The price of everything , the value of nothing.

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Knowing the price of investment management does not mean you know its value. Unfortunately the outcome of an investment can only be known retrospectively.

Turning this on its head, past performance may not be a guide to a future , but assessing it is the only quantitative way to measure value.


Two things happened to me last week that got me thinking.

The first was an investment breakfast with the consultancy Aon that explored Investment Cost Transparency with Dr Chirs Sier.

The second was a press release from a company called Profile Pensions that was sent me by a friend in journalism. The journalist wrote me;

While the point made by the press release is a good one, Profile Pension’s itself appears to charge rather high fees and have something of an obscure remit!

Here is the press release


ONLY ONE IN FIVE BRITS KNOW THAT THEY PAY ANNUAL PENSION CHARGES

New research from Profile Pensions reveals the UK’s lack of knowledge about pension fees & charges 

  • Only 16% of adults with a pension think that they pay annual pension charges
  • A massive 84% say that they do not, or don’t know if, they pay annual charges
  • According to data from Profile Pensions, people pay on average three times more than they should have to with an average 1.09% annual charge

Profile Pensions, impartial pension advisers focused on making customers better off in retirement, has revealed that the vast majority of UK consumers are totally unaware of how much they are paying in annual pensions charges.

A recent study found that only 16% know that they pay charges. A staggering two thirds (62%) said that they do not, while a further fifth (21%) simply didn’t know. And the uncertainty doesn’t stop there with nearly half (47%) of respondents admitting that they have no idea how to go about finding out what charges they pay.

This lack of awareness is backed up by Profile Pensions’ customer database* which shows that people are paying three times more than they should have to with an average annual charge of 1.09%. Consumer inertia means that the cost to pension holders could be £18,239** over 20 years, potentially pushing retirement back by up to two years.

Michelle Gribbin – Chief Investment Officer at Profile Pensions said: “The fact that so many people have no idea that they pay charges in the first place, let alone what those charges are or how to find out, should be a massive cause for concern. Add to this the thousands of people that are being needlessly overcharged and there are some serious questions to be answered about why awareness is so low.

“It’s clear that the industry needs to take action and providers need to work harder to educate consumers. As impartial advisers we see instances every day where customers will have smaller pensions at retirement than they should due to lack of transparency from providers. This is simply unacceptable and means that thousands aren’t realising the full potential of their pensions savings.

“These statistics are shocking and a timely reminder that people need to take action, as early as possible, to make sure that they are facing retirement confident that they have enough money to live on.”


This is how I responded to the challenge set me by the journalist

1. The price of everything

I agree with your view of Profile. They charge a lot to consolidate pensions  and their principal driver is an analysis of the Annual Management Charge.

This rather misses the point of value for money. I was at a presentation earlier this week from Aon and Clearglass (an institutional data analyser)

 

Screenshot 2019-11-17 at 07.18.54.png

I attach a photo of one of the slides (ignore my scribbles).

It shows the AMC (yellow box), the other fund costs (black box). together these make up the Total Expense Ratio.

But then there’s the blue box which represents the trading costs of the funds which is quite often the biggest expense a consumer pays.

When I reported on the Fidelity IGC’s Chair Statement over the past two years – I pointed out that Fidelity savers pay – on the default more in blue-box transaction fees  than in AMC. A typical Fidelity AMC is 0.30 per cent for its default future wise fund

But the total cost of ownership for Fidelity’s Future Wise Workplace default is around 64bps.

Fidelity quoted in 2018  0.39% blue box costs.  At this point the cost of ownership was around 0.69% This  fell to 0.64%  when transaction costs reduced to 34% in 2019. ( you’ll often here percentages quoted as “Bbs”. Bps stands for “basis points” each of which are 0.01 per cent).

By comparison, LGIM’s “blue and black box” costs  for its default multi asset fund are -0.1 per cent and +0.1 per cent respectively,. so what you see as an AMC  is what you pay. I pay around 35 bps in total for L&G to manage my money (source L&G’s IGC chair statement 2019)

Which would you rather pay?

0.64% in cost and charges for a stated charge of 0.30%  (Fidelity) or..

0.35% in costs and charges for a stated charge of 0.35% (L&G)

This is why the “money” part of the equation is a lot more complicated than Profile Pensions makes out.

 

2. The value of nothing

As for the value, you might see at the top of the image above  the figure 15.99%- hand scrawled by me. This is the total cost (yellow black and blue box) of one fund analysed by Aon.

It had an AMC of around 2% but its transactional costs were 14% pa. And here’s the thing, the (hedge) fund manager might well have been retained if they had consistently returned 20% pa – an absolute return of say CPI + 3%.

Sometimes, the cost of realising an investment gain seems extortionately high but may be worth it. In order to understand that 15.99% charge that year, Aon would have to research what actually went on.

Let’s imagine the fund invested in Africa. That 14% transaction cost might be a legitimate fee paid to a charity for good service or it could be a bribe paid to an unjust dictator for the right to sell (I simplify for effect – but sometimes there are external considerations that can justify high charges).

Obviously you’d only involve yourself in that kind of fund if you had someone like Aon holding your hand and you had deep pockets.

This is the  second problem with Profile pensions. They have no way of measuring value , so will throw out babies with the bathwater.

This is why I turn away from simple cost comparisons. They don’t tell the full picture on cost or on value.

 


 

Value for money’s knowing the value of your money

If a consumer wants to know if they are getting value for their money they can do so by benchmarking what they’ve got against what the average person is getting. This is what we do at AgeWage and the comparison gives rise to our score which simply tells you if you’re outcome is better or worse than average for the set of contributions you’ve paid

This score will tell them how their money has performed by working out their individual performance taking into account the timing and incidence of their contributions , and comparing it to the performance an average investor would have got.

We call this the AgeWage score..

AgeWage evolve 2

 

A 50 AgeWage score makes you average – bang on target. This system avoids misrepresenting costs, and measures value by the outcome of the savings – what you’ve got to spend when you cash in your chips.

I am still very nervous about advising people to do things based on low and high AgeWage scores, there are plenty of other things that go into the mix, like guarantees, terminal bonuses, early surrender costs and the utility of the pension contract – much of which can be pre-paid (things like life cover – waiver of premium and the quality of drawdown).

This is why  I want to take AgeWage Ltd into cohort 6 of the FCA ‘s sandbox- we’re trying to work out how people react to finding out what actually happened to their money.

We’ll be starting by simply looking at the value for contributions made over a saver’s full journey. Then we can start breaking down the journey to see how rough the ride was (and how rough it might be in future). We may even look at the environmental , social and governmental good that savings have done over the years.

Kind regards

Henry


Looking at the whole picture

The point made by Profile pensions press release is a good one. Charges do matter and low charging funds tend to do better than high charging ones. But that L&G fund may not do as well as the Fidelity one – despite it having lower charges and even the 16% charging hedge fund may be valuable in the right context.

A better way to behave with your money is to find out what is going on with it and then start making decisions. The AgeWage methodology is that better way as it tells you about value as well as money.

Profile Pensions tell you some of the story of what you’ve paid but miss out the blue and black boxes. You need the whole story, and that can only be done through looking at the whole picture.


How transparent is Profile Pensions?

I am quite sure that Profile Pensions are doing the right thing by their clients but it is hard to work out how much they are going to charge.

One part of their website talks of a charging structure that looks like this.

Screenshot 2019-11-17 at 08.27.24

But another part of the website which provides tracing as well as advice quotes a different fee structure

Screenshot 2019-11-17 at 08.25.57

and another part of the site quotes not just an initial charge but an ongoing charge (which is here shown as optional).Screenshot 2019-11-17 at 08.28.38

And there are a few provisos here; to get paid from a pension, you are going to need to use something called “adviser charging” and that’s only available if the pension provider you are working with is prepared to pay your adviser out of the fund they are managing for him/her.

A lot of funds won’t pay adviser fees on the  way out or in. Profile Pensions may have found a better way to get their money which I don’t know about, but having spent some time on their site this morning, I can’t work out what that is. Which is worrying for me – as I want transparency.

If Profile Pensions can only be paid from providers who operate adviser charging, it rather goes against their claims to be totally impartial.

It should be made clear that the costs quoted here are not the cost of pension provision but pension advice. The cost of platforms and all the fund costs listed above are on top of   the 0.6% optional advisory charge.

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My conclusion

Profile Pensions have a high trust pilot rating. Good customer service is important, but it doesn’t guarantee good outcomes (see SJP and even pension scammers – which Profile Pensions and SJP aren’t).

They have an excellent website and good PR – that’s a good press release as far as it goes.

But they do not have a product I would endorse because it is at heart based on a contingent charge, relies on platforms that pay Profile Pensions and the charges are still very high , for what is essentially a remote service.

There is nothing new about the story in the press, most people don’t think about the charges on their pensions, they don’t even think about their pensions (see Evolution not revolution)

 

About henry tapper

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