There are two ways of managing a pension system. The first allows people to make their own way home and is based on freedom and choice (think 401k and UK pension freedoms). The second is through defaults that are “done for you” – think workplace pension savings and Aussie Super.
Right now we default people into a savings scheme at a default saving rate with a default minimum and normal retirement date. People like that – it’s one of the reasons people don’t opt out of workplace pensions.
But with defaults – somebody eventually needs to be accountable, otherwise you get class actions (think defaulting PPI, defaulting certain drugs as treatment. It is all very well having default mechanisms until they stop working, then you have two things you can do, keep schtum and hope no-one notices , or tell people there’s been a problem.
Last year we had a problem with workplace saving and few people reached the end of the year with as much money in their pots as they started. People have often commented on people comparing two statements and working out that they’ve lost money – people think they will jack in their savings, sue their trustees and blame the Government. None of these things happen, they didn’t in 2008 and they didn’t in 2022 and each time that a bad year ticks by, everyone gets a little more complacent.
I’m not going around town with a big drum shouting that pensions are a rip-off but I do want to point out to the people who write the value for money guff that gets inserted into VFM reports that last year most people got very little value for their money, not only did they not get their pot uprated by inflation but the pot wasn’t uprated by a higher rate of interest either. Infact higher interest rates sent some funds into a downward spiral, funds that were advertised as “low risk”. Of course funds that were trying to grow, shrunk and the only people remotely smiling had had their money in cash.
If you had been invested in cash last year you would have been among the top 10% – maybe 5% of savers in terms of improving your outcomes. Sounds silly but no more silly than 2019 when being invested in inflation linked gilts made you the investment superstar.
I’m just saying that people just don’t get markets but they do like to know what’s going on. So my websites tell people how their money has done relative to things they understand
- Sitting under the mattress
- Sat in a high-interest account
- Invested in the average workplace pension fund
- keeping pace with inflation
These are simple yardsticks that people get – they might have other ones in mind like average earnings or the various measures of inflation. They might even query the composition that’s been chosen of the average workplace pension fund.
But they see all these measures as – in different ways – measurements of value. Beating any of these is an achievement. People will even feel happy losing money so long as they know they lost less money than the average saver.
All of which is good when you’re winning. but what if you are losing? What if you set out to get an absolute return and lost money , what if you made less than if you’d put your money with Santander 1-2-3, what if you didn’t beat inflation, what if your workplace pension fucked up? What if?
Well you’d ask for an explanation. “We never promised you a positive return and this is why…” Simple answers to questions that people actually ask.
I’m sorry to bore on this but it’s so important, value for money is not about coaxing people into saving more or getting high net-promoter scores, it’s about making money work as hard as you do (harder in my case).
It is so much more important to tell people how they’ve done than how much they’ve paid for their money management or what the pension’s “net performance” has been.
Ordinary people aren’t interested in abstract notions like TERs and TCOs or even AMCs. When Tesco tested putting the cost of the investment on a simple pension statement people pushed back, telling Ignition House , they weren’t interested in what came out, they wanted to know how they’d done and yes they wanted to know how to work out if that was well or badly.
People think that they can put a shortfall calculator onto a website and people will use it to work out how much more to pay. Well some will, but most won’t. “I’m not giving you any more money until you tell me how you did with the last lot” one pension saver told me last week – quite right too. We take it for granted that people take our best endeavours for granted – but they don’t. People want to know that we’re looking after them and that goes for yesterday and tomorrow.
This may sound like motherhood and apple pie and it is. Motherhood is really important and apple pie is one of the nicest dishes. Both are in too short a supply.
Someone has to be accountable for defaults, the Government has chosen this to be trustees and IGCs. Right now we don’t have defaults to pay pensions (we did away with that in 2015) but we may get them again. When George Osborne said that from this day forward nobody need have to buy an annuity again, he didn’t say that we couldn’t have a pension from our pot (other retirement income streams are available.
When we start to provide default retirement income defaults again, then someone will have to be accountable for them too!
Right now, nobody knows whether they are getting value for money or not, and that’s the fault of the way we choose to measure it. But that is changing and will continue to change. When we can tell people how they’ve done, people may be interested to know more. Right now – we don’t get to first base and neither do the people we’re supposed to be helping.
If you want to stop people cashing out their pension pots – give them some proper information about why they shouldn’t – give them their own value for money statement – which talks to their experience – not to the provider’s.
If you want people to feel confident in the pensions they save for in retirement, tell them how those savings are doing. Until people who are paid to manage our money are accountable for how they do it, people will distrust claims made by fiduciaries that they are getting value for money.