I got this mail this morning from a friend who thinks very deeply about private pensions and how we can organize them to help ourselves to better retirement (while ensuring they are invested for common good).

We’ve been talking lately about how we can measure “good” and  “bad” private pensions and whether we can consolidate to good without accidentally throwing the baby out with the bathwater.

He is pushing back hard on my idea that we standardize a way of calculating Value for Money  (VFM ). Here’s what he’s saying.

I don’t think a common definition of VFM exists – you can’t look at it purely in terms of backward looking risk adjusted return, the governance and administration must be forward looking predictors. So you get into trying to weight the quantitative [the risk adjusted return] against the qualitative [the governance/admin etc].

I think Government could choose to set aside the governance and get behind standard reporting of returns, but

(a) I don’t think we should describe it as vfm – let’s just call it the net returns, that’s what it is

(b) I don’t think we could end up getting  behind a single proprietary method.

And there is of course the whole challenge of backward looking measures. There’s a risk that if you rely on returns alone you force schemes to turn away savers who haven’t joined on the basis of returns to those who’ve already left.

It’s too late for the members on whom you’ve based the measure, and no guide for those who’ll use the measure. But you just have to caveat. And you shouldn’t give the measure too much weight – you shouldn’t force schemes to close, you can force them to think themselves into it.

This is profound stuff.  The challenge is whether the past tells us what to do or is a guide. It’s back to the advice v guidance question and I’m frankly too libertarian to want to advise people or “force” them.  You can put as many circuit-breakers on a railway as you like, trains will still crash – just not as often and not as hard. My interlocuter and I are on the same page, but maybe a couple of paragraphs apart.

Whose value – whose money?

VFM for the people

If VFM is to be useful beyond helping DC trustees/IGC think in a straight line about what they are doing, then it has to provide a framework for comparison. Fiduciaries will have to learn to compare apples and pears as that is what ordinary people have to do. I had to decide how to consolidate my pensions and (other than by comparing charges) had no measures to do so.

I was shocked  that I couldn’t get returns on my pot when I asked for them (just reams of fund factsheets which didn’t talk to me). When I read IGC reports, there was nothing that talked to me, my pot, my experience. Current VFM reporting is so top-down it gives me neck-ache.

I  will continue to explain to those in power that people want and deserve an ordinary measure that tells them whether their pot value is accurate (quality of service) and whether it’s mid-table , in the relegation zone or top of the table .

This may be no more than a benchmarked performance score to the expert but this is what most savers and most employers need to get interested. It’s not just a measure of performance but a statement of honesty (transparency) and it tells employers and savers that there is someone accountable for what has happened, good , bad or indifferent.

If if the Minister for Pensions and Financial Inclusion  is still thinking about financial inclusion, then this should resonate. It is simple and simplicity is inclusive . But I accept that simplicity can be dangerous – as we have seen in the populist movement in America.

We need a pension priesthood  and they need to understand VFM in a different way, for them VFM needs to be understood both historically and speculatively. Read on…

VFM for the pension priesthood

Trustees/providers/consultants/IGCs and regulators need to show they are more ambitious than simply taking bets around our benchmark. They need to show they have a plan to make our money matter and that they know how it’s working for common good (TCFD).

They need an investment strategy and to understand returns on a risk adjusted basis. They need to show they are enabling those who want to engage with the management of their money, that they are providing tools (access to info , guidance – maybe advice).

They need to show they are giving people investment pathways and/or a default decumulator (perhaps collective decumulation). Finally they need to understand the execution of strategies is efficient and this means not just understanding charges, but benchmarking  charges (what should we be paying for this service?)

The priesthood’s VFM is about how the scheme deploys its resources most effectively and is a measure of the competence of those managing the scheme to deliver future results (more than just returns). Results could include the scheme’s contribution to climate change goals, capacity to help people get the spending of the pot right and any other risks that fiduciaries consider within their remit. These measures go beyond reporting on the past, but they don’t exclude the past. If a scheme can’t evidence historic capacity to manage member risks, then trustees should be asking “what will give members confidence things are changing?”

Collectively, these things can add up to a VFM framework that makes sense for the priesthood, but it is not contributing to a  common definition, it is the definition for the experts and each expert will have a different opinion, a different benchmark and will come to a different conclusion of whether the scheme is going to provide VFM going forward.

I don’t want to strip the priesthood of their mysterious arts (which are really important). I think that Chair statements still need to include all the tPR/FCA reporting requirements. But  they need to include the common definition of VFM in their reports and in their thinking.

Should we worry if a simplified measure takes off?

If this is what the press pick up on – good. It will mean that people will start asking questions about how their pension has been managed and some of those questions can and should be awkward. Trustees and IGCs should not have to defend the past , they must explain it – people deserve an explanation and the priesthood should be able to explain the mysteries of past performance not just when they are asked -but proactively.

In short I think we should be entitled to know the value we have had , for the money we’ve paid and to an explanation , whether the performance is good, bad or indifferent. This is not a matter of nudging people to consolidate (though it could help people on that journey), it is a matter of simple decency.

Here’s my question for you , dear reader.

Do you think the Government will adopt a  “common definition of VFM” based on  outcomes?

Use of VFM to consolidate pensions

The DWP want to use VFM assessments for small schemes to determine whether they should fold into larger multi-employer schemes. The FCA want IGCs to ask employers with failing GPPs to benchmark against leading master trusts while the Pensions Regulator is exploring using relative performance to assess data quality.

Using VFM and performance metrics seems to be a common preoccupation for Government as they pursue consolidation – whether at scheme or individual pot level with initiatives including the pensions dashboard , small pot consolidation and what the Pensions Minister mysteriously calls Auto-Enrolment 2.0.

Clearly the layman’s definition of VFM shouldn’t drive Trustees , employers and savers to pack in their scheme or pot. But it is a starting point. Schemes that have given poor outcomes and hold poor quality data have a higher bar to jump as they need to show that they can turn things around. There may be more risk for schemes who have done well and are complacent about the future (they  need to know their risk-adjusted score before congratulating themselves).

I think this is analogous to fast-track and bespoke, with fast-track in this context being the road to consolidation while bespoke suggests that the scheme is declaring UDI and an intention to soldier on and prosper.

But if a scheme has no history of getting things right and fails on the common(ers) definition, then a regulator can and should be asking much harder questions about the future (again the analogy with fast-track and bespoke is helpful).

As for savers consolidating pensions, we have been in the FCA sandbox and the FCA’s current view is that savers do not regard the AgeWage score as advice but “the provision of factual information”, so long as this is the case, we don’t see savers consolidating with the help of scores, should be a problem, though clearly many older DC pots aren’t really DC but a hybrid of DB/DC with all kinds of benefits that should be safeguarded unless there’s a good reason to get rid of them.

Postscript

Should we standardize the calculation of a common measure?

I’m having to argue for our approach as the AgeWage approach, because we are pioneering this thinking. We got the common benchmark going with Morningstar and we developed the algorithm which provides our scores. But the benchmark is available to all and what we do could be done by any other organisation (if they could be encouraged to invest in the data analytics).

We are currently the “tallest dwarf” but I’d be prefer to have competition, I am happy for AgeWage to be technical architect of the VFM Standard and for the standard to involve other versions of the Morningstar UK index, different algorithms, so long as there is eventual convergence (VHS/Betamex issues). We are here to disrupt and innovate, we are not after a monopoly.