Judging your workplace pension (by saver outcomes)

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Defaqto has produced an important piece of work for financial advisers wanting to help employers get to know their workplace pension. You can access it via this link (there is a little signing up to do to get there)

As Defaqto rightly point out, it’s not just financial advisers who can benefit from their  work, choosing a workplace pension is an employer duty and doesn’t need an adviser. Of the 1.4m workplace pensions selected by employers , most were selected unadvisedly.

Whether as an employer, you use an adviser or not, it is wise to know why you chose your workplace pension. This is not just because you’d want your money to work as well as it could for your staff, it’s because bad decisions can come back to bite you, especially if you never documented how and why you made the decision in the first place.

The Defaqto guide is split into two sections, the first helps advisers with the marketing of their services to employers and is useful to the general reader in that it sheds light on the “value add” that advisers can bring.

The second section is for the general reader and in particular for employers who want to get to know their workplace pension. It is entitled “key factors to consider when reviewing a default fund” and consists of seven sections

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The actual analysis carried out by Defaqto is not on the universe of choices available to employers but on the master trusts. This excludes a number of providers active only in providing GPPs and Stakeholder plans.  Confusingly several providers who don’t offer a master trust (Royal London, Hargreaves Lansdown and Intelligent money) are included in the analysis and the governance section confuses itself a little between IGCs and Trustees.

The IGC and Chair reports provide useful information. However, the lack of consistency in the way data is collated and presented means the results are largely not comparable. In addition, conclusions are often based on internal data and are therefore arguably subjective.

All of this means the relevance of the reports is low, which decreases the trustees’ (sic) strengths. This is certainly an area where further collaboration between the FCA and TPR would improve matters for advisers, employers and, most importantly, members

If Defaqto are confused, so will be advisers and the general public. For what it’s worth, I think that you can compare the quality of IGC reporting , but that some of the best IGC reporting is on workplace pensions that don’t appear in this survey (mainly because they are not open for new business). The Prudential IGC report is a case in point. We need alignment of reporting on workplace pensions, whoever is doing it.

By your fruits shall ye be known

The main thrust of the second part of the report is to find a way of comparing workplace pensions by likely outcomes for savers. While “outcomes” includes the experience of “fantastic service”, Defaqto’s measure really focusses on three measures

  1. The costs experienced by the saver from all sources
  2. The value for the risk taken by the investment manager
  3. The absolute return achieved – the achieved performance.

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This is good from a theoretical point of view, but it is hard in practice to marry all these up into one comparison. You’d need to weight the various components by value to create a balance scorecard of results. The provider offering the best value for money in this analysis , might be the suitable solution, but there are other factors – payroll compatibility for one thing, brand another. In my experience of running the Pension PlayPen, decisions are as often as not taken not on value for members as cost to the employer.

But that doesn’t devalue the work Defaqto is doing. We need to move away from the historic bias towards providers who are cheap and easy to use, and move towards selecting workplace pensions that are best for savers. And this report is a step in the right direction.

How do we know that a fund is right for savers?

This report has been commissioned by NEST and People’s Pension. NEST’s CIO is reported as saying

Too often the pensions industry talks about investment performance without considering the risk taken. And yet we know from our research that many pension savers want steady, smooth returns instead of high volatility.

It’s important and great to see that Defaqto has devoted part of this report to the level of risk taken by different default funds. The turbulent market conditions over the past few months have reinforced the importance of diversification and good risk management.

More sophisticated investment strategies are likely to weather difficult markets better than those that rely too heavily on a single asset class, like equities.

“All pension schemes can help build confidence in savers by focusing on achieving the best risk-adjusted returns for our members, and moving away from often misleading short-term, headline returns.

I thoroughly agree with this – but feel that the analysis needs to go deeper and to touch the actual experience of savers. We need to engage with people’s actual saving experience.

Actual data trumps theoretical data

The difficulty of the Defaqto analysis is that it relies on theoretical rather than experienced data. So the Sharpe and Sortino ratios come from data supplied by fund managers , not the experienced outcomes of savers.

This is important as much of the risk that savers take relates to factors outside the fund manager’s control. These are listed by Defaqto in the report

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NEST and People’s Pension both have complicated charging structures with different allocation rates, varying annual management charges and annual product charges. While most of the other items are included, some may be extras. The question of “exit fees on transfer” is particularly grey.

We at AgeWage are looking at doing both performance analysis and an analysis of value for risk taken based on the experience of the saver. This kind of analysis looks at what members paid in and what they got back – their experience.

So we’d go further than the CIOs of NEST and People’s and say that what employers and their staff want to know is how the default fund has done for them, not for their trustees, investment committees or IGCs.

The science can create Sharpe and Sortino ratios, can be applied to individual’s experience of saving. While this does not give “pure” information back to fund managers, it gives experienced information to savers and their fiduciaries (trustees +IGCs+investment committees).

Knowing that a fund is right for savers, means understanding how it works in practice. A car can look great in a table of What Car, but until you get behind the wheel and experience it , it’s hard to get a feel if it’s right for you.

We need to be doing a lot more road testing of workplace pensions and that’s where I think AgeWage and Defaqto, might be able to work together in future.


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About henry tapper

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