A long time ago , I and a colleague were presenting to the trustees of the parliamentary DB pension plan (the PCPF), an alternative AVC arrangement to the Equitable Life (whose proposition was collapsing).
We knew that we were offering our service at twice the price of others presenting in the beauty parade which had been organized by a firm of consultants. Our pitch was based on the value we would bring and – even then – the value for parliamentarians money.
When we finished, the Chair of the Trustees, an eminent MP , asked us how he could justify to his members putting forward the more expensive service.
My colleague, inspirationally replied
” Sir, we believe our rivals are selling at a loss, if you agree with me and appoint one of them, then you must instruct your members to report every contribution they make to the parliamentary privileges’ committee”.
We were appointed , I suspect on a combination of product, wit and chutzpah. But I suspect that many purchasers of DC pensions know that their fiduciary duty to those they purchase for extends beyond comparing prices.
Selling on price
Selling workplace pensions on price is nothing new. It happens out of laziness. It happens because of a combination of these three things.
Those who market pensions workplace pensions are too often rewarded on volume not margin, their job is to squeeze their pricing actuaries – an internal broking job that enables to compete when the horse-trading happens prior to an appointment
Those who purchase workplace pensions, employers – or trustees selecting the workplace pension to transfer member assets too, have insufficient information or education to consider a decision based on value.
Those who advise on the purchase find it easier to justify their fees by quantifying the saving in price to the purchaser of each bp off the AMC.
It has happened for decades and it is still happening today and this is why we are seeing so little innovation in the investment of DC.
To win new business , providers need a headline AMC which is not only competitive enough to make the shortlist, but has the give in it to win the horse trade prior to appointment. If you go into a pitch knowing that ultimately you will win or lose on price you need an investment proposition which can be stripped down to win theAMC limbo dance.
“It’s only DC”
The problem is systemic and it comes about because of a phrase I have heard when working in pension consultancies . “DC” pensions are not taken seriously by many consultants who value their work in DB over the work of their colleagues in DC. DC is – to them – a kind of broking, the product a commodity and the outcomes of the products of little interest. They are only DC and the people in the actuarial practices assigned to the DC departments are those not up to doing proper work.
This engenders low esteem in DC consultants which encourages them to sell their wares on their broking skills. Since they haven’t the courage of their convictions with regards “value”, they commit resource into marketing themselves to potential clients rather than researching providers. If the value of the service they are offering is challenged, they point to their fees being lower than those who do the job properly and the results of their work being lower AMCs.
Dumbing down has become vertically integrated from the senior partner to the most junior consultant- “it’s only DC – normal standards do not apply”.
What does this mean?
The consequences of the dumbing down of DC pensions are these
- Pricing of workplace schemes is now so keen that providers have no choice but to strip out value enhancers in favor of the cheapest passive funds they can purchase.
- Passive managers, starved of margin, look for back door profits
- Fund governance – such as ensuring transitions are completed at fair value – is not done
- What members get by way of achieved return is less than the declared net performance
- In this race to the bottom, quality decision making is abandoned.
And this is the area of financial services that Jeremy Hunt wants to encourage to invest in high-value , highly-priced growth opportunities.
Measurement must change
We must start measuring the outcomes of the investment strategies employed by workplace pensions better. That means moving away from the top-down approach where fund performance is measured in theory, charges based on assumptions are netted off and net performance based on hypotheticals is ditched. Performance measurement must be based on achieved outcomes using member data, what and when they save and what the pot value is on the day of measurement.
Moving to a measurement system based on what actually happened is the only way of outing poor practice, hidden fees, kickbacks, sloppy transitions , late investment of contributions , dry powder in funds – all of the little things that create the tracking error between what a saver gets and what they should get.
If standards improve -accountability will follow
If workplace pensions are considered on the basis of what they have actually delivered, employers and trustees can hold those who manage their saver’s money to account.
If the declared net performance is not being achieved in practice, then providers should be asked to explain where there is leakage and either improve or be sacked.
Simply taking the investment manager and the administrator’s word for it is not good enough. Their performance needs not just to be measured but properly benchmarked.
Without this accountability, there can be no hope of moving towards better practice.
The problem here is one if timing. Measured performance must be over some time period. This means a delay in getting figures for the actual investment performance of a provider’s strategy. There is then the issue that it will take some time for there to be measures of any changed strategy, either by that provider or by going to another one.
Future performance obviously has some uncertainties. There needs to be some articulation of how anybody will have some confidence that a changed strategy/provider will do better going forward.
Did the AVC make a transfer before the collapse of Equitable?
Was any other Government department able to help with the solvency position of any of the proposed options?
Did anyone point out the correlation between sales volumes of Equitable Life salesman and their salaries ( not to be confused with nasty commission of course)