A rare but wonderful experience!
Once in a blue moon I get a mail from someone who is clearly an expert in pensions but modest enough to recognise she/he struggles with their own money! I feel in awe of such people!
I got a message on social media from such a person this morning. I hope that the questions (and my answers) prove helpful to people in our shoes!
Those questions and my answers!
Q. Henry, I’ve been thinking, probably a little too much about my DC pension pots, as I have multiple funds both contract based and trust based.
A.
Thanks for your questions , I am replying on linked in and on your personal mail (which I got from Linked in)
Your questions are all pertinent, I’m not qualified to speak for DC schemes but here are some thoughts.
You aren’t unusual, and you look like you are beginning to think, “these pots are my financial future”?
Q. My own role looks after DB schemes, but that is not quite what I have been provided with all my career. What frustrates me is I want my fund to grow by more than the default. But is that right?
It seems reasonable to want more than average. But you’ve got a number of pots and the default return on each will be different, if you’re in a very good scheme then your default return will be above the general average so it may be best working out which of the schemes you are in is offering best value for money and starting there. Our data analysis (and we’ve analysed over 1m pots) – is that those who self-select , statistically are unlikely to beat the default.
Q, Should I know more than the organisation running my pension?
A. Ideally you would know your pension , study the IGC report or Trustee chair statement and look at the statement of investment principles when there is one, but you’ve got several and I wonder if you can really do due diligence on all of them. You need someone to tell you where you are getting value and where not. You could employ an adviser – if you’ve got the money, or you could use a resource such as agewage.com which provides value for money scoring , providing you can give the website the details of your policies and membership.
Q. Is the default fund the best return per unit of risk?
A. It’s a question that has been troubling us a great deal. We have a metric called “value for risk taken” which we use where we have a great deal of data from savers in an individual fund (typically we need 5,000 + records in the fund. It allows us to see the experienced risk people have taken in the fund and the experienced return for that risk. It’s a technical calculation and we haven’t rolled it out to individuals yet, but that will come.
Q If not then why not?
A. The main reason we haven’t found a way of providing a metric for value for risk taken is that we need a large data set and we have only got about 40 such sets. The second reason is that we are still testing with the FCA, what can be shared as factual information (guidance) and what is considered individual investment advice.
We are using the FCA sandbox as a controlled environment to test whether providing value for money information – of the type you are talking about, can be considered factual. If we deliver investment advice to individuals, we are into a different “cost paradigm” – e.g. it becomes very expensive to you!
Q. Secondly, why does a scheme offer suboptimal funds?
A. The answer is almost certainly historic and could be to do with a good round of golf!
When I worked on provider investment propositions we would get all kinds of intermediaries contacting us wanting their preferred funds on our platform and many went on with little due diligence. Ongoing fund monitoring has often been poor and good funds have turned bad. Woodford is a classic example. Twenty years ago “open architecture” and unlimited choice was all the rage – a triumph of marketing hope over the sober reality of saver’s financial capability!
Q. Finally, why does a scheme provide dozens of funds, but then only provides a quarterly fact sheet, which can be three months out of date before it is published?
A. Investment reporting via factsheets has been allowed to fall into disrepute because providers know that only a minority of their users (customers) use the information on offer. It’s a supply and demand thing and monthly factsheets are too much of a fag for many fund managers, let alone the insurers who have to convert them to reflect the unique information created by their fund wrappers.
I guess many of the more well heeled providers are moving to a more efficient digital means of reporting but the traditional factsheet is not telling the modern saver what he/she wants. For instance – if you are interested in ESG and personal stewardship , you want to know where your money is invested (not just the top 10 or 5 holdings) and you will want to know what the fund’s doing on stewardship, this kind of information isn’t ever going to be on a factsheet , but progressive providers, like L&G are adopting software that will give you a look through to the fund’s holdings and even allow you to participate in the stewardship of your investments.
Q. Why does a benefit statement provide little or no information about the return achieved?
This is a real bugbear of mine.
I’ve attached a couple of pictures of the kind of information we would like to see on trustee reports
and individual benefit statements.
We think everyone should be entitled to see their internal rate of return, the rate of return they’d have got as an average investor and a score that tells them how they’ve done against the benchmark. This goes for trustees, IGCs and GAAs who should be able to see the average scores achieved by people in various schemes, funds, by age group, by pot size or any other way that their data can be cut!
Q. Having a deferred pot in the XYZ master trust, I recently received a survey, so suggested there should be a separate helpline for investment questions. It feels to me that to get people more engaged with their pension savings, then the investment information and assistance to members needs a rethink
This is a great suggestion. If I was running your master trust , I’d be sending you an email asking whether you wanted to apply to be a trustee!
The problem with such helplines is that unless the discussion is data-based and factual, it strays into advice. What is needed is better quality information available to you and to the person on the helpline so that you can have a meaningful conversation about your situation, without it being deemed advice.
Henry Tapper
CEO AgeWage Ltd www.AgeWage.com
Tel 07785 377768
“Q. My own role looks after DB schemes, but that is not quite what I have been provided with all my career. What frustrates me is I want my fund to grow by more than the default. But is that right?”
“It seems reasonable to want more than average. But you’ve got a number of pots and the default return on each will be different, if you’re in a very good scheme then your default return will be above the general average so it may be best working out which of the schemes you are in is offering best value for money and starting there. Our data analysis (and we’ve analysed over 1m pots) – is that those who self-select, statistically are unlikely to beat the default.”
Good to know…….I’ll be sticking with the default fund on my Tata Steel Workplace Pension with Aviva (DC Scheme).
Also, by doing so, I will remain in the ‘Lifestage investment approach’ which is a pre-determined investment path. This is designed to gradually reduce risk and automatically moves my money between carefully chosen funds starting 10 years prior to my chosen retirement age. For me this is a good way of investing for my retirement without having to be too hands-on in managing my pension plan.
Furthermore, this ‘approach’ has a feature called ‘automatic rebalancing’. This is where Aviva automatically adjusts how my entire pot of money is split between funds, at regular, set intervals. They do this to make sure I’m not exposed to a different level of investment risk than I wanted to be.