Yesterday’s blog on the capacity of “value” to simplify pensions has solicited some strong comment and a very interesting debate on linked in
I am interested in the comments of Simon Ellis who has been assessing value in funds
For those us who have grappled with Assessment of Value statements for UK authorised funds over the last twelve months there is nothing new here, and compared to your wish, no rapid adoption of a single simple approach.
The factors that drive perceptions of value have been established, ‘measures’ or opinions of what constitutes value in the eye of the beholder remain disparate.
In a way that’s right- there’s a big difference in expectations or senses of what is good value between an auto-enrolled scheme for a small number of lowly paid shop-workers and the high paid employees of, say, an investment bank.
What I think is more notable is the continuing convergence of thinking and methods between the two lead regulators. Anyone who thinks these two worlds will remain separate is, in my opinion, being naive.
The names and people may stay different (and the reporting into different Government departments too) but the direction of travel and emphasis is getting more common by the day.
Philosophically, I believe value is intrinsic in what is being bought. A can of beans tastes the same in the mouth of a prince and a pauper. There is no reason why a shop-worker shouldn’t be invested in the same fund as the investment banker though the banker is likely to have lower pension costs if the shop-worker’s employer cannot get good terms.
But if you are in Tesco’s workplace pension likely, getting more value than almost any employer scheme we have analysed. I have spoken with several fund platforms who are struggling with value assessment and I agree, the difficulties are in comparing perceptions of funds. It should be remembered that until recently , Neil Woodford was considered to deliver more value than any other single manager.
So long as we measure value as the marketability of a fund, then it will be the capacity of the manager to talk a story that solicit expectations and drives money to the fund. But that is the sizzle and not the sausage. The sausage tastes the same whether you play polo or drive one.
Is there anything new in a single definition?
- The funds industry relies on value assessments of authorised funds
- The IGCs rely on value for money assessments of contract based workplace pensions
- The Trustees rely on value for member assessments of trust based pension
But strip away the marketing and what is being measured is what happens between the money arriving and the point of measurement. In all three instance we are measuring individual experiences within collective vehicles – whether we define collectivity as a mutual fund or a workplace pension and I think there is something new about measuring and bench-marking the saver’s experience as that is fundamentally the same.
This is radical and disruptive because it denies the rights of marketing to assert “segmentation” as a source of value in itself.
Is there any value in quality of service?
I believe there is. A high quality of service should lead to more targeted outcomes. Take SJP , where perhaps 50% of the money that leaves the fund pays for advice. The advice itself is valued by customers , as is witnessed by high customer retention and high customer satisfaction. The bundling of advice into a management charge is highly tax-efficient and makes life easy. The quality of service argument at SJP has to take into account the old argument that advisers get the right money in the right time in the right place.
Stripping out the cost of advice, SJP may or may not be offering value from the funds they manage and that is what the value assessment should be about. As I have argued on this blog before, a value assessment of funds should be independent of a value assessment of advice and it is up to SJP funds to demonstrate that they offer equivalent of better intrinsic value than promised both by the expectation of the fund holder and against alternatives.
So how does a single definition simplify?
We all look the same without our clothes on and that’s true for our savings too. Much as we like to consider our fund, advisory or tax-wrapper a value-add, what matters to the saver is its capacity to deliver.
There may be a need for a different benchmark for life assurance endowments or for cash ISAs, but DC pensions are homogeneous. We put money in on the hope we can get money out at a future point and this is a commoditised activity. I believe that a single benchmark can be used to measure a wide variety of pensions and that this presents a saver with an entry point into an understanding of how his or her pots have done.
A single definition – money in V money out of course takes into account costs and charges leaving the pot in the meantime. The saver who chooses an individual rather than a default strategy can overlay their own measures of success, but VFM is really about establishing the average experience.
Towards unified fund governance.
If we accept my assertion that people converge on a default and that a default for pension saving is measured by money in – money out then we can converge value assessments, value for money and value for members.
Quality of service is of course a factor but that is in the eye of the beholder and that will influence purchasing decisions for those who have money to buy advice and fancy features.
But the engine is performance and can be measured by the experienced rate of return measured inclusive of charges. If we can accept this universality , we will have taken a giant step towards simplifying pensions.
And where is this helping ordinary savers?
The current perception of pensions is that they are hard, complex – even toxic. Many people may think of pensions in terms of the FCA’s adverts about scamming.
To change this perception, we need to make pensions easier, simpler and comparable.
Value for money is a concept which goes a long way to achieving this. It is not a new idea, but if we can apply it so that a wealth management pot can be compared to a workplace pension pot then we will be further on. Whether our idea of wealth is £5m or £5,000, our fundamental understanding of value for money is the same.