After 13 podcasts and 12 hours of recording time, Darren and Nico “out” their views on how value for money should be measured.
The podcast is going to be submitted as part of their response.
Their 6 key messages are;
- Yes performance matters most
- Performance should be measured gross
- The framework should show the unbundled cost of investment management
- VFM should be subjective and be based on the beliefs and intentions of trustees
- Governance should be given its own pillar
- Retail pensions and decumulation should be in the scope of stage one, employers should be mandated to participate.
I may have got some of this wrong as Darren and Nico seem to differ in their views at times. Darren says at one point that outcomes are based on contributions (the argument for “engagement” as a pillar), there is a lot of bickering and no clear statement of what the two see the point of a VFM framework to be. The following comments are meant to put clear blue water between what I see as the purpose of the VFM framework and what Nico and Darren want.
So let me clear about how I think Value for Money is measured by ordinary people
People assess VFM by comparing what they’re buying with what they could have bought
Throughout the now 14 episodes of this podcast, the idea that people weigh up VFM by considering what they have or are about to purchase against what is available has hardly been mentioned. But if you tell someone how much something costs, they’ll consider that expensive or cheap relative to a benchmark (what they think reasonable). If you tell someone you think something is good value, they’ll ask you what is the price and measure relative to what they think reasonable.
There is no talk of “thresholds” or benchmarks in this episode at all. There is no measure which anyone (including the DWP) could use to determine a red, orange or green rating which employers could relate to. Instead, it seems whoever is left to mark the homework (presumably providers, IGCs , trustees) would in this version of the VFM framework, be free to use whatever combination of data they wished to.
VFM is about objective fact not subjective opinion
When measuring outcomes of payroll saving into a workplace pension, people want factual information not the opinion of experts. They have been given expert opinion on VFM for decades and they have ignored it.
The Pension Regulator’s value for members framework and the IGC’s value for money statements. The DWP took the VFM framework took over because neither system was working.
Darren and Nico’s podcast seeks a continuation of the past , calling for a fundamental reassessment of pensions through a return of the Pension Commission.
Instead of recognising the serious intent of the consultation, it looks to include decumulation in VFM assessments, it wants to mandate employers to use VFM assessments , it wants retail pensions to be in workplace pensions and it seeks to kick the simple measures outlined by the DWP into the long-grass.
Rubbishing the consultation’s intent in order to pursue an alternative agenda.
The DWP decided to start with the accumulation phase of workplace pensions and exclude retail Sipps and decumulation in order to focus on immediate priorities, weeding out bad schemes , consolidating to good schemes and creating a standard way of looking at VFM which everyone could understand.
In doing so – they landed on a key insight – that for savers it is the value of “their” money that matters, for employers it is the value of “their” employees savings that matters.
In this podcast, Nico and Darren claim that retail products dismiss the measurement of personal outcomes. They want to measure “gross performance” as if DC savers were in DB schemes. This alternative agenda is akin to that of the Pharisees and Sadducees , the keepers of arcane wisdom. DB is not DC and it deserves a different means of measurement of risks individual savers are taking. VFM cannot be measured by the mumbo-jumbo of DB analytics
The VFM framework does not measure the quality of governance
Nico and Darren believe that the key to good performance is good governance which is one of the reasons that institutional approaches (workplace pensions) will always provide better value for our money. Try telling that to savers who have suffered the appalling performance of NOW pensions over more than 10 years.
The “institutional approach” is a euphemism for “top down” measurement which focuses not on the member experience or the member outcome but on governance . Historically measured by TPR’s 31 characteristics of a good DC scheme, the assumption is that where good governance is evident, good outcomes will follow.
Attributing VFM to the way that a scheme is governed suits Trustees, IGCs and regulators but it is meaningless to employers and savers who are interested in their and their employees money. That is why the DWP consultation devotes three line to governance which is dismissed as a means to measure value.
The VFM framework mentions “outcomes” 67 times, entirely in relation to what savers get. Chapter four of the consultation does indeed explore up to 3200 measures for “net performance” but in truth, the only measure people are interested in is how their money has done relative to the average saver. The only thing that an employer is interested in is how the staff’s money has done relative to others. Nobody but those in the temple are interested in “pick and mix” assessments of performance tables delivered from on-high.
The DWP understand this. This is why I have repeatedly said that the consultation is 95% right. The 5% that is wrong is in residual thinking based on outdated “top-down” metrics , a left-over of DB reporting and the actuarial hegemony of performance measurement.
VFM is not about what the pension industry gets paid but about what gets paid to savers
This consultation is not about how the pension industry gets paid but about how and what savers get paid. But that is not Nico’s and Darren’s agenda. At one point, when discussing what asset managers actually get paid by workplace pension providers, Darren says he feels sorry for fund managers who get such a small slice of the AMC.
Fund managers are not charitable institutions, if it costs them 2bps and they are paid 3ps, they are working to 50% margins. The purpose of the VFM framework is not to benchmark the fees paid by providers for asset management (Chris Sier and ClearGlass do this brilliantly) it is to measure whether savers get value for their money.
Value for money is not too hard for ordinary people to understand
Saying – once more – that VFM is too hard for ordinary people (like the 1.2m employers with workplace pensions who aren’t expert) to work out, means that extraordinary people, like trustees, IGCs and their advisers are allowed to make up the measures and everyone else has to fall in line with their views – which are invariably that VFM is being achieved or will be by the time the saver gets to take his/her money.
Nico and Darren’s VFM framework has no future. It is a continuation of the failure of the past ten years. It is transparently self-serving and while it will play well to those who provide governance and consultancy to large occupational schemes- it does not wash with me. Nor I suspect will it wash with the DWP, FCA or TPR.
You can listen to this thirteenth “special” podcast here