I am a fan of David Hutchins and when he writes, as he writes in Pension Expert, on value for money (VFM) – I read. I read but I don’t always agree and I certainly don’t agree with the premise behind this statement
Pension plans whose fiduciaries seek high-quality investment solutions with good governance and customisation capabilities will perceive value differently than decision-makers seeking a basic, low-cost packaged solution.
The premise is that VFM is decided on by clients who make purchasing decisions on workplace pensions – this means employers – or occasionally trustees set up by an employer to take decisions on an employer’s behalf. David continues
It is important to recognise that there is a spectrum of client needs, and that VFM must be interpreted relative to a pension plan’s positioning on that spectrum.
The idea of a workplace pension is not new, defined benefit plans have rightly determined decisions about costs, risk taken and benefits granted because they took the risk, paid the costs and granted the benefits. But DC plans are different, employers do not take the risks and don’t get stung by costs that get passed on to members. In fact “value for money” is not something that greatly matters to employers – so long as the workplace pension is compliant and the scheme meets the employer’s reward strategy , then the employer’s job is done.
“Value for Money” is not a marketing test for employers but a way for members to see whether their money is getting the value they should expect. Of course people have no clear expectation of the value they can expect because there is no common definition of value for money and no benchmark against which VFM can be tested.
Even if there was a way to test VFM , there would be no accountability on workplace pension providers because those charged with assessing VFM (trustees , IGCs and GAAs) are finding themselves marketing their schemes to employers rather than telling members what has actually happened. I fear that this trend will be made worse by the FCA’s proposals to provide VFM assessments on “employer schemes”, unless those assessments focus on what has happened to member money.
The interfering hand of the “intermediary”.
One of the remarks that is thrown at our work is “so what”. It is typically thrown by employee benefit consultants who act for their clients (employers) and who’s job it is to maximize the value of an employer’s benefit spend.
The client’s value is not however measured in the same way as the member’s value. What matters for a member is the value of pension and for the “client”, the perception of the future value of the pension, as presented to them by employee benefit consultant and provider. The interfering hand of the intermediary may influence the workplace pension we participate in but should not sign off the value for money assessment, that is signed off by a fiduciary on behalf of the saver.
Employee benefit consultants who dismiss value for money as a backward facing measure, do so because there is no economic value either to them or their client in transparent disclosure of past performance. Indeed there is considerably more to be lost than gained by telling people on a quantitative basis whether they have done well or badly from their workplace saving.
The interfering hand of the intermediary intervenes so that what has happened so far is discounted to nothing. David’s VFM spectrum is based purely on a speculative view of what is to come.
Sadly, no one can buy past performance. To analyse the role of investment strategies in a DC pension plan default, we firmly believe that fiduciaries need to adopt a forward-looking mindset. This involves considering future performance and risk scenarios and understanding how their choice of default is likely to affect members’ savings over the course of their remaining career lifetimes.
This is the “so what” moment at its most cerebral, it consigns the member’s savings experience to the dustbin. Past performance has no value as you cannot buy it and that’s because it has no price. This is another example of social capital being driven out by economic capital, the saver’s sense of ownership of what they’ve saved being dismissed as secondary to what they could achieve with more saving. In this paradigm “shortfall” is promoted over “sufficiency”, future speculation prized over consolidate gains. Value is never achieved and is always just out of reach awaiting the next contribution.
Value for money exists independently of employers and is priceless
Despite 40 years of being told that past performance is no guide to the future, people continue to value their purchases by how they have done for them. Financial economics may consider this quaint or even wrong, but in doing so , they miss the important emotional attachment granted to products that have delivered what they promised. This is of course the accountability that people sign up to when they enter into a long term contract like a pension. Dismiss in 2060 what’s happened since 2020 as “so what?” and today’s saver is likely to be unimpressed.
People , for want of any evidence of customer service (good or bad), will judge their value for money by the outcomes of their savings and this can only be done if they have clear information about how their pension has performed relative to others. Of course such performance needs to be specific to the contributions , costs and charges they have paid and specific to the value of their pension pot on a certain date.
And of course that information should be freely available to you , since it derives from the pension plan you have been paying into over your career.
VFM – the consumer’s measure of accountability
To date, we have allowed definitions of value for money to be determined by firms such as David Hutchins. This means that providers , benefit consultants and employers have been able to mark their own homework. Attempts by consumers to hold providers , intermediaries and even employers accountable for the results of purchasing decisions are typically dismissed with “so what?” or “no once can buy past performance”. This is arrogant and trust-destroying.
It is not for providers like David’s or for financial intermediaries or even sponsors to determine the value we get for our money. We call upon independent fiduciaries with no skin in the game to do that. They should not be answerable to scheme providers, or scheme sponsors or even regulators, they should be accountable to members. They need to provide the independent information on VFM to the savers who carry the ultimate risk measured by the outcomes of their pots.
So long as we consider VFM as a forward looking measure, we will discount the past to nothing, this aligns with the needs of the financial services industry but not their customers.