Lemons remain lemons despite short-term ripeness, plums provide a longer-lasting delicacy. Unfortunately to get to the sweet spot you need to ride the J-Curve or hockey stick

Low or negative returns in early years in exchange for longer term growth may sound alright if you are a Treasury economist or a pension enthusiast , but they can muck up VFM positioning on league tables. The Australian system , where league tables of net performance are all important, shows that many Supers play it safe and invest in lemons.

FAUX-VFM

The short-term impact of the no so jolly hockey-stick is of course diluted over the lifetime of a saver’s investment experience.

This is one of the reasons why I do not favor the quant-based system of net performance reporting which looks at performance from the perspective of a fund manager rather than the experience of savers. To measure the experience of savers, you need to compare the time-weighted returns based on actual contributions and actual NAVS – the internal rates of return of our savings experience.

As the duration of workplace pensions increases, so the IRR method becomes more attractive, especially if member data becomes more reliable (dashboard readiness should help).

In the meantime, workplace pensions are going to have to report a false VFM based on the marked to market valuations  of assets designed to be held over the long term but measured over a matter of months,

We are back in the doom-loop of measuring pensions on a discontinuance basis rather than as ongoing concerns and to a large extent this is a regulatory failing. The duration of a funded pension scheme should include the period in which a pension is being spent as well as saved for. We should not be thinking of “cashing out” pensions at all.

But perhaps I am getting ahead of myself. Right now we are measuring VFM on the saving phase of pensions or “accumulation only”. We need to live with the assumption that people will regard their “pensions” as ending when they stop saving. But even here we need not assume that VFM is about the short-term return-spans being measured by the VFM framework.

If the Government wants to use the VFM Framework to increase public acceptance of the use of long-term assets, it is going to need to wean us off short term performance measurement as a proxy for pension VFM.

This is going to mean a break with the performance measurement system which was developed by the fund management industry to ensure competition between fund managers in the allocation of DB mandates. Instead we will need to move to a system that measures the experienced risks of the savers who invest in these funds.

This can only be properly done by measuring the sum of individual experiences within a scheme or over a wide range of schemes (for instance a GPP or Master Trust).

The Government is at last acknowledging the deficiencies of net-performance in telling people about long-term , but have yet to find an alternative. An alternative is in the market and I’d be very happy to explain how it might be implemented at scale and in short order.