I got an email last night from a Peer of the realm and realised that the idea of value for money that people have is so various that after nearly 150 sessions, the VFM podcast has not been able to pin it down. Here’s the key section of the email that woke up in my head
Transparency is a great thing, but I wondered if you and the good folk in the industry felt it was headed in the right direction. I wasn’t sure. It seems we are not going to see transaction costs or any other hidden costs any longer. Historic performance is to be based on arithmetic averages which flatters, I think, relative to any external comparison. I have not yet found and mention of stewardship as an important service forming part of value for money.
It is very true that the concept of value for money championed by Chris Sier, with whom I started my company has not been taken up by the FCA and TPR in their measurement of what pension schemes get from their investments , nor any mention of stewardship of the assets or the funds that hold those assets.
Chris left me to set up Clear Glass which helps large funds, typically held in LGPS but also in large private DB plans understand what they are paying and whether this is value for money. This is institutional works and what the Government wanted from a VFM measure was for employers and ultimately for members of the employer’s workplace pensions.
My correspondent is right in his estimation of the FCA and TPR work which we are being asked to consult on. It is, to use a phrase of Robin Ellison ” a masterpiece of dross” as it allows those who measure performance sway, while those who want to know whether they did better , worse or average returns on money sent to pensions, get very little.
What institutional funds get from Clear Glass is a value for money report for their purposes, but what TPR and FCA will produce for employers and members will not give them either the transparency that ClearGlass discovers or the AgeWage scores based on data from schemes of money in and money out. It is a “flagship of absurdity” (another Ellison phrase).
Clearglass and AgeWage are two companies that offer VFM for institutional pension schemes and end users of pension saving schemes. Both do so by using data and not “arithmetic averages which flatter“. The VFM question is based on returns from investments and not about the pensions that are bought by the investments.
Clearglass’ work looks at the amount that is taken out by funds from the asset performance and returned to the pension scheme trustee (or to the LGPS via pools).
AgeWage’s work looks more at what members actually get from their contributions and its numbers include the costs of investment administration as well as what’s paid for the various services paid by the trustees or GPP managers at the expense of the member’s pot.
When it comes to the future, members will not just be interested in pots but guided retirement outcomes (including CDC pensions). What members will be interested may not be how their pots have grown but the rate of their retirement income (whether CDC pension, annuity or drawdown).
When the DWP started talking about VFM at the start of this decade, it was no closer to pinning it down than it is today. Is it a transparency measure of costs paid created by Clearglass or is it a transparency measure of returns achieved by members, as measured by AgeWage.
In truth, the answer is neither. It will be meaningless and useless in the future , just as the numbers which are produced for VFM are not understood or used. My correspondent wanted to know how to respond to the consultation on VFM, I can only suggest he listen to the last four VFM podcasts as it will tell him what this blog tells him. There is no clarity of purpose for the VFM project and no love for VFM (other than from mathematicians).
Measuring the cost of funds will continue to be the business of Clearglass while the benchmarked measurement of people’s returns will be AgeWage’s business. They are the most transparent ways of doing two different things. The market has moved on in the past 8 years since Chris Sier and I set out on our joint task. Chris has since died and I speak for him (badly). I am neurologically damaged but carry on, thinking now about how Chris’ work can be useful for CDC funds and how AgeWage can can measure the pensions (rather than pots) that people get from their contributions.
Both Chris and I confined ourselves to measurement of data since it was objective and undeniable. Neither Clearglass or AgeWage reports have been challenged for what they do for that reason.
But they do not measure the effectiveness of investment through an ESG lens, they do not measure stewardship in other ways. They do not measure the help savers get with their pots nor how pensioners or annuitants are being treated and it most certainly does not measure the use of UFPLS (pension freedom).
So in answer to the question from the Peer, I would quote Robin Ellison. Until we know what VFM is supposed to do, then we should treat the VFM paper of FCA and TPR as a masterpiece of dross and flagship of absurdity.
