My friend Emmy Labovitch, who is now a Director of the PPF told me the one risk you can get off the table if you’re a consumer is cost. If you can measure cost then you can look at the value of your pension pot and start thinking about value for money. This goes for the PPF and your pots, it’s the same fundamental equation.
This is not going to be another blog about the FCA’s decision to let those running workplace pension fund platforms off the hook on cost disclosure.
It’s going to be an explanation for people who care about the “value” savers get for “their money”, on how big data can be used to provide evidence to trustees, IGCs, GAAs and employers on how to peek behind the curtain – the FCA has drawn.
And my thinking on all this resulted from conversations with Emmy. Whether your pot is £19bn or £19k, the issue is the same.
Outcomes matter most
What people care about most when they save is what will come out at the other end (the outcome). They don’t care too much about a smooth ride while their money is building up, they don’t care much about great comms , advice in the workplace or fund choice. They care a lot about responsible investment but they care most about outcomes.
We should be able to look at the value of our pension pot and tell whether we have got value. That’s what people want to do.
We know this from the 2017 NMG survey on what matters to members of workplace pensions. This work was commissioned by the Independent Governance Committees of workplace pension providers.
Jane Craig , who wrote the report , points out that low charges don’t figure high on the value list.
It’s important however to highlight that members fail to connect the impact of charges on their good returns – it is therefore up to the providers to help them do this.
This was what was behind the FCA’s proposals and rather than embracing the idea, the providers have rubbished it.
The FCA had proposed requiring illustrations of
the compounding effect of the aggregated costs and charges for each available fund/option offered to workplace #pension savers.
— Josephine Cumbo (@JosephineCumbo) February 4, 2020
How do we show the impact of charges (as well as good returns)?
I have been struggling with this question for three years, ever since I read Jane’s report and I’ve come to this conclusion.
Although telling people how they’ve done is an imperfect measure, it is the only measure relevant enough to capture people’s imagination – to “get engagement”.
The initial testing that AgeWage has done shows that telling people how their pot has done – compared with the average pot – in a single number, is hugely powerful. We hope to spend some time in the FCA’s sandbox working out how powerful and how to channel that power for good, but everything points to a single VFM score being powerful
You are probably trying to work out how you can give a pension pot an Experian style score.
It’s simple so long as you have access to two bits of data, the history of contributions made to build up the pot and a way of reinvesting those contributions in a notional benchmark fund. Provided you have these things, you can tell how you have done compared with everyone else.
We contend that people who get left in low value high charging funds lose.
We can’t tell you why you are a winner or a loser, unless we know all about the value you’ve got from your pension provider and know what charges you’ve paid. But our score can prompt you to ask those questions yourself, and try and work out whether you’ve been clever, lucky, unlucky or – on rare occasions – ripped off.
Of course the people who aren’t keen on cost disclosure aren’t too keen on providing us with the data (well at first at least). Providing this kind of information which proves incontrovertible numbers is not the kind of thing you do if you are trying to keep money in your pot.
But hold on – there is good news – AgeWage has analysed getting on for 1 million pots in the first few months of trying and a lot of fiduciaries, sponsors and even some brilliant providers have bought into this way of looking at funds. We are not ready to go to savers with these million scores but the hope is that providers who want their employers to get proper reporting and their savers to engage with issues such as ESG and investment pathways, will promote these scores directly to their savers.
But isn’t past performance no guide to the future?
Absolutely right, we don’t suggest that our scoring system is an absolute truth. It’s more like the star over the stable, it catches the eye and leads people to what’s important. What people do once they’ve got engaged is another matter (and critical).
One of the things that the score can do is to get people asking questions about costs and charges, exactly as Jane Craig suggested. I agree with Jane that it is up to providers to get them to do this (another reason I’m so incensed by the FCA – but still my beating heart!).
We should not take decisions just on charges, we should understand the value we have got for the money deducted and we should take decisions on aggregating funds on other stuff as well – such as the capacity of providers to pay us our money back in ways that suit us.
But if we can’t get to the charge line on the shopping bill, it’s not a bill but a shopping list.
I would argue that what people want to see after they’ve been shopping is what comes out of the shopping bags (including the bill)!
When finding out about value for money – outcomes matter most!