The decision from the DWP to defer prescribing on how a commercial pension provider charges member’s for their services is welcome. It would have been better if we didn’t have to consult further and that the Government made the message clear “don’t buy on price alone”.

So I disagree with interactive investor’s reaction to the news

“It’s disappointing not to see more at this stage from the DWP on what a fair charging system for pensions looks like. It is vital that pension costs and charges are better understood and more comparable for scheme members as fees can make a big difference to retirement outcomes. At the moment, millions of workers paying into a workplace pension are completely in the dark about whether they are getting good value.

Fees can make a big difference to retirement outcomes but not as much as the returns those fees pay for.

High fees + low returns + poor service = bad value for money

Low fees +high returns + good service = good value for money

If you provide great service then good things happen, you feel confident to transfer money into your pot from poor value pensions, you may want to pay more into your pot from payroll or your bank account, you may use your pot to pay yourself a wage in later age. But all these things cost money.

If you want your money to work for you , you need to accept that it avoids risks. We know that there are big risks coming, from a changing climate and from a society that has changing needs. We know that companies can be brought to their knees from poor governance. If we want to avoid these risks, we need to have an investment manager that can manage our investments in a responsible way, that doesn’t just mean avoiding risk , it means managing risks which can’t be avoided through good stewardship. Much of the value from the market is not readily available but needs to be searched out- often from private markets . All of these activities have costs attaching to them.

People are not mugs

We are consumers, we buy things. If we go on a comparison site, we can sometimes compare the price of a single item – a toaster or a laptop from different sources. We an work out the cost of ownership by adding shipping costs to the price, we can look to see what warranties are included and what after sales service, in short we can buy on price , because we have pretty well perfect information.

But purchasing a pension is different because we do not have perfect information quite so easily. We are buying well into the future and the product will be ours way after we’ve thrown the toaster and the laptop out.  We need help in purchasing, which is why wholesale purchasers (employers and trustees and many individuals) employ advisers.

We need to understand the value of the product we are buying as well as its price and that means researching the outcomes that others have had before we buy. We use services like trust pilot and star ratings , we might use past performance tables, we might use AgeWage scores.

But most of us won’t do any of this. Most of us will trust in others to take decisions on their pensions. People are not mugs, they know how to pick their fights and trying to second guess the provider they choose to look after their money is for many people, a mugs game.

People understand “value for money”.

Ask 100 people if they buy on price or value and you will get different answers depending on people’s confidence in buying. A confident buyer can buy on price because they understand value, most people try to balance value and price and use some version of “value for money”, a few people subscribe to the view that if you have to ask the price you can’t afford it. My guess is that the bell curve has pure value and pure price purchasing as the outliers while most people buy on VFM.

This gives me a chance to use my favorite distribution chart.

Random cartoon to cheer up actuaries

So when Interactive Investor concludes

“A more transparent and comparable charging structure could finally bring fees into the spotlight and enable people to make better informed decisions about which provider should look after their money.”

My take is that they are talking to the “bell-end”, those people who are super confident on value and can make decisions on price. The people who can do that are the kind of people who use Interactive Investor’s SIPP platform and they are entitled to better price information than they are getting.

But do we really have to homogenize the pricing structures of Nest, People’s Pension, NOW, Smart, Cushon and L&G (all of which are different), to work out who should look after our money?

We are in a digital age where “personalized communication” counts for a lot. Charging structures change a lot. Nest is super cheap to a youngster and expensive for people in their sixties, NOW is super cheap if you have a big pot and super expensive if your pot is tiny. People’s Pension switched from a flat AMC to  a charging structure that reduces charges as you build your fund,  Aviva has always had a flat charging structure, L&G moved from tiered charges to a flat charging structure. Not only are charging structures different, they are dynamically different.

A price comparison can capture all of this complexity and should be able to compare the charges “you will pay” for each of these providers based on your size of fund, size of contributions and period that you want your money managed. It is not beyond the power of firms like Interactive Investor or Pension Bee to build such an engine and use it to show the comparable price with their product.  So why doesn’t it happen?

Why don’t we buy pensions on price?

I think there is a strong case for buying pension platforms on price, so long as funds they offer are priced consistently between platforms. I think there is a strong case for buying funds on price when there are several classes all at different prices. Where you know what value you are purchasing you can buy on price.

Pension Bee has taken the decision that most of their customers buy on value for money and rather than using price modelers, they are looking to use value for money metrics to compare pension pots.

They are picking up on recent research. When a group of Tesco staff were shown the price of their pensions on a simpler annual statement earlier this year, Ignition House found that they found the price they were paying for their pension a useless piece of information , unless it was accompanied by a measure of the value they were getting for that price. If you want to see what I mean , watch from minute 37.06 (this video should start then)

People need their perfect information to make complex decisions on pensions. We can’t define what “their perfect information” is , because it is personal. But it varies.

Right now, very few people are taking pension decisions because they do not have their perfect information.

There are better ways of presenting information on price than by setting out workplace pension charging structures and those selling to “price-buyers” should be building modelers that make sense of charges on a personalized basis.

We should not be homogenizing the pricing structures of workplace pensions to meet the needs of a relatively few price- fixated buyers.

We should be pursuing a metric for the majority of buyers , a value for money metric, the Pension Bee approach.

And we should recognize that many savers will never want to take purchasing decisions about their pensions and for them , there need to be better defaults, both for the time they are saving and the time they are spending their workplace pensions.