The results from our first 100 retirement savers are in and our test group averaged 54/100 on their outcomes.
Some of the people who did best are in workplace pensions , including a friend from Port Talbot who has got 78 VFM on his Tata Steel Aviva workplace pension. I managed 63 on my LGIM fund and many of the other higher scores are from people who had the good fortune to be in a workplace pension default managed by a household name.
Results so far suggest that putting your money in cash has consistently delivered the worst value for your money while the more esoteric strategies we’ve discussed, have seldom scored above 50. The results are extremely predictable, well diversified , well executed low cost funds have consistently provided better outcomes for people than DIY alternatives.
Building governance from the bottom up.
Pension consultants like to measure governance at what they call “scheme” or “plan” level. That means measuring what is going on by aggregating all the little pots and treating people’s experience by looking at one big pot.
The problem with this is that it is not the scheme that is taking the risk, but the individuals within the scheme and telling people they are getting value for money at “scheme level”, isn’t helpful if their pot has underperformed.
This big data approach also misses the granularity you get by treating the scheme as a collection of small pots. By looking at a scheme from “pot up”, rather than “scheme down” you start putting members first.
For most people, the capacity to invest the amount they need to fund for their retirement in a risk free way, is simply not there. Cash is a terrible long-term bet, no matter how attractive it may be from day to day.
We need to take risk with our savings, if we are to meet our retirement goals, because we don’t have the money not to.
Trusting in defaults
For much of my career as a consultant I was distrustful of defaults. I had started selling pensions to people using what were then called managed funds, went on to become three-way managed then multi-asset and more recently diversified growth funds.
The main characteristics of the funds I sold in the 1980s were that they charged active fees to track the index, paid little attention to good execution (incurring horrible transaction costs) and were so big that they were never able to capture value in an agile way. These funds, especially the Allied Dunbar Managed Fund, lagged the market.
The Allied Dunbar Managed Fund made me distrustful of defaults.
Instead I was taught that in investment matters – small could be beautiful so I went through a phase of my career insisting that by using best buy funds, from lists created by fund- pickers, I could give my clients greater value for money. It turned out that I was simply following another herd and doing no more than I’d done earlier with managed funds.
So I decided at last, that picking funds was not something that I was any good at. I might as well leave the management of my own money to the people who I trust and I trust the asset managers who convince me that they are (to a certain extent) on my side.
What I look for in my default manager
Having worked in financial services all of my life, I’ve got to know some fund experts who really do know a lot about getting value for customer’s money. Men and women who are characterised by having high integrity, low egos and intelligence and experience that is both intuitive and learned.
When I meet one of these people, I listen.
One of the people who I listen to is John Roe, who runs the multi-asset funds of LGIM, he doesn’t run my fund but he used to and he manages a lot of money for friends of mine.
Over the weekend I will be thinking and writing about a presentation that John did at the PLSA conference a couple of weeks ago. He did it with Emma Douglas, who’s someone I have worked with – and who dominates the intuitive end of my spectrum of good. John is at the other end of that spectrum, he is a learned man who’s thinking I admire.
Both Emma and John work for one fund manager – it doesn’t matter that it happens to be LGIM, there are plenty of other good workplace pensions that benefit from great management (I mentioned Aviva at the top of this blog).
Where I find the very best thinking and the intuitive capacity to meet customer needs is currently in the management of workplace pensions. I would include the team Mark Fawcett has assembled at NEST in that category, I think the work that Nico Aspinall is doing at People’s Pension as another.
It is not for nothing that these people are working in workplace pensions, they choose to manage money for people like me that do not pretend to know better than they do, but they manage the money as if they were me, in other words they think about my value for money.
How the investment of money in a fund matters.
As I started out saying, most pension governance is at scheme level. The outcomes for individual members are of secondary importance and so long as those who do the governance satisfy their internal processes and can demonstrate they have exercised their duty – the job is done.
I asked a question at another session of the PLSA conference. The question was “what tips do the governance experts in this room have for explaining value for money to members”. I was surprised by the response from a senior governance expert who explained that her value for money work was not for her members but to satisfy herself and other fiduciaries that value had been achieved.
For the 100 or so people who have got AgeWage value for money reports on the pension pots they own, value for money is all about their experience, their investment, the costs and charges they are paying and what they can expect to see when they ask for their money back.
Of all the things that influence the value we get for our money, the return on the money invested is by far the most important. The investment of our money matters hugely.
And it’s more than just return
When I talk with John Roe and others, I want to know from them what kind of investments my money is funding. Am I helping the world I live in become a better place or is my money adding to the problems?
The people who run our workplace pension funds are charged not just with delivering us a good retirement in financial terms, but to make the world we retire into – a decent place.
Which is why ESG is more than just a box to tick, it is the at the very heart of a fund manager’s job.
Could workplace pension defaults give best value for money?
We live – whether we like it or not – in a world where we must take on the risks of investing for our retirement. But we do not choose our workplace pension provider, or the fund or the fund manager – that is all done by others and we default into the choice that others make.
The fiduciary obligation on those who take those decisions for us is immense. It is relieved to a degree by good regulation – the construction of the master trust authorisation framework, the constraints that operate around contract based workplace pensions and the work of trustees and IGCs should mean that employers and members are protected from bad decision making.
Defaults are everything, over 99% of NEST’s 7.5 m pots are invested in defaults. The results from our initial work at AgeWage, suggests that using these defaults will deliver value for money but we have only just started.
One thing I am sure about, unless we start measuring the performance of the workplace pensions at the level of the individual saver, we will not really understand what ordinary people think of value for money. For ordinary people, the scheme or plan is a concept that means little to them and scheme or plan governance is achingly abstract.
People want to know what value they are getting for their money, AgeWage sets out to do that and the results so far are very encouraging, the people who are doing least are doing best and the people who are trying hardest to beat the market , seem to be coming off second best.
I’m very pleased with the AgeWage 78% VFM score on my Tata Steel Aviva default workplace pension. I see this as very good value for money considering the Aviva annual management fee is 0.26% and all the investment decisions are made for me (low involvement investment).
Tata Steel UK employees have recently received notification from Aviva that the default pre-determined investment path name will soon be changing to ‘My Future Focus Universal Strategy’ and there will be a change to the composition of the funds within it. The funds’ assets, objectives, risk profiles and the glide path will also change. Investing responsibly will be a part of ‘My Future Focus’.
Aviva are making these changes because they believe their customers will benefit from enhanced asset class diversification (the concept of ‘not putting all your eggs in one basket’). The funds will now access additional asset classes such as Emerging Market Bonds (bonds issued primarily by the governments of the countries designated as emerging), Property (commercial property such as offices and warehouses) and High Yield Bonds (bonds issued by companies with a lower debt rating).
Over the long term, Aviva expect this to lead to an improved outcome for their customers.
It is no great surprise that defaults work best most of the time. Far too many people, if forced to make a choice, will take fright and go for low risk or cash funds.
However, I think we may have a problem going forward. An employer’s default fund will often be a Lifestyle one with a selected retirement age of 65 or 67. Many employees will be working beyond these ages. This may be particularly true of lower paid employees who simply intend to keep working whilst they are physically capable of doing so. Their modest pots may not do too well, unless they have had the foresight to change their selected retirement age.
As you say, default workplace pension schemes work best most of the time. The TATA Steel Aviva workplace pension should have been considered by IFAs when TATA employees sought their advice after being faced with a choice of moving into the new British Steel Pension Scheme (BSPS2), PPF or transferring out. This would more than likely have produced better outcomes for many of them.
In July 2019 the FCA proposed that advisers will be required to demonstrate why any scheme they recommend is more suitable than the consumer’s workplace pension scheme. I hope this proposal is implemented as it could benefit those who wish to transfer in future.
The TATA Aviva workplace pension’s pre-determined investment path has a default retirement age set at 65. This can be changed to age 55 – 75 if need be. Very few of the TATA Steel employees I know will be working beyond the age of 60 let alone 65 as heavy industry and shift work etc takes its toll.
Lower paid employees who intend to keep working beyond the age of 65 would still benefit from a workplace pension with a pre-determined investment path but I agree that they may or may not have the foresight to change their selected retirement age. Perhaps this is something that employers or administrators of workplace pensions could take on board to ensure employees are aware well in advance?