When I went to see the Pensions Minister earlier this week, I had three problems and three ideas
My first problem was that we had no fix for the feeble participation rates for pension credits, I’ve written about the solution we discussed here
My second problem is that we’ve no good way to turn pots to pensions, I’ve written about the solution we discussed here.
My third problem is that the drive to create a common definition of value for money , seems to have stalled, this blog is about why the Government needs to get this back in gear.
VFM – the story so far
Value for Money (VFM) is a measure we use to compare things. We say that of two identical bottles of ketchup, the one with the lower price offers better value for money. But we might say that a more expensive bottle of washing up liquid is better VFM because it goes so much further. Both value and money come into the equation, price only wins where value is equal.
Too much of the VFM agenda in pensions has been dominated by price, mainly because we haven’t got a good way to determine value. There are two ways to think about value, one is based on features “investments , record keeping, service, communications etc.) The other is based on outcomes – what people get for their money. Whichever way you want to define value , it’s what the user cares about that really matters.
For the past ten years, I’ve been arguing that what users care about is the outcomes of their savings, features come second. But IGCs , Trustees and until recently regulators, have been happy to talk about the features of a DC pension scheme as their value.
I’m glad that this featured based comparison is falling out of favor, there never was any way that you could measure value using 31 quality features.
Measuring outcomes is relatively easy, you just need some data about the timing and incidence of contributions, an up to date pot (net asset) value and a good spreadsheet. You can find out the value you’ve got from your pension using your personal internal rate of return (IRR) that takes into account all the things that have happened (good and bad) to your money since you started saving.
But if you have an IRR of say 6%, does that mean you’ve got value for money? What rate is “good” for your money? What rate is bad? To answer these questions we need a benchmark. For the past 3 years we’ve been telling people whether they’ve done well or badly using a benchmark which is a proxy for the average pension fund used by savers in the UK – it’s called the Morningstar UK pension index and it allows us to work out what the average person would have got with the timing and incidence of your contributions.
Compare your IRR and the benchmark IRR and we can tell you if you’ve done well or badly, and even by how much
My conversation with the Minister focussed on finding ways for savers, employers and trustees to compare value for money between disparate pension pots and schemes, using this method of comparison. The Pensions Minister and has sent me away to do more work on this, which I will do, together with some like minded people.
My meeting with the Minister happened because Guy Opperman laid down a challenge to the pensions industry to show a bit of vision. I was one of the people quoted in the FT’s Pension Expert saying that the Pension Minister could do a bit better himself.
“We are still without a consistent definition of value for money, we have no real innovation in turning pots to pensions, and most of us are still suffering from a plethora of small pots, many of which are lost pots,” Tapper said.
“If Guy Opperman is signing off, as some have suggested, it will be interesting to see if our next minister is someone with a treasury background who can bridge the [gap] between retail and institutional pensions. I think this is probably necessary,” he added.
Having met the Minister in person, I see no sign of him wanting to “sign off” or being removed from post. Personally I’d regret either of those things happening because I like Guy Opperman as a person and think he’s been a good pensions minister.
But I meant what I said when I called on the Minister to bridge the gap between retail and institutional pensions, FCA and tPR, Treasury and DWP. Funnily enough, I came away from my meeting feeling that I may have misjudged the Minister and the situation.
I sense that there is a real fire in his and his department’s belly to crack this VFM thing. I hope I am right, a lot depends on it – we need to give people some way to work out whether they are getting value for their money and here I know that our idea helps.