to scheme members about value for money.

So let’s look at how VFM is being used elsewhere. I’ve been looking around and the first thing I’ve notices is that…

VFM is a lot simpler than pension people think

The way that people estimate value for money is by a simple analysis of inputs and outputs. Take football, you want to know who is delivering value for money, take goals v salary

Screenshot 2019-08-21 at 05.44.38.png

Actually, best value for money last season came from two south coast heroes, Callum Wilson – who’s goals cost Bournemouth around £148,000 and Brighton’s Glenn Murray who only cost £122,000 a goal.

Purists may point to a host of other factors, but this is what matters for Talksport listeners……..

Now let’s move on to how Government does Value For Money assessments for what it buys

Government procurement may look complicated

Comparing outputs and inputs

Screenshot 2019-08-21 at 05.35.59.png


But in practice, it’s very simple.

A local authority sets up a new programme to reduce litter dropping. One of its early steps is to agree with stakeholders a set of outcomes for the programme. The effectiveness of the programme is to be judged on the extent to which it reaches its outcomes in a year.

In this case, the programme achieves 97% of its outcomes and councillors declare they have ‘come within a whisker of winning the battle against litter’. The programme was effective.

However, the programme cost more than expected and overspent its budget by 25 per cent. This was because the programme managers allowed costs to over-run in their drive to meet the outcome. The programme was not economical.

The cost over-run prompts a review of the service. This concludes that, outcome for outcome, it was more expensive than similar programmes in neighbouring areas. The programme was not efficient.

If programme objectives had been exceeded sufficiently, the programme may have been cost-effective despite the overspend. However, programme managers could still be criticised for exceeding the budget.

The most disadvantaged parts of the area were also those with the biggest litter problems and these neighbourhoods improved more, from a lower base, than wealthier places. The programme was equitable.


So how have pensions people got in such a mess?

The idea of using value for money assessments in pensions to ensure people are protected from rip-offs has been around a long-time. The Stakeholder Price Cap was introduced so that the money we paid for our pension management was capped at 1% of the amount under management. These early price cap set the tone for VFM debating and by the time the Office of Fair Trading reported on rip-off workplace pensions in 2014, this idea for VFM had  already taken root.

Here are some slides delivered by Sandy Trust to the Institute and Faculty of Actuaries.

Sandy starts by saying that VFM is in the eye of the beholder, quoting trip advisor.

Screenshot 2019-08-21 at 06.03.33

but concludes it can’t be as simple as all that…Screenshot 2019-08-21 at 06.03.59

It is at this point that the member’s view of VFM is replaced by that of various Government organisations (office of Fair Trading, National Audit Office, Financial Conduct Authority and The Pensions Regulator).

The conclusion is that VFM in pensions (especially pension savings schemes) is already out of control, it cannot make its mind up whose perspective it’s measuring, it’s complex , it’s expensive to measure and there is little clarity of approach.

In short it presents an opportunity to actuaries to “help customers and in so doing help themselves”. 

Screenshot 2019-08-21 at 06.05.16

Sadly value for money has not helped savers – though it is helping actuaries 

We now are in a position that every DC  trust and contract based work place pension must report on value for money in its own way, through the formulae of IGCs, GAAs and Trustees with the help of their advisers – typically the actuaries who sat in the room listening to Sandy.

Far from simplifying pensions , VFM has become one of the most complicated areas of pensions.

  • Some providers use returns based formulae such as CPI +3% (Adopted by the Prudential)
  • Some providers use a balanced scorecard, assessing each aspect of the workplace pension either using numbers or the “red orange green” or RAG rating system.
  • Others seem to have abandoned all objective reasoning and adopted a “let’s give our lot a tick for VFM and go down the pub approach.

It’s time we listened – not to ourselves – not to Government – but to the savers

In 2017, in a rare moment of unity, the heads of the various IGCs clubbed together and got a project underway led by NMG. The report produced what its co-ordinators – Sackers – described as

some interesting and unexpected insights into how members perceive value for money when it comes to pensions.

The overwhelming insight – that dwarfed all others was that for ordinary people

Perceptions of what value for money means focus around ‘good returns’:  In the online survey this was the top rated attribute; the workshops revealed this is much broader than investment returns but is perceived by members as achieving a good outcome at retirement.

This isn’t complicated at all. It goes back to the simple examples we looked at earlier.

  1. Goals for money
  2. Litter for money
  3. Holiday for money

So why not “money for money”? 

What members said they wanted as their VFM measure was very simple. They wanted to know the amount that they got at retirement compared with the amount saved.

The pensions industry has refused to address that simple request

“Value for member”

Instead of a simple way of calculating the amount of money out for the amount of money in , we have decided once again that members cannot have what they want, they must now have a new metric called “value for member”.

This is a clever ruse that perverts the simple idea of “money in – money out” and returns us to an abstruse formula that no”member” or any other kind of saver, will either understand or be interested in. Value for member requires trustees to

assess the extent to which those charges and transaction costs represent good value for members. Trustees are required to detail the level of charges and transaction costs under their scheme and explain the outcome of their good value assessment in a new Chair’s annual governance statement.

We are back in the cul-de-sac we explored earlier with the OFT/NAO/FCA/TPR/IFOA alphabet soup. This time we can add in the PLSA, who in conjunction with the Investment Association have come up with this new way for actuaries and others to make money – at the expense of value for money.

Why we can’t have what savers want?

Savers have had precious little say in what they consider value for money from the pension saving schemes they choose to join or choose not to opt-out of.

Instead of what they want, they get what the OFT/NAO/FCA/TPR/IFOA/PLSA/IA think they want. Which is exactly what the pensions industry wants but nothing to do with what savers said they wanted (when asked).

What savers want is to know how their savings have done. They want an answer that is simple, ideally simple enough to be expressed in a score or ranking.

They want to understand that score or ranking  as how they’ve done relative to the average person and that is all they want.

They do not want a detailed attribution analysis that looks at costs and charges, risk and return, details the quality of comms, at retirement options and a host of other “features” of the pension plan.

They want a simple way of assessing their pension savings and how it’s done.

Why can’t we give them it?

AgeWage evolve 2


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Value for money? Let the saver decide

  1. Eugen N says:

    You are right, clients price high ‘good investment returns’.

    What 89% value for money would mean to the saver? People are not that good with percentages to be able to make the difference between 78% and 89%.

    For example, having a 75% value for money may mean 1.45% per annum underperformance, instead of 0.75% per annum underperformance for 89% value for money. Assuming this is the auto-enrolment scheme, and the switch to another scheme is not possible, it could mean that it could be good to access the £500 allowance for pension advice to have this looked at.

    This leads to another problem, pension schemes have a lot of cheap funds available, so for example I could easily recommend a 70% Global Equity, 10% Global small Cap, 20% Investment grade asset allocation, but the pension scheme does not make available a simple automatic rebalancing tool!

    We would need to have a benchmark against which performance would need to be measured. For me for the default fund, it would be the one above!

  2. henry tapper says:

    Eugen, you have completely misread the 89 – it is not 89%! What we do – which I explain on this blog is look at money in/ money out and create an Internal rate of return, we then use our Morningstar Index to understand the average return (net of charges that this contribution set has achieved, If the resulting score is above 50 -it’s outperformed, if below – it’s underperformed in terms of money in money out. The score represents value for money agains the average – that is all! Most people can work out that 89 is better than 78

  3. henry tapper says:

    If you would like to discuss with me the consitutent elements of the Morningstar benchmark and the way our algorithm recallibrates, I would be happy to have that conversation. It is very simple and along the lines you suggest

  4. John S Mather says:

    When I worked for IBM research, before entering the financial; services business in 1973, we knew as scientists that the two dimensional graph was only a slice across a surface. We also learned that the number of dimensions was not restricted to three.We also observed that there could be more than one maximum and minimum.

    But what do your slices tell us?. For example 33%Good 67% Bad

    What if you made this into a Venn diagram and you found that all of the 33% were also those advised by IFAs? Since only 6% take advice this is highly likely with some notable outliers ( South Wales). Maybe the real differentiation was education of the individual at a time when they could take action to fix a problem and as a result the member increased contributions.

    The AgeWage Percentile is a very good indicator of what has been achieved by the interaction of many contributing factors over the life of the contract A concept that is valuable to the majority of the population who spend very little time learning about pension during the accumulation phase. at their leisure do have time to complain about the outcomes

    It would be a good idea to examine people in the top decile and what they did differently

    Then again another axis could be the % of NAW achieved. There is no satisfaction in a 89 Score and £10,000 in the pot Better to have a 50 score with £1,000,000

    Time to stop hacking at the leaves and time to dig at the roots of the problem. Keep up the good work

    We cannot solve our problems with the same level of thinking that created them. Einstein

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