Babies, baths and bathwater
12 April 2018
This article was featured in the May 2018 issue of the magazine.
Henry Tapper, director of First Actuarial, takes a data-driven approach to managing pension pots
Most of us know how hard it is to see a doctor these days. And many of us consult the internet before ringing the surgery.
If only we could say the same for pension advice. I am sick of being told I should seek independent financial advice every time I want to know about my workplace pension.
You won’t get a recommendation from a qualified adviser without a ‘full fact find’ and after you’ve signed terms of business and a fee agreement. This is all very well when making a life-changing decision, but what if you just want to look at the funds you’ve invested in or move your pension pots together? Why can’t you do this online?
I’m always surprised by the phrase ‘throwing the baby out with the bath water’, and equally so when told not to compare kinds of pension because I might not spot a guaranteed annuity rate lurking in the bath, or a with-profits guarantee, or some terminal bonus. If I’ve got one of these lovely things coming my way, I think the baby should be shaking its rattle at me – it shouldn’t be hard for these ‘outliers’ to be flagged. Experts tell me these outliers need an independent financial adviser (IFA) to spot, but I say don’t be silly.
I’m also told I can’t look at my pensions without an IFA because I’d be comparing apples with pears, which is why Money Supermarket, Go Compare and Comparethemarket don’t have a pension comparison site. They have been warned-off because only someone with a degree in pension science can compare one fund with another.
It seems you can’t put all your babies in the same bath – which is even more silly. I want a big bath for all my babies! The problem is some bath suppliers are rather less than happy about losing their babies. Pension Bee run a rather amusing Robin Hood Index (https://bit.ly/2JcEq78) revealing which providers let you take your babies and which insist you use their bath.
How do we help ourselves? Though the original idea was that there would be many competing independent dashboards the government’s idea now is to create a pensions dashboard. We look to be heading for one big dashboard, a sort of dashboard-NEST.
...price comparison sites are beginning to get excited about pensions...
The trouble is that rather like Pensions Wise (the government’s pension guidance service) the dashboard won’t tell you what to do. Instead, it will tell you the pension equivalent of how much fuel you’ve got and when you’re likely to reach your destination. All the fun stuff – like, ‘is my pension any good?’ – is far too difficult for a government website.
So how could we work out what’s hot or not in our pension portfolio? Well, the other big idea in the government’s locker is ‘value for money’ (VFM) and this is a lot more exciting.
The idea behind VFM is that it’s a rating, allowing you to compare baby A to baby B as well as the bath and bathwater. You’d be able, for example, to compare NEST with a QROPS (qualifying recognised overseas pension scheme), a SIPP (self-invested personal pension) with a Stakeholder, and even the workplace pension that your employer chose with all the schemes they didn’t.
If this sounds utopian, let me give you some reassurance. Achieving universal VFM ratings only requires two things:
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a proper measure of value, and
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a proper measure for money.
Value can be measured by the outcome of the investment and money is what you pay to get that outcome. An ideal outcome would involve you paying nothing and getting a shed-load more money back than you ever put in.
What is needed to achieve this scoring system is harder to achieve than to explain. No one knows the outcome of their pension saving until the day the money runs out – hopefully when you know longer need your pension. Nobody knows how much you are paying, unless you can get to all the hidden costs and charges your pension providers don’t talk about.
But help is at hand. The price comparison sites are beginning to get excited about pensions because they can see how VFM ratings could make pensions as easy to compare as, well, baths and bathwater, and investments as easy to move around as babies.
If we can put all the pension experts back in their box and silence their silly quibbles, then we can get on with collecting the data to compare the funds and put them into league tables that show what value they’re giving, what they’re costing and what value we’ll get for our money. When we’ve managed to do this – and we’re beginning to think we can do it – then you, your employer and your colleagues can start helping themselves, which is what they do when they feel a little poorly.