Jo Cumbo remembers Port Talbot

Posted on April 29, 2023 by henry tapper

If you could go to one of the two Facebook support groups for mis-sold BSPS pension Scheme this bank holiday weekend, you’d find this post

Al Rush has put the last four minutes of this week’s VFM podcast, the minutes Jo Cumbo talks of her time in the Taibach Rugby Club looking at what steelworkers had been mis-sold, for the people who use the group. Some of the people who listen, will have spoken with Jo when she was there.

Jo and Gareth

Al Rush reminds me  that Gareth died recently – he comments

These men experience difficult and dangerous working lives – the issue isn’t so much one of mortality, but their health tends to go by their early seventies. They look on fifteen good years of retirement *as* retirement. Anything much more is a bonus.

The 56 minutes of the podcast that precede Al’s snip are great and I’d urge you to listen to what Jo (and the guys) are saying, but I suspect  that the podcast will get most listens for when Jo calls out her times in Port Talbot as the highlight of her journalistic career.

For the steelworkers impacted by bad advice, matters are far from over.

1400 of them are about to get “compo”  through the FCA’s redress scheme. Many more are still waiting for payment either from IFAs or FSCS and efforts continue to find a restitution scheme for those who want to take some or all of their money back into a defined benefit pension scheme. The focus of the camera may not be so sharp, but the matter is not closed. The FCA face a complaint , signed by hundreds of steelworkers, about how long it is taking for a remedy to arrive.

The groups are private, but the podcast is public and you can access it here

You’ll have to wait for Al’s podcast.

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Victory for Mum’s a feather in Laura Trott’s cap. Hats off to Steve Webb

Posted on April 28, 2023 by henry tapper

Steve Webb and This is Money’s Emma Maslin – who led the campaign

The Government appears to have listened to Steve Webb who has been fighting a one man campaign on behalf of mothers who – due to the complexity of child benefit rules, were in danger of losing credits for state pensions – irretrievably.

The problem

The problem is set out on LCP’s website

Since the High Income Child Benefit Charge was introduced in 2013, the number of families claiming Child Benefit has dropped every year.  In August 2012 the number of families on Child Benefit stood at 7.9 million but this has now dropped to 7.0 million.  Those who have decided not to claim are typically higher income couples who have decided that claiming child benefit and incurring a tax charge for the same amount was a waste of time.

But there is a risk that if they simply make no claim at all they will miss out on the valuable National Insurance credits which go to those who get Child Benefit for a child under 12.  Parents do have the option to claim just the NI credits (and not the cash) but many simply do not claim at all.   Crucially, where people realise they have missed out they can put in a Child Benefit claim but under current rules it will only be backdated for three months.

But the bit in bold is about to change

There is  a statement on National Insurance credit changes in HMRC’s policy paper on tax administration and maintenance published 27th April

The government recognises concerns that some parents who have not claimed Child Benefit could miss out on their future entitlement to a full State Pension. The government will address this issue to enable affected parents to receive a National Insurance credit retrospectively. Further detail on next steps will be available in due course”.

As Steve Webb recognizes, this is unreservedly a good thing. Brandon Russel’s  headline proclaims

Hundreds of thousands of mothers set to get state pension boost

We don’t know when the change will take effect and how the new rules will work, but Steve Webb should be made an official hero of Mumsnet!

Laura Trott is proving a highly effective behind the scenes operator and I hope that Mums will recognize that getting these concessions out of HMRC is far from easy for any department. Webb tips his hat with generosity.

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Steve Hodder and the £1.5trillion question – what to do with DB?

Posted on April 28, 2023 by henry tapper

It’s the hottest question in pensions, one that’s exercising the Bank of England , the PRA , TPR and should be exercising you next Tuesday

I’ll be putting the tough questions to LCP’s Steve Hodder, the man who spoke  for LCP in the the dark days of the LDI crisis and is speaking for them at next week’s Pension PlayPen coffee morning.

If you have any interest in pensions, DB or otherwise and you are alert to the nature of this £1.5 trillion opportunity then you should register. If you don’t know what I am going on about, read this morning’s blog “Not so fast, BOE calls for moderation in all things

If you’ve got time , read the transcript to the BOE’s Charlotte Gerkin’s call for moderation

And if you’d given up hope that we’d ever here encouragement for DB schemes to do more than lockdown, have a read of TPR’s Annual Funding Statement  –  and its announcement that contains the word “ambitious” in relation to long term funding targets.

As Steve Hodder has been saying on Linked in , while there is a rush to the factory gates where some advisers are handing out chicken dinners, schemes might want to take a step back and consider the merit of paying pensions!

 

REGISTER HERE

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“Not so fast” – BOE tells insurers “moderation in all things”

Posted on April 28, 2023 by henry tapper

“I referred to a feast and I’ve offered what seems more like an abundance of greens” – Charlotte Gerkin (BOE)

I got to yesterday’s Pension Age conference just as LCP’s Ken Hardman was explaining how capacity for bulk buy-out was expanded by a healthy reinsurance market. When I got home late that evening I found myself reading a speech by Charlotte Gerken, the BOE’s insurance expert– delivered at pretty the same time on the other side of the Capital.

She identified four risks for insurers off-loading risk onto funded reinsurers and concluded that insurers

.. need to approach these arrangements with caution and consider carefully whether their risk management processes are able to deal with these risks adequately. With responsibilities for pension payments for millions of policyholders for decades into the future, insurers need to demonstrate they can execute these transactions prudently and manage their risks over the whole life of the contracts.

The upbeat tone adopted by Ken Hardwick contrasts with the cautious tone from the Bank

Insurers

“need to balance the short-term financial and reputational incentives to grow rapidly, with long-term and enduring financial strength, to meet the long term needs of policyholders and the economy”.

Insurers that take on pension schemes will need to hedge their interest-rate and inflation risks, which may mean wider risks to financial markets.

“Insurers therefore need to understand, as they take on these vast sums of assets and liabilities, how they may become greater sources or amplifiers of liquidity risk…

the Bulk Purchase Annuity  market is in a period of accelerated growth and yes, while we are pleased with the opportunities this brings, insurers should approach this with moderation.

In the meantime , the Pensions Regulator seems to be waking up to the likelihood that between £500bn (BOE) and £700bn (PWC) of pension liabilities will transfer from the balance sheets of UK corporates to UK insurers in the next 10 years. These liabilities are our  pensions that will now be paid as annuities not by the trustees of the schemes in which they accrued.

In its annual funding statement , TPR estimates that

 around a quarter of all DB schemes may have sufficient funds to buy out their liabilities with insurance companies. Trustees of those schemes will need to consider if their long-term targets remain appropriate, whether that is to buy out, or to examine other endgame options.

And TPR is sounding remarkably chipper about the rest of the DB schemes it oversees.

The majority of remaining schemes are estimated to have funding positions that are ahead of their funding plans. In these cases, trustees should consider whether the existing strategy and level of risk is in the best interests of members. If not, this may be a trigger for trustees to review their pace of funding and level of risk, or to re-order their long-term targets and set new, more ambitious objectives.

What is meant by “ambitious” depends on whether the ambition is to pay better pensions or take even less risk in meeting existing promises.

The reality is that occupational schemes have £500bn less in assets to pay these pensions, that coverage of payments has fallen and that what is left of growth portfolios is largely in illiquid assets that didn’t burn in the LDI fire sale. As Charlotte Gerken was warning insurers, these assets may not be valued at what they are marked up and are not assets insurers should look kindly on. And TPR acknowledge that many schemes invested in pooled funds (presumably LDI pooled funds) will have suffered lasting impairment to their funding strategies by losing assets, hedges or both.

The return of  “ambition” to the Regulator’s lexicon

Stuck with fewer marching and growth assets , these trustees may take comfort in research from Ruffer which suggests that while inflation can spike to 10% in a matter of months, it will take on average 10 years to revert to the BOE’s 2% target. The return to the BOE’s long term inflation target doesn’t look like happening any time soon

That would suggest that there is no need for trustees to hurry either. They can consider what “ambitious” means and perhaps accept that their days responsible for a  pension scheme aren’t over quite yet.

There is a third and important player in this. The DWP and Treasury have been at loggerheads for some years about whether occupational schemes should be allowed to consolidate between themselves, either operationally (using master trusts) or more fundamentally, through the approval of Superfunds.

As the BOE and PRA warn about capacity and the Pensions Regulator considers “ambition”, perhaps it is time to look at innovative alternatives to de-risking , including the encouragement of open DB schemes, CDC , DB mastertrusts and superfunds.

We have seen what happens when corporate DB schemes adopt a single strategy, diversification has its advantages.

 

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Reinventing pensions – What (TF) does that mean? Find out this pm

Posted on April 27, 2023 by henry tapper

Full line up and timings at the bottom

I’m participating in an event this afternoon called “reinventing pensions”.

All the details are on here

Oli Payne – who is organizing things knows a little about “reinvention”- he works for Ford who are having to reinvent their business model to compete with Tesla and the new paradigm of greener cars.

For Ford, the threat is existential, there is a very real chance there could be no Ford Motor Company in 20 years, there’s no plan B, Plan A had better work – that goes for motor manufacturing as much as the planet.

Pensions don’t have quite the same threat , or at least the people working in the pensions industry, who will be attending this event, don’t. Which is very much the problem.

Pensions need reinvention

Some aspects of the way we do things  need a good boot up the arse and I hope whoever is judging the shenanigans this afternoon will be asking what kind of impact the proposed innovations are going to have.

So if you can get to the City of London this pm – sign up – there’s still a space for you

You can register up to 4pm for the event from thislink

 

SPEAKER SCHEDULE
16:15 Welcome from Oli
16:30 Joe Burton – You’re already over-funded… But by how much?
16:40 Joe Craig – Why pensions need better stories
16:50 Georgia Stewart –Unlocking the pension superpower: Voting
17:00 Henry Tapper – Using member outcomes to determine value for money
17:20 BREAK
17:30 Jon Parker – ’20% for the planet’ – should pension schemes be mandated to invest with a social purpose?
17:40 Harry Brignull – Why is good design considered “optional” in the world of workplace pensions?
17:50 Danny Meehan  – Could letting the member choose be the path to true engagement?
18:00 Aled Davies – From digitisation to democratisation – how technology will Reinvent Pensions
18:10 Networking (until 19:00)

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Consultants – we must end the “AMC limbo” now!

Posted on April 27, 2023 by henry tapper

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

  1. 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.
  2. Passive managers, starved of margin, look for back door profits
  3. Fund governance – such as ensuring transitions are completed at fair value – is not done
  4. What members get by way of achieved return is less than the declared net performance
  5. 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.

 

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“Insurers don’t understand investment”- that is the pensioner problem

Posted on April 26, 2023 by henry tapper

Many comments on my blog are so well argued that  they should be published as blogs in their own right, rather than languish in the obscurity of the archive! Some comments go unpublished but all are welcome (other than the spam which wordpress effectively weeds out).

One comment in question is the  this response to a recent blog of mine where I pointed out that herding into LDI was continuing as DB trustees pursued the “endgame” of buy-out. Here’s the comment from @Jnamdoc

If you have a comment you’d like published as a blog – please send it as a word document to henry@agewage.com

 

Insurers and industry types always see the answer as more insurers, industry or consolidation. The route cause of our current problems can be traced back to the 2003 reforms which formalized (for political reasons) that pension obligations became a legal liability of the employer, creating a separation between schemes and the sponsors. {Ultimately these reforms, with continual Regulatory zest – because they could – led to scope for criminalization of corporate actors if they could be adjudged (with hindsight) to have weakened (even inadvertently) the claims from that liability}.

Anyway, at a stroke CEOs /FD/ commercial directors (the leaders of industry and investment who hitherto had taken a keen interest in the pension scheme, bringing a mix of skills including an investment / entrepreneurial understanding) stepped off of Trustee boards, advised they had a conflict of interest. Boards were thus stripped off the commercialism needed to invest and thrive (or at least at the talent pipeline was switched off, static since, say, 2003, as there are some brilliantly capable trustees, but they tend be of a certain generation).

Once that gap had been created between schemes and sponsors and members, the consultants stepped in with their alignment to the insurers, and this started to infiltrate the Regulator bodies and thinking.

That was the root cause.

The effect of the above factors has as we all know been terminal for the ongoing provision of DB pensions for working people – and Insurers with a vested interest, have messaged that only they are capable of managing schemes, and hence the ever increasing calls for “consolidation” – that suits their business model, and has almost become the accepted wisdom.

It is not – it’s the route of the problem, because Insurers (naturally for them) see schemes as being in incubation, until they are sufficiently overfunded, at which point the insurers will pick them off. The notion that only insurers will be skilled enough to operate and pay pensions is misplaced and narrow minded– it tends to the ultimate Statist solution or one size fits all approach, the corollary to saying all business should be nationalised.

The manifestation of this incubation mindset has given rise to the language of “de-risking”. Insurers, naturally see the World in terms of risk elimination. They do not care nor are they interested nor understand “investment” (as Myners commented) – that is for others. Rather they look to eliminate risk, that is there raison d’être” – and if someone else is picking up the costs (members and sponsors) until they are ready for buy-out, then they will encourage Regulatory language to maximum de-risking and funding levels.

What we need is a change in the Regulatory Framework for DB pensions that re-connects employers and members with the Scheme, broadening the talent base, where the system should reward investment, through improved member outcomes, lower costs to sponsors, and broader support of the macro-economic impact.

The current system is underpinned by the false messaging that schemes are in decline and need rescued by consolidation. That is because we have starved them of talent, treating them as something to be prepared for transition to insurers. That system is designed to deliver schemes pregnant with surplus to cover the “insurers’ profit”.

There must be a fairer way to share and spend that surplus. By definition the surplus definitely exists – insurers will not ever take on scheme without a full life understanding of their profit, and that surplus is being taken from members and sponsors.

So, the current framework is undermined by a false premise – that separates employers and members from the Scheme, that only insurers (the one-size fits all de-riskers) can provide pensions, and hence all of the language is about consolidation and insurer buy-out. We all need to reconnect with collective pension investment and outcomes – roll on CDC, not consolidation.

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The Pill he is ; how can our Bank’s economist be so out of touch?

Posted on April 26, 2023 by henry tapper

The Bank of England’s Chief Economist – Huw Pill

Since the middle of the 19th century, people have been using “pill” to refer to people who are hard to swallow for one reason or another. A person might be called a “pill” for being unpleasant, foolish, boring, weak, or otherwise difficult to take.

The unfortunately named Huw Pill told a podcast in the US that there was a “reluctance to accept that, yes, we’re all worse off“.

Huw Pill is the chief economist of the Bank of England, a man charged with succeeding Andy Haldane – an economist with the common touch. Sadly Mr. Pill doesn’t seem to have inherited that gene. Here’s what he said to he told the Beyond Unprecedented podcast from Columbia Law School.

“Somehow in the UK, someone needs to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether through higher wages or passing energy costs on to customers etc,

What we’re facing now is that reluctance to accept that, yes, we’re all worse off and we all have to take our share; to try and pass that cost onto one of our compatriots and saying: ‘We’ll be alright, but they will have to take our share too’.

That pass-the-parcel game that’s going on here, that game is one that’s generating inflation, and that part of inflation can persist.”

We aren’t “all in this together”.

What people are objecting to, and I listened to a phone in on this overnight, is that Huw Pill is not “in it together” with all the people he is talking about. He does not have to worry about whether he can pay for the basket or trolley of food when he reaches the checkout, he doesn’t have to worry about the electricity meter or whether he can put fuel in the car or afford the bus. None of these – the impacts of the inflation on the poor, touch Mr Pill.

The people on the phone in did not take kindly to the idea that after a decade of austerity they were being asked to restrain themselves in asking for cost of living pay increases or benefit increases or putting the prices up in the businesses they own – when they are just not getting by.

To get the lecture from a man who represents the Bank of England charged with keeping inflation to 2% or below, was too much for many of last night’s callers to swallow, a bitter pill indeed.

A trancript is downloadable from here

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What will the IFS pension review – do?

Posted on April 26, 2023 by henry tapper

Last week the Institute of Fiscal Studies launched a major project reviewing the UK pension system and the future of financial security in retirement.  It will do so not with public money but with money from a trust set up by an asset manager.

Although it will be “working with”  Alistair Darling and David Gauke, they will be featuring in a private capacity and not as representatives of Government. Joanne Segars is also within the camp – she has worked variously for the TUC, ABI and PLSA and is now pursuing a career as a  pensions expert.

What will the review be and do?

The Pensions Review will be  a multi-year project that will  assess the consequences of current pension policy, the economic environment and individual behaviour for living standards in retirement. The IFS expect it will provide recommendations for reform to improve outcomes for future generations of pensioners across the UK.

The review will be led by  Jonathan Cribb, Carl Emmerson and Paul Johnson and claims it will systematically review the evidence on the challenges facing future pensioners and undertake  empirical analysis to understand recent economic trends and how people have responded to previous pension reforms.

In addition it will engage with policymakers, employers, trade unions, those in the pensions industry and other stakeholders representing different groups in society to understand the key challenges and trade-offs.

The IFS expect it will commission opinion polling and public engagement activities to understand how people from across the country see the challenges of funding their own retirements, and gather their thoughts on potential routes for reform.

Isn’t this the Government’s job?

We know the IFS to be a force for good, it holds the Government to account in many areas of finance and its views are widely respected, but it is a charity supported by donations and by organizations that fund it. It’s naïve to suppose it is unbiased and over the years there have been many attempts to expose the bias in the IFS’ approach. Here is one.

The Government too is biased and that bias changes from parliament to parliament but its civil servants – those who work at key departments for pensions (the Treasury and DWP) are charged with being apolitical and servants of the general public.

I worry that the IFS has taken upon itself a job that in previous generations has been done by Government or at least by Government appointees. The launch of the event on April 20th, was marked by a keynote address from Lord Turner who chaired the last Government funded pension review in the early years of the century.

The recommendations of the Turner Review (from the Pension Commission) were generally adopted and led to the major private/public partnership of the first quarter of the century- auto-enrolment.

But there were less happy outcomes following the review. The drawbridge on defined benefit pension schemes – at least in the private sector- is being pulled up on generations to come and while the current generation of pensioners has “never had it so good” , the same prospects are not available to those yet to reach the retirement zone.

The case for a pensions review

Whether you consider it hubris or boldness, the IFS has set out its agenda for change – and stood in for a second pension commission , which many in pensions have been calling for.

They are making the case for doing so by identifying eight areas of policy failure which the review will investigate and report on the key finding of the IFS in its current work;-

1. Many employees are only saving very little for retirement.

2. Fewer than one-in-five self-employed workers are saving in a pension. This compares with around a third when the Pensions Commission reported.

3. Most private sector pension participation is in the form of defined contribution pensions which leave individuals bearing risks that are difficult to manage well.

4. Increasing numbers approaching retirement live in more expensive, insecure, private rented accommodation.

5. Higher state pension ages are a coherent response to the challenges of increased longevity at older ages, but they pose difficulties for many and longevity improvements have not been as big as predicted a decade ago.

6. Demographic and other pressures mean that spending on state pensions and other benefits for pensioners is already projected to rise by £100 billion a year by 2070, with even bigger increases in health and social care spending.

7. Those retiring with defined contribution pension pots face considerable difficulty and risk in managing their finances through retirement.

8. While current pensioners are still doing well on average, and many of the recommendations of the Pensions Commission have been successfully implemented, the future looks risky at best for many current workers hoping for a comfortable retirement.

These are the terms of reference for the review, and these terms represent bias’s that are inevitable but need to be flagged. The report will be about saving, it will focus on individual decision making over financial management, it will review Government decisions on the state pension age and the fiscal consequences of decisions about inclusion, contribution rates and pension freedoms.

These are the terms of reference of the PLSA, ABI and IMA, the principal trade bodies of the financial services industry but these organizations do not run Government, they are primary players in the financial lobby. Abrdn, which is sponsoring this review, is a part of that lobby.

What will the IFS review – do?

The IFS review will look at the financial futures of people retiring in the UK or on UK savings through the lens of the IFS and those who support it. Generally speaking, that lens is transparent, it presents facts in a relatively unbiased way but it represents a paradigm of thinking that is peculiar to those who manage other people’s money.

Many people in this country do not have savings and rely on benefits or the goodwill of others – particularly families. These people exist outside the reach of financial services and quite possibly rightly so. Yesterday’s pension playpen coffee morning was focused on how such individuals could provide for themselves through direct purchase of pension bonds (Selfies). Will such thinking be embraced in such a review – or even considered? What about the work being done to broaden take up on Pension Credit? The terms of reference seem to think exclusively about inclusion in terms of broadening the net of “saving” as the financial services industry likes to think of it.

I suspect that the IFS review will do what the financial services industry wants it to do, which may not be what the Government wants. This is where it differs from the Pension Commission and why I am interested but not no more – in its outcomes.

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Norbert Fullerton’s Chinese take-away

Posted on April 25, 2023 by henry tapper

This article ‘s here because of an article on LCP’s website, written by Norbert Fullerton. He marvels at how the Chinese have consistently been better at table tennis than any other country over decades.

You can read the article here. Here is Norbert – in action.

Norbert is explaining that the way the Chinese measure how they are doing with their trillion pound sovereign wealth fund, is to set up a “reference portfolio” based on market returns expressed by indices and compare how their fund is doing. This is precisely what we should be doing in the UK, to tell ourselves – whether we manage others money or have others manage it for us, how things are going.

He concludes

In a world increasingly focused on short-term performance, market sentiment, geopolitics and portfolio diversification, the evolution of the reference portfolio approach to asset allocation for sovereign funds brings a breath of fresh air. Adopting a disciplined and consistent approach, like Chinese table tennis champions, can help sovereign investors manage risks better and make more informed investment decisions – enabling them to achieve (or exceed) their financial goals in the long run.

Reference portfolios can be used in precisely this way to measure how our investments are helping us towards our retirement planning goals. They can help us answer the key question “am I getting value for my money?” and it can help those who manage our money make sure we are.

Reference portfolios can tell us how we are really doing

The DWP wants to use a threshold test to measure value for money. The primary test is to be “net performance” but measuring what members get from a regular saving DC plan is problematic. It depends on using a DB measurement tool which takes no account of the timing and incidence of contributions, struggles to account for member charges and requires tortuous calculations to record returns from lifestyle defaults – especially when managers change.

The complexity of measuring performance is threatening to make VFM testing unworkable. Whatever value VFM tests bring, is undone when no-one can understand the working. The recent debates over Ofsted rankings are a good example of a measure that is undermined when people can’t understand the process behind it.

To put it politely, the recent consultation’s chapter (4) needs some innovative thinking and that’s what we are proposing. AgeWage has analysed over 7m DC pots using only contributions and NAVs to measure member IRRs. We use a reference portfolio to create a price track representing the unit price progression of a default fund since 1983. The early stages of the reference portfolio is created by fund returns provided by Morningstar, more recently we use proprietary and consultancy research on the asset allocations of workplace DC defaults.

By comparing actual with the reference portfolio returns we can create scores using an algorithm we’ve devised that takes account of dispersions of performance over time.

This is what would result. The first table shows an analysis of a master trust where over 40,000 member records were analyzed. The analysis took a matter of minutes to generate as it simply referenced the data held by the trustee’s administrator.

Table one

The second analysis was on a GPP set up for an employer using special terms negotiated at outset. As with the first example, the analysis is on what savers have actually achieved from their investment in a default fund.

In our view, using IRRs rather than constructing net performance tables by netting off assumed costs and charges from assumed performance is more accurate, cheaper and makes more sense to employers, trustees and even savers, making sense of the value they have got from their money.

The benchmark IRR returns are based on a “reference portfolio” used to the same purpose as discussed in Norbert’s recent article.

The advances in data analysis that make comparisons of reference portfolio outcomes to those achieved in real life, is currently largely ignored. I suspect that it will take a radical intervention from the FCA, TPR and DWP to move the conversation forward.

AgeWage has set out to establish this methodology at the heart of performance and VFM measurement and we will continue to use every opportunity to promote what we view as the true and fair way to tell DC savers how they have done.

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