Although financial advisers do a great job and advice usually provides value for the money it costs, 9 out of 10 British adults will take the key financial decisions about their retirement on their own.
The FCA wants unadvised individuals to understand the value they get for their money, It thinks value for money can help them engage with and take decisions on how to turn their pots into a retirement plan and it says as much in its consultation CP20/9.
If value for money can engage and empower us to take better pension decisions then perhaps we can narrow the advice gap that has dogged our pension system since we began the great risk transfer from guaranteed benefits to pension freedoms.
But we need to ask serious questions about how we can get the public interested in the VFM of their pensions. In this article I ask three serious questions and hope I can provide three serious answers which can help the FCA and savers towards simplifying pension decision making.
Question one; can we inform people about value for money without giving advice?
For the past two weeks I have been discussing with various regulators whether the AgeWage value for money score is providing “advice.
Eventually we landed on one particular sentence in the FCA’s handbook (Perg 8.28)
The provision of purely factual information does not become regulated advice merely because it feeds into the customer’s own decision-making process and is taken into account by them
The regulator goes on to talk of ‘value judgement” as what differentiates advice from guidance. The FCA agree with us that a value for money assessment cannot be advice provided it is based on fact and not on judgement.
Question two: can we provide a common definition of value for money that includes quality of service?
I have also been thinking about a single definition of value for money as the Work and Pensions Select Committee asked for.
The FCA have offered us a three legged stool which brings together performance , costs and quality of service; but what is the definition?
One way we can arrive at such a definition is by establishing what a normal experience of performance, cost and service is and setting that as a Standard. Put another way we can define value for money as “the normal performance, cost and service experienced by the UK DC pension saver”,
Contributions, performance and costs combine to provide outcomes and can be measured using a technical term – an internal rate of return. Providing we can find the normal rate of return for any set of contributions we can establish whether someone has done better or worse than normal and do this without judgement.
As it happens, the normal return achieved by a DC pension fund in the UK can be measured using the Morningstar UK Pension Index.
This describes itself as
“a rules-based, blended index designed to capture the returns from the ‘average pension pot’ of the UK Pension Holder. This index can be used as a benchmark return for UK pension holders and will allow them to compare the performance of their own pension”.
The AgeWage algorithm employs the index to tell savers what they would have got if they had been normal and we actually calculate what the normal pot size would be relative to that achieved on the way to giving an AgeWage score.
But the AgeWage score only measures two of the three legs of the stool.
The third leg of the value for money stool is the quality of service a customer gets from the pension provider and this involves taking a view – a value judgement. Or so I thought.
Thankfully there are people who think about quality of service a great deal harder than me and I set out last week to ask them whether a data driven measure for quality of service could be established . By extension, I wanted to know whether we could work out what normal service looked like and whether people could know whether they were getting better worse or normal service,
Speaking with one of the few female bosses of a pension provider , I got this instruction on how to measure VFM
“We should have 4-5 measurable inputs (trust score, NPS, call pick up times, online availability, transaction processing covers a lot I think)”
And talking to another woman who has done more than most to understand value from those who are saving , I got this response
I have spent a very boring amount of time thinking about value for money.
And in all of this the customer feedback is key – or it’s just groups marking their own homework against their own definitions of value.
The key phrase is “definitions of value”. There can be only one for value for money to provide a meaningful way of comparing one product with another. There has to be a Standard. You cannot impose a Standard for quality of service without collecting a great deal of experience and that experience is evidenced in the data items outlined above.
Question three: can we make value for money into a Standard?
Which brings me to a third matter that is troubling me – Standards with a capital S. The common definition of value money in pensions must be a Standard or it is nothing. Standards are created by people who need them , certified by organisations like the British Standards Institute and the Certification is Accredited by an accreditation organisation such as UKAS,
Andy Angethangelou has for some time been looking to find a standard for transparency which is certifiable and whose measurement can be accredited. His transparency task force can bring together a wide range of goodwill behind a value for money standard and I met with him and representatives of the relevant accreditors and certifiers last week.
Initially we had been looking at whether the AgeWage score should be the standard for value for money. But I am moving away from this. I think that we need to have a Standard that defines pension value for money so that the definition of pension value for money is that standard.
A Standard is a noun that notifies a level of quality or attainment. As mentioned above, I would argue that the Standard for value money could be defined as the normal level of performance , costs and quality of service experienced by a UK DC saver,
Standard is also an adjective describing ordinary, average and normal which validates the definition.
So long as we can see we have done as well as the next person, we can feel we have had value for our money. While every provider aspires to beat standard, a normal distribution of outcomes means that as many people will do worse than do better.
Once we understand the data behind experienced performance, costs and service we can understand what normal is. Then we can start working on making normal better – raising standards.
But so long as people’s experience of performance , charges and their quality of service is marked using home-made definitions , then we will have no transparency and no Standard.
- We now know that we can use the AgeWage score to help people understand the value they have got for their money and this does not constitute advice
- A definition of value for money could be the normal performance, costs and quality of service experienced by UK DC pension savers
- Value for Money can become a Standard but we need the goodwill generated by Andy , the TTF and the good people in pensions to make it happen,