The Con Keating take on value for money

Towards a Value for Money metric


The Work and Pensions committee’s paper “Pensions Costs and Transparency”, as well as the Editor of Professional Pensions have called for a commonly agreed definition of value for money for DC funds. Clearly costs and fees are only a part, often small, of this.

The fund management industry and many pension managers have been keen to stress that the financial performance of a member’s savings is only part of the overall value to the member. There is more than a grain of truth in this, but it obfuscates the fact that it is the amount of the members’ savings which are consumed and enjoyed in retirement. This is, and must be the paramount concern.

Value for money is at heart a cost-benefit or input-output comparison; it is retrospective. In the case of DC funds, the inputs are the contributions made and their timings, and the output is the market value of the fund at measurement date. This delivers the actual performance as an internal rate of return (IRR). 

An IRR is a risk-experienced average return. It has experienced the good and bad times of market behaviour over the period of saving. This renders otiose the confused and confusing discussions of risk management, and the role of risk in the risk return equation.

This requires a little explanation. One of the few things we know about risk is that it means more (bad) things may happen than will. The essence of good active fund management is the identification and avoidance or mitigation of those bad events which will occur from among those which may. Passive investment is acceptance or tolerance of what comes to pass.

The IRR of a pension fund reflects the strategies followed by the funds in which it was invested. This might be the passive ‘non-strategy’, or cyclical rotation, or market-timing, or even life-styling. Each had their own ex-ante risk exposures, but the IRR explicitly captures all of those risks which eventuated. It also captures the costs associated with risk avoidance and mitigation of those events which did not occur.

The arguments that a value for money metric for an investment should reflect the ex-ante risk-preferences of the investor/fund manager are a canard. There is no need for a plethora of comparator benchmarks.

However, to be really useful, the IRR of a member’s savings does need a comparator, a benchmark or counterfactual. This may be peer-relative, the IRRs of contributions invested in other funds or strategies or it may try to capture the wider and more general universe of possibilities, the average allocation of DC savings to different classes of funds. This is a broad index, capturing the products, management styles and asset allocations actually used by DC savers. 

A benchmark index of fund averages has been created by Morningstar and Agewage for this purpose. Over the period from 1980 to date, it has averaged 80% equity and 20% fixed income. The constituents of these broad categories, equity and debt have changed over time, and doubtless will continue to do so in future.

The contributions of a member may be applied to this benchmark, and an ‘as if’ IRR derived. Comparison of the IRR achieved and this benchmark ‘as if’ IRR indicates the (relative) value for money achieved. It may be presented as a return, a score or even the historic probability of achieving that outcome.

Costs and fees have not entered the picture here. They were what they were. We might augment the analysis forensically and consider what the IIR might have been had these deductions been different, or perform many other analyses, but those are separate matters from what value for money was achieved, and their application is practically limited to prospective situations.

Similarly, we may augment the basic value for money analysis with additional qualitative disclosures, such as service quality. 

However, the basic value for money metric is simple and clear, and most relevant to the pension saver.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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