As I am in the Highlands of Scotland on Monday (the last day of the DWP’s consultation on its VFM framework), I will be submitting AgeWage’s response today. This blog is about the most important thing the VFM framework can do – shift thinking from cost to value and shift the goal of having a workplace pension from maximizing compliance to maximizing outcomes.
I was with TPR, FCA and DWP yesterday. I cannot report who said what but I can report what was said and when I wasn’t gabbing off, I listened to two excellent presentations, one on measuring the quality of service and the other on how trustee and employer decision making can change.
Right now, the metric that gets those who decide on the workplace pension offered to staff is the headline AMC. Though the charge cap is 0.75% of assets per annum, AMCs of much lower can be negotiated with the help of employee benefit consultants or by using published information in some IGC reports. In practice, most negotiation is through consultants.
Although consultants carry out research into the qualities of workplace pensions on offer, it is the quantitative metric, the AMC – that typically determines who wins the business.
The VFM framework aims to break the hegemony of the AMC by making it one of three tests of VFM. In our discussion yesterday, the conversation was all about what you get for the money and not about the money itself. This is what the VFM framework should be doing and though I’d like to think the people in the room yesterday where in the vanguard of thinking on this, I sense that the general direction of travel is towards value and away from cost.
How to view cost and charges
Thanks to the work of pioneers , such as Dr. Chris Sier, we now know much more about what we are really paying for investment management , but there are large areas of DC costs which remain unchartered, especially the impact of transitioning assets from fund to fund. We need to continue the analysis of cost as a separate discipline as the efficiency of our investments is one of the things that trustees can control in terms of performance.
But when you own a DC pot, you do not get told what investment charges you are paying. Instead you get a bundled charge which is decided on by a pricing actuary within the provider as a mix of charges for investment, scheme services and money retained by the provider to meet its (and possibly the shareholder’s) demands.
In order to understand value for money, we do need to know what we are paying for and in what proportions so the discussion on costs and charges should be moving on from it determining VFM to its disclosure being key to the transparency needed to reckon VFM. Without that transparency, VFM measurement is obstructed, non-disclosure needs to be called out – but it does not necessarily mean that the provider is not offering VFM. This is why I do not think that transparency is a test of VFM but a test of transparency.
Moving to value
It was mentioned yesterday that the VFM framework mentions “outcomes” 67 times. Well done whoever had that measurement job!
Actually, outcomes are worth mentioning 67 times, because VFM is about saver outcomes and though these can be calculated in other ways, the chief outcome is the size of pot at the end of the day. The “end of the day” is not the same as retirement, it is the final day the pot is needed or the day the pot runs out.
Measuring member outcomes has to be done individually unless the DC scheme is collective (which means everybody until RM’s CDC scheme is up and running).
Individual DC performance measurement cannot be measured collectively , as if everyone was in a DB or CDC scheme, it must be measured individually and then the average of individual measurements must determine the experience of the scheme. This is absolute to my mind. Not to measure DC through individual experience is to devalue the member experience,
DC pensions , where members take the risks, provides a different measure of value – the rate of return that each saver gets. When we start relying on this kind of measurement, then we will always be considering the outcome , because the measurement is the saver’s outcome and not the net performance of the scheme (not the same thing at all).
So – to move to value – we need to do more than simply urge trustees and employers to choose pensions on likely outcomes rather than price, we need to give them a measure of value and a benchmark for that measure that means they can keep tabs on value going forward.
This is not the same thing as determining what the likely outcomes in the future will be (past performance can’t determine the future) , but without employers and trustees being re-educated to think of success as being good outcomes rather than good prices, we aren’t going to get decision making on anything other than price.
Outcomes matter What % of a living wage are you targeting and on your current projection at what age can you start take benefits? Some of your “ Pots” can only mature three years before death
Some blunt wealth warnings should be on the front of the glossy brochures some pensions are as toxic and life threatening as tobacco