Lady Lucy and the Riva Ariston – costs are appropriate, value is common.

Lady Lucy burning too mucy fuel

A couple of weeks ago, one of Lady Lucy’s engines stopped working. It turned out that I had run its fuel out. Worse, i had no way of knowing as the engine’s fuel gauge was broken.

Meanwhile the other engine still had plenty of fuel , as testified when I went to the Bourne Marina for some Derv.

One engine was on lean burn, the other was running through the Derv like we were in Saudi. Over the winter, I’ll ask John the engineer to look into it and even things up.

The cost of inefficient pension management

I have been in awe with the complex work of my colleagues Chris Sier and Ritesh Singhania in developing the CTI template at Clear Glass.  An engine out of fuel is like a pension fund out of money, I can see why high internal costs on a fund can run a pension out of money. Of course, when we are looking at defined benefit schemes, the cost falls to the sponsor who must make good the shortfall before a pensioner finds an empty pay cheque. But in DC we are on our own (other than the sharks).

There is no one to make up the shortfall if our money runs out before we do, which is why we need people to watch over the fuel economy of the funds we use. That’s why we have MIFID II and why the FCA and Chris Sier worked together to find a template that told us how lean our engines were burning.

I guess diagnostics come in useful if you are a maritime engineer or analyzing pension funds, but if you just sail your boat up and down the Thames, or own a pension pot, you aren’t that interested in the how and why, you just want problems fixed and steady state efficiency.  It’s what Chris and Ritesh and Clear Glass bring to the party.

Disclosure of costs and charges

I like the use of the word “appropriate” to describe cost and charges in the FCA’s common definition of value for money

The administration charges and transaction costs borne by relevant policyholders are likely to represent value for money where the combination of the charges and costs and the investment performance and services are appropriate

At Peter Freebody’s yard

Close to Lady Lucy, in the Hurley millpond sits a Riva Ariston Super, her 350 horse power V8 produces twice the power of my two Perkin engines for a boat a quarter the size. Her fuel economy is outrageously poor but no-one who owns these magnificent boats worries about fuel.

High transaction costs can be worth it , just like the fuel costs on a Riva Ariston Super. We know that buying and selling property is an expensive business, relative to more liquid investments which are traded every day. But when we invest in property we are investing patiently for an inflation protected income stream. Likewise, when L&G invest the money they receive from pension funds buying out their liabilities, they are not minded by year one costs of investing in Salford Docks or a Southampton Hospital. The long term value spreads those costs and justifies them.

What we should be reluctant to pay, is high transaction costs for liquid investments like most equities and bonds. Where we are burning fuel like a Riva but driving Lady Lucy, we need a good service (and maybe a new engine).

So when I’m buying my next boat (gulp), I won’t be asking about fuel economy , I will be looking at the utility of my boat. The utility is its value for money, fuel economy informs and I trust my engineer that it will be appropriate to the function of the engine.

VFM –  for consumers is the bigger picture

Why I am keen to build standards for value for money comes from the same motivation as drove Chris Sier to Chair the Institutional Disclosures Working Group, because someone has to.

We can’t have consumers running out of petrol up river and far from a service station!

Value for money is the consumer development of cost and charges disclosure, by measuring the outcomes of fund investment , we can see whether the engines have been burning fuel at the right rate. If a VFM analysis shows a poor score then trustees or IGCs can investigate whether it was the costs and charges that were at fault or something else.

The point for us is that a VFM score keeps us aware of the proper maintenance of the pension without dragging us into the engineer’s workshop for exhaustive explanations.

Costs are appropriate, value is common

What I mean by this is that when comparing a Riva and an Osborne (Lady Lucy), an expert would say we are comparing apples with pears. But to the non-boater , both do the same thing, carry people over the water for pleasure.

We can be too cute in disclosing value , money and quality of service. Not all savers are actuaries, anymore than all boaters are engineers!

A general metric , such as I am advocating as one or maybe two VFM standards, talks to the experience of owning a pension pot and the utility of that pot – its outcome.

Disclosure, like costs and charges, needs to be appropriate. But there needs to be Clear Glass through to the fuel economy gauge, for those who want to drive the boat!


About henry tapper

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