I remember when I used to provide market intelligence to Eagle Star feeding back the confusion we were creating amongst trustees and sophisticated members and policyholders who were trying to find out how funds were performing.
Every time that Eagle Star set up a new “product” – it set up a new fund series. Sometimes the only thing that changed was the way that charges were taken, but the people monitoring the funds had to check which fund series they were in and try to make sense of whether the reporting was gross or net of charges, whether they were in for a bid/offer spread if they sold – or a single swinging price and of course most of the time the mix of funds people were in was constantly changing as their investments followed a lifestyle strategy.
Even in the late 1990s I knew that the amount of money that our customers would get from their retirement saving depended on a lot more than the markets and the skill of the managers. I talked with people like Caroline Moore about the impact of transitioning (when one fund is exchanged for another) and Malcolm Kemp about tracking error (how for instance holding some cash in a fund could change the performance).
During this time it became obvious to me that whether I got value for my money was down to a lot of factors about which I had no control and that my retirement really was in the lap of the Gods (or so investment gurus seemed to me at the time).
Has anything changed?
Today I speak to a lot of people who are those “Gods”. I speak to the CIOs of large pension schemes , Trustees, IGC members and people running employer governance groups. The first complaint I hear is how hard it is to get accurate, consistent and relevant information on the performance of individual pots from the people charged with giving that information.
It was ever thus!
The reality is that they still have to rely on performance reporting that has changed little since the early 1980s when I started advising. People simply don’t get the information to know whether the bets other people have taken on their behalf have paid off, whether the costs of management have ripped into their pots or whether they have been treated fairly and profited from the markets.
Most of those who took decisions on our pots are not here to account for those decisions (Caroline and Malcolm are exceptions) but even if they were, would we be able to see where they had gone right or wrong? Even if we are super-consumers and act as trustees or sit on IGCs , we can’t see the impact of implementing a transition on a saver’s pot, we can only hope that the sequential risks that the transition involved worked in a saver’s failure.
Nothing has changed and nothing is changing. The saver takes the risk, the provider the decisions and the saver has no line of site.
Outcomes based reporting
Recently, I have come to the conclusion that the only thing that allows us to properly understand the value people have got for the money saved into their pension pot is by measuring outcomes.
I won’t bore you with the details of the AgeWage algorithm but will say that by the end of 2019, it will have been employed over 1,000,000 times to give over 1,000,000 AgeWage scores which will have been shared with insurance companies, master trusts and the trustees of large occupational DC plans.
And whether the score is 100 or 1 (and we’ve had both), the story behind the score will be different. Helping to understand those stories is the most important feedback that a provider can give a fiduciary or a fiduciary can give a saver. Not only does it tell the plain unvarnished truth but it gives the person taking the risk a narrative about the money which is engaging and a learning experience.
Getting away from these long and slightly cliched expressions, it gives punters something to get hold of.
I think that outcomes based reporting is the only way to report on DC. Individuals take the risk, individuals deserve the reports, what they do once they are engaged is critical, but if they never engage, we know that what they do is strip our cash and leave their money to rot. That is not what anyone wants to happen.
Why Investment Reporting has to change.
For 35 years I have seen people being short-changed when it comes to reporting on how their savings have done. In that time we have become so accustomed to not being given reporting on our money that we have given up.
Today, everyone from the regulators down believe that we cannot provide a common measure of value for money (saved). This despite the methodology of producing individual Internal Rates of Return and benchmarked IRRs is now readily available.
It seems inevitable, however hard it is to stomach, that change will come and that providers will be judged – not by their IGC and Trustee’s complex VFM reports, but by the outcomes that savers experience. Of course these outcomes are more than just the size of the pot and individuals will measure the value of their relationship with a provider by soft factors too, but the critical measure – as was shown by the NMG VFM surveys of 2017, is money in – money out.
Investment reporting must start with outcomes and build backwards. It can no longer rely on constructing fabulous statements to do with value for money depending on reporting that means nothing to the ordinary saver,