AgeWage was set up to improve the pensions savers got from the pots people built up from workplace saving. We have seen a problem reporting to people the value of their savings in “value for money terms”. We addressed this problem by thinking about reporting from the saver’s perspective and asked “what do people want to know” – we asked a lot of people this question through social media and we concluded they wanted to know three things (whether valuing their or their staff’s pension saving)
- How much have I saved?
- What return have I had on my money?
- How does that return compare?
People expect to see performance reported in real time, the consultation suggests a 10 month lag between performance measurement and the reporting of that measurement, this is too long.
People expect to know how they have done, the net performance method tells people how their funds have done and the impact of charges on performance, it does not tell them how they’ve done and it doesn’t tell employers how their staff have done.
People expect to know how they’ve done compared to “average”. Whether you use a popular word like “average or normal” or an industry word like “normal”, their has to be something to compare your value to.
The VFM consultation is aimed at improving standards and thus outcomes including the standards of decision making made by those who choose workplace pensions for others. In 2014 the OFT reported that this standard of decision making was “some of the poorest it had seen”. The bar for improvement is set low.
Why has no one addressed the questions people have about their pensions? If people knew what was happening with their pensions would they feel able to make better decisions? If people understood their or their staff’s value for money, would we see better outcomes from people’s savings and ultimately better pensions?
We think the answer to these questions is “yes” on all counts and we ask a final question. What is stopping us giving people those answers?
The barrier to change.
Decision making on pensions has been divided by those who pay for advice (typically larger employers and affluent individuals) and those who don’t.
Between 2013-19 AgeWage was called Pension PlayPen and provided employers with a balanced scorecard to help them choose their workplace pensions using analytics from an actuarial consultancy and making them available at a cost of £100 per employer. We helped around 7,000 employers make a decision, typically decisions were taken based on ease and cost of use of the workplace pension, the workplace pensions that were free to use and supported by a strong infrastructure won over those who advertised superior value in other areas.
That was when the value of the workplace was small, where there was an existing valuable workplace pension, the employer would pay much more for advice and would receive an analysis of their choices based on a more sophisticated scorecard. However, the analysis of the key drivers of VFM – net performance and quality of service – was often subverted by a simpler metric “price” and many decisions were taken on the headline AMC with actuaries becoming little more than brokers.
Since then DC consultants have tried to restore “value” as the driver for employer (and member) decision making but this has often been swimming against a strong tide.
To reassert the principal of value, investment consultants have dug deep into their analytic resource and focussed on two areas
- The true cost of investment management – adopting the CTI methodology to view cost through a scientific lens
- To translate the methods developed to analyse DB funds into DC consulting. This has seen the development of Went performance” as the preferred measure for evaluating value offered and has allowed DC cost analysis and performance measurement to become part of the DC consultant’s toolkit
The risk adjusted measures such as Drawdown (VAR) and annual standard deviation (ASD) are DB techniques translated in the same way.
This allows the decision makers on DC – trustees and the executives of large DC pension schemes, to see DC through the same lens as DB and firms such as Redington, LCP, Barnett Waddingham and others have built successful DC practices providing advice to employers and trustees that can afford this type of analysis.
But this development has left behind the vast majority of employers who have no DB experience and indeed no appetite for paying for this kind of advice. This has left many large DC schemes and employers with large workforces participating in multi-employer schemes with little guidance or advice on whether they and their staff are getting value for money.
In the absence of an authoritative alternative to a DB based analysis of value for money, net-performance has developed unchallenged as the way to assess value from a DC pension scheme.
However, net performance is singularly unsuitable as a means to measure value for money for all but a few schemes who value this kind of analysis. It does not give people real time information on the value of their money, it does not tell individuals or employers how people have done and it doesn’t allow an easy way for people and employers (or trustees, IGCs and Government) to compare the saver’s experience.
AgeWage is only four years old and can be forgiven for not having changed the way the industry looks at DC saver’s performance , but we have and continue to challenge the received idea that DB methods work for DC savers. We do this for the reasons that the Minister for Pensions has mentioned, DB is not DC. We think it is unfair that savers do not get their own measure of VFM as they – not employers, trustees or Government – that take the risks of poor VFM. We think that employers – other than for a small minority who pay for advice, are little better informed than their staff. We think that VFM needs to be democratised and offered as a measure that can be used whether you run Nest or are one of it’s million+ participating employers.
A note of optimism
Since 2019, AgeWage has analysed over 7 million DC pots – some from DC master trusts, single employer DC trusts, workplace GPPs , non-workplace SIPPs and legacy pensions
So long as we can compare contributions to outcomes (money in v money out) we can tell people , employers and fiduciaries how a saver has done in absolute and relative terms and where we have large quantities of data or access to price tracks we can give risk adjusted metrics.
Those who have used our service, validate it and use it again. We are quoted in IGC chair statements, trustee chair statements and we are used by employers to tell their staff how they have done. An unexpected and happy -product of our analysis is that it offers stakeholders an insight into the quality of data that has been analysed. Where we cannot create reasonable analysis, we can refer the record to its source for investigation making our service the prompt for data cleansing. We maintain a benchmarking chart that allows clients to se see the quality of their data against that of others (important in assessing quality of service).
Slowly we are building a fan-base for what we do and we feel that now is the time that we must push the DWP hard.
Our view is that net-performance is a way of analysing DC performance that is too slow, too expensive, too inaccurate and too little to do with the saver’s experience to be of use as the primary measure for value for money.
We believe that measuring IRRs of individual savers is fast, cheap, accurate and exactly reports the saver’s experience. It is therefore the alternative and superior way to measure value for money.
Which is why AgeWage sees the Value for Money consultation as so important.