Jo Cumbo’s post deserves a proper answer

Looking for comments on the Government’s proposals to allow #pension providers to use estimates of future investment performance, in their new value-for-money assessment.

To be clear, this is about the provider estimating returns to persuade clients of its value for money. pic.twitter.com/BvTMIvetMu

— Josephine Cumbo (@JosephineCumbo) January 30, 2023

There is no commercial pension provider that isn’t going to make an optimistic assessment of its capacity to deliver value for money in the future. This isn’t a criticism of providers, it is a simple statement of the bleeding obvious, we all invest into a DC pension on spec. – we take the provider’s word for it.

The question that I think Jo is asking is whether the DWP should be permitting a provider to include its view of its future as part of its VFM assessment and you can only agree it can , if you think that a VFM statement includes a pitch deck. I don’t see the need.

How experts judge investment promises.

There’s an established way in which investment consultants view the likelihood of an investment promise being met. Every investment promise has to include an objective to deliver above average value for money for it to be worth considering and the assessment of value starts with the investment beliefs (or principles) of those managing the money. The Trustees/IGCs must be in harmony , but ultimately the decision making on how a DC scheme meets its objective to be better than others is with the boiler-room, the investment team.

Good consultants will interview the team (or at least the senior members) and establish whether the beliefs are firmly held and credible. They need to work out if there is a plan and then they need to work out whether the intentions are being implemented by the decisions being taken.

The things that influence outcomes are all to do with risk and reward and strategies vary between those that seek to cover-off or “hedge” all the risks and those who take risk deliberately (out of conviction).

Sticking to your guns (investment beliefs) may lead you down a rabbit hole that you can’t escape from. There are one or two master trusts who have consistently found their beliefs have led to bad outcomes and it is hard to see how they will ever pass a VFM framework assessment. But most master trusts have good years and bad years and some may have a run of good years which puts them top of the pops. Recent league tables published by Corporate Adviser include unlikely heroes such as NPT, Aon and the Lewis master trusts.

Those whose performance lags , but aren’t in the relegation zone , may claim to be sleeping giants with the capacity to come good because of their prudence and that can be their pitch.

Others will argue that their investment teams are paid to take positions (particularly on currency) which require balls and can make or break a VFM assessment.

Finally there are managers who bet big and offer more expensive products in their defaults with a view to providing more value – even if they keep less of the AMC themselves – paying away more to external managers.

Here the issue is not just with the righteousness of manager selection ,but with the solvency of the master trust who -should the strategy go wrong – will have found little value for the money they have paid away.

Whatever take you have of the future must be backed up with clear evidence that the strategy being employed is not just speculative but grounded in economic sense.

Those who have read some of Nico Aspinall’s blogs will see he believes that the investment structure adopted by a workplace pension’s investment team can make a material difference to outcomes. Nico would argue that a future assessment must include the amount of intermediation in the offering (the less the better).

In my view, the disclosure of what an investment team wants to do, and how they intend to implement their ongoing strategy is critical to third parties assessing them. So this information needs to be available to those who need to find it.

But I am not at all sure it needs to be in the VFM statement itself which should be a statement of historic fact from which conclusions can be drawn by readers. The availability of further information, including a pitch is welcome, but it should not be in the Statement itself.

Does this get us anywhere?

There are certain ways of measuring the value that a default fund is creating for the risk it is taking and these “risk-adjusted” measures of likely returns can be helpful to consultants in plotting the range of likely outcomes from each strategy.

The reliance on lowest common denominator defaults that simply track everyone else with the cheapest possible fund solutions will be found out over time, though they may continue to be successful in the short term. These strategies are already coming under pressure from consultants;

The over-reliance on low diversity of outcomes leads you to bad decisions (cash is not a good long-term investment strategy though it provides predictable outcomes).

There is undoubtedly , information that can be shared by someone conducting a VFM assessment on the likely spread of outcomes from the investment strategy in play. But this is about as far as we should expect speculation to go.

Jo Cumbo is right to object to use estimates of future returns as a marketing tool

“this is about the provider estimating returns to persuade clients of its value for money”

But the VFM statements are said to be initially pointed at employers and their advisers and not at the general public, so the Government may consider that any statement about future returns will be taken as part of the responsibility of the providers to be prudent.

If that is the case, then a “pitch” in the middle of a value for money statement will go down like a lead balloon. I suspect that providers will work this out.

The estimate of future returns will be considered much as a symbol in a horse’s Timeform rating. Except Timeform is an external rating agency. Those providing speculative statements about future returns should be very wary of how they do it. They will be held accountable for them.