Why our pensions need a benchmark of everyone!

This post’s about getting people engaged with their pensions. It is quite technical but I’ve tried to keep it in a language that keeps you interested. I am a firm believer that people will be interested in pensions if you give them information that is clear vivid and real. We went into the FCA sandbox last year to see how ordinary people reacted to being shown how their pension did compared to everyone else’s. People were super engaged once we started giving their pots performance scores!

But to give a pension pot a performance score, we needed to do something that was very innovative and though the scores are simple, getting there wasn’t. This is about our quest for the benchmark of everything and are ongoing quest for the benchmark of everyone.

The benchmark of everything

The FT’s   talks about the quest for a holy grail – a benchmark of everything. He writes of benchmark providers seeking to capture the performance of the entire market, from bonds and equities to private assets.

People familiar with DC pensions will know that the asset classes that count as “everything” are increasing what our DC pensions are invested in.

So why don’t we turn this around and ask whether we mightn’t find the benchmark return for everything is the average return achieved by a DC saver.

The conventional view of the average return achieved by a DC saver is “net performance”. This is what the DWP want trustees to measure to compare schemes and decide whether to consolidate or be consolidated.

But “net performance” is not the same as the  rates of return that individual savers get. That’s partly because measuring multi-asset performance that changes over time is so damned hard, but also because the return that people get is impacted by all kinds of external risks and rewards. These can come from the sequencing of contributions , the transitioning from fund to fund and the vagaries of a single swinging price.

I’m sorry to say that – despite the best efforts of the performance measurement industry, ordinary savers simply don’t get net performance. They get reporting that tells them how they have done, not how others think they’ve done.

And to know how you’ve done, you need to have something to compare – let’s call this the “benchmark of everyone”.

The benchmark of everyone is not a dream.

The simplest way of telling people how they have done is to give them the internal rate of return based on their contributions and the current value of their pot. You could express this as a percentage – “your IRR is 7%” but you’d get a question – “is that good?”

You might be able to help a few people by comparing that return with inflation over the period or perhaps bank interest rates, but most people will have in the back of their mind “how have I done compared with other people?”

Most people actually want to know what everybody else has done which is why we need a “benchmark of everyone” and this could be achieved if we had everybody’s internal rates of return. Actually we do have around 2.5 million individual rates of return here at AgeWage but we aren’t yet confident that we can create an index of everyone’s returns. However, we think that with co-operation we could get there.

And if we created an index that contained the data of tens of millions of savers , we could see how everyone has done going back 40 or 50 years.

From there it is just a short step to compare how someone’s done compared to everybody else.

So where are we today?

Three years ago I went looking for a benchmark of everyone in workplace pensions and couldn’t find one. Nobody had tried to create the price-track of the average pension managed fund used for savers over the past 40-50 years and we were told this would be impossible.

But one benchmark provider agreed to take up the challenge. Morningstar agreed to set up a UK Pension Index that provided a daily index of prices of various equity and bond markets going back 40 years. We worked with Morningstar looking at what people had been invested in and saw that this changed over the years. Of course if you are trying to produce an index of everything it will miss things out and it won’t be as inclusive as the index of everyone.

But it will do for now!

Because what the Morningstar UK index allows us to do is to turn those Internal Rates of Return into AgeWage scores – which tell people how they’ve done compared to everybody else.

And when people get that information – they get engaged – and from there a lot of good can happen.


About henry tapper

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