Tonight we have an FA Cup final. It may or may not be a great game but that’s not what Chelsea and Arsenal fans are worried about, they are worried about the score!
The score will create an outcome, the trophy. There may be many who see football as a beautiful game , but to the fan it is all about winning and losing.
Now I have to admit that i have brought you to this blog on false pretenses, this blog is not about football but about results and specifically about the results of your saving for retirement.
I guess that if you want season tickets in perpetuity to the Emirates , or Stamford Bridge, or even Huish Park, you are going to need a result on your pension savings. So perhaps you’ll forgive me for tricking you!
What’s the score on responsible investment?
I am much the same with my pension as I am with Yeovil Town, I want my pension to be a winner and I think about what helps me win. Yesterday I published a blog that suggested that pensions that are invested on a responsible and sustainable basis are bigger than pensions that aren’t.
That was not advice, that was fact. Data scientists in Harvard had looked at what had happened to American mutual funds and found that it was responsible investment that had protected people through the pandemic.
Will this information influence some readers to switch their pension pots to the ESG alternative in their fund range. Perhaps. It is certainly more likely to influence people to do this than not. People are free to make up their own minds but if they can see evidence of responsible investment protecting people through a pandemic, they may well choose to invest responsibly.
From the evidence presented in the blog – I can see responsible investment beating “don’t give a shit” investment 3-0.
Evidence based decision making
My friend Robin Powell is a fan of evidence based investing. He is interested in the outcomes of investments and he has spent his career pointing to what works and what doesn’t. in his introduction to his blog “The evidence based investor“, Robin points out
There has, in fact, been a welter of independent, peer-reviewed research dating back to the 1950s on how best to invest, and the findings are remarkably consistent. Yet although this evidence is widely known in academic circles, the investing public remains largely oblivious to it. Even investment professionals and industry commentators are either unaware of it or for their own reasons choose to ignore it.
We have to take decisions on something and it is best we take decision on evidence rather than supposition. Robin’s job is to separate fact from fiction and help us take financial decisions based on facts rather than superstition.
For the rest of this blog I’m going to be talking about how we can work out winners and losers amongst our various pension pots and why we need to do these measurements.
We need to pay attention to our pensions
Most adults in the UK are investors, auto-enrolment has seen to that. Many of us don’t recognise we’re investors, we don’t even know we are investing and that is because most investment is made on our behalf, NEST estimate that 99% of its 9m savers are investing in its default fund, the 90,000 who aren’t are the outliers.
But though we are happy to let people invest on our behalf, we have a responsibility, if only to ourselves to check how our investment has done, compared with others. It would be good to have this information to hand but it’s not that easy.
The need for employers to take decisions on their pensions
In it’s recent paper on value for money, the FCA points out that employers – who choose our workplace pensions, aren’t given much evidence on which to take their decisions
We think it is difficult to conduct a meaningful assessment of VFM when an individual provider’s schemes are reviewed in isolation. A review of other options available on the market can provide a point of reference, and may provide better value for scheme members (CP20/9 4.13)
The paper goes on to suggest FCA and TPR schemes could be benchmarked on a common basis.
The scope of this comparison would be a matter for the IGC. For workplace pension schemes, this could include not-for-profit options such as NEST or The People’s Pension. (CP20/9 4.15)
The need for people to take decisions on their pensions
If it’s tough for employers , it’s even tougher for employees.
If an employee is unhappy with their workplace pension scheme, they have little option other than to continue to make contributions to the scheme, opt out and keep their pension saving in the scheme or opt out and transfer their pension saving to a new scheme (CP20/9 Annex 2.7)
It is only after leaving a workplace pension that employees are able to make a choice as to what to do with their money. In the absence of meaningful information, they will do nothing, which leads to the pot proliferation described by the PPI in a recent paper. This pot proliferation is hugely inefficient and is likely to reduce the scope of improving value for money over time. As the Now press release accompanying the paper puts it
There are already 10 million small deferred pots, costing £130 million a year in administration. With 27 million small pots in 15 years the bill for servicing these pots will be £1/2 a billion a year. The report explains that, today, every active member in an auto enrolment pension is supporting one inactive member. But by 2035 the PPI research shows that every active member will be supporting more than three inactive members.
But of course people don’t bring their pots together to reduce the servicing costs to the providers of workplace pensions, they do so to make it easy for them to manage their money in later age, either by consolidating to an annuity, drawdown, onward investment or to their bank accounts. Even without investment pathways, people will take decisions because this is their money and they are free to do so.
Back to scores
As with football matches , so with pensions, what matters most is the result (to use today’s jargon – the outcome). We cannot escape results, in the end the data catches up with us, as my friend Ben Piggott says, you cannot drink performance data.
So how do you score a pension? How can you tell winners from losers? How can you work out if you got value for your money?
You need three things
- You need your data – you need to have a history of all the contributions you’ve made since you started (when and how much) and you need to know the result, the value of your pot
- You need to have something to compare it with – a benchmark
- You need to have a formula (an algorthm) which compares how you’ve done with your benchmark
What you need to do with your data is to create an internal rate or return
There is only one measure that tells you how you’ve done. Technically its called your internal rate of return and its unique to you. Only you made the precise contributions, into the precise funds on the precise days over all those years and your result or outcome is the current value of your pot net of all charges taken from the pot over the years.
Then you need a benchmark internal rate of return
Knowing your internal rate of return is a start, but it is unlikely to be enough, you need to be able to compare this number with the next person. The trouble is that you can’t – because the next person did things differently. So you need to compare your return against the average person. The average person , in financial circles is called a benchmark and the way you work out how the benchmark did is by investing your money into the average person’s fund.
There has never been an average person’s fund, till now. And the reason there is one now is because of two organisations, one is AgeWage and the other is Morningstar and together we have created an average fund called the Morningstar UK Pension Index which goes back 40 years and creates a price for the average investor for the best part of 15,000 days.
Then you need a formula to compare the two and turn the comparison into a result
Just as in football , so in pensions – the result depends on data. While it is quite easy to see the data of a football game – via a scoreboard. it is harder with pensions, because pensions go on for 40 years not 90 minutes and because there can be up to 15000 measurements of both your results and your opponent’s (the benchmark).
But computers are good at doing this stuff and we’ve got some good mathematicians who can arrive at a formula that makes sense of the comparison and simplify it into a single number
Infact we could give you a comparison of all your pots
And in doing this, we could tell you who has provided you with more value for your money and who less. If you scored 50 out of 100, you would have drawn with the benchmark.
Tomorrow I will move on from creating a scoreboard (dare I call it a dashboard) to start thinking what good knowing the scores does us.
Tomorrow we will know whether Chelsea or Arsenal have won the FA Cup for 2020.
Thanks to all the testers of AgeWage scores, who are beavering away to find out their scores, please feel free to join them by submitting your pension pots for analysis at http://www.agewage.com
“Tomorrow we will know whether Chelsea or Arsenal will face one of the Manchester clubs and when I produce my third blog on Monday, we’ll know who will be in the final”?
I thought Arsenal and Chelsea saw off the Manchester clubs in the earlier round, the semi-finals, Henry. But I lost interest in the FA Cup when they moved it from 3pm on a Saturday at the old Wembley ….
On the idea of piling into ESG now, isn’t there a danger that’s doing what many investors have always tended to do – buying higher and selling later and lower? Some of the “new normal” isn’t so ESG – cars are said to be “safer” than public transport, use Rishi’s up to £10 vouchers to eat less well, etc.?