This afternoon we are discussing value for money in pensions, how we measure it and why it’s important. This blog thinks about how we make purchasing decisions.

Many people impulse buy, some buy regardless of cost because they want it and some buy purely on price. But most of us weigh up the value of what we are buying and ask a simple question “is it worth the price?”.

Financial services are no different, we want to understand the value of the service and we want to know what we are paying for it and that goes for what we have today as well as what we might have tomorrow.

To do this we need to have good information, presented to us in a sensible way. When buying instant coffee we can see the cost of powder per 100g but we must rely on taste memory to remember the flavor. There are other things that matter too – like ease of use, , nice packaging etc. and our brain prioritizes these components of the purchasing decision differently. But there is a general consensus when buying coffee that we are deciding on price and experience.

Is pension Value for Money  driven by price and experience?

The problem we had with selling pensions before auto-enrolment was that the product was intangible so people had no experience of it. The price was presented not as the cost of the service but as the contribution we were being asked to pay. This felt all wrong to me as a salesman and to people buying. They had no experience of the product and didn’t know the price. In the end I had to be paid a lot of money to get the sale over the line and this cost often made what I was selling poor value for money.

Auto-enrolment made life much easier for the saver, there was no purchasing decision, the only decision that needed to be taken was the opt-out and as people are naturally inclined to save, that happened relatively rarely, but we cannot say that auto-enrolment has made pensions value for  money in the purchasers minds.

Even employers struggle to explain their purchasing decision, often deferring the decision to their accountant, financial adviser and in the case of Nest – the Government. Most workplace pensions weren’t  purchased as no price was paid at point of sale.

But there comes a point where people have to take purchasing decisions on their pensions. Where they have multiple pots, they may choose to combine them, making a decision on what pot will be their “big fat pot” – (thank Steve Webb for big fat pot).

Similarly some employers who have chosen to have their own bespoke workplace pension scheme need to take a decision on whether to continue with it, or roll it into a larger multi-employer scheme called a master trust.

In both these cases, their needs to be a purchasing decision and this is when we need to use our inbuilt skills in assessing value for money. But as we have seen with coffee, we need to know price and have experience to make a decision . We need to understand the relative costs of what we are buying compared to what we have and we need to be able to compare the value of the products.

The Tesco staff experience

When Tesco talked to 1026 of their colleagues (staff) about their workplace pensions, there were two things they wanted to know. They wanted to know what they were paying for and they wanted to know what they were getting and they didn’t want one piece of information without the other. They wanted price and experience.

The employer experience

If an employer is prepared to pay £200 + per member per annum to run a bespoke  pension for staff (figure care of the DCIF), then they need to know that that extra payment over the cost of a “free” master trust, is worth it. Like the Tesco members, they want to know the price difference (in this case £200 + per member per annum) versus any drop in value from the new arrangement. They want to know price and experience

Consider this chart, which is  work in progress for AgeWage’s benchmarking service.

If you were an employer with a scheme with over £500m in member pension savings, you’d be pleased to see you had a better than average Value for Money score but also worried that some master trusts were providing better value for their members,

You’d question just what was going on and try to find out what was going on with these AgeWage scores. You’d want to know if these comparisons were apples with apples and you’d like to know whether you were giving your members a better quality of service. But as these scores are based on the experienced outcomes of the members, you’d accept, perhaps reluctantly that they are the best proxy for “experience” readily available to you.

It’s not as simple as that – is it?

Well of course it isn’t. There are many things that matter apart from outcomes and that’s why the Pensions Regulator identifies 31 characteristics of a good DC pension plan. It’s also why IGC VFM Assessments are so complicated.

These assessments are valid but are limited in value as they mark their own homework but no-one else’s. I can’t remember which IGC report is from as every IGC VFM assessment is different and those few people (like me) who read them all, end up with a fruit salad , not a bowl of apples. It is impossible to use value for money assessments unless they all work to a common definition of what VFM is. We need common experience to make purchasing decisions.

A common definition of value for money

We are inching towards a common definition of value, I think it is the eventual outcome of a person’s saving and that outcome is mostly defined by the value of the pot at the point when the experience is over. Within the word “experience” there are many considerations, for instance people may feel the experience more valuable if they have seen their investments work towards a more sustainable planet, do social good and improve the quality of employment though better governance. Some people will value the opportunity to influence these things either through voting or the expression of interest.

People may also have views on the quality of their experience in terms of support,  communications and in the quality of record keeping by the plan administrators. These will impact their decision making just as the ease of use of a jar of coffee has impact on the purchasing decision.

I am sure it is possible for us to measure the value we get for the money we spend on ESG and on the member service proposition and I am sure too it is possible to measure both the costs of provision and member outcomes.

Which means I believe we are moving fast towards a standard for value for money that can be applied to all types of workplace retirement plans that provide pots rather than pensions. If we can get to that point, then we can look at the second and equally challenging concept of establishing value for money for the way we spend that pot.

There is still time to register for today’s VFM conference which will be discussing these issues in more depth, you can do so in 20 seconds. Note- it’s worth registering even if you can’t make it between 2-4pm this afternoon because you will still get a recording of the day.

Register here