How should we assess value for money in pensions?
In the wake of Labour’s win in the UK general election, the industry has welcomed Emma Reynolds as the new pensions minister.
While her appointment has been well received, Reynolds will undoubtedly have a lot to contend with over the coming weeks and months.
Value for money is one such area of contention, with the Financial Conduct Authority (FCA)’s new consultation paper looking to evolve the industry’s definition of value.
To this end, we so often see investment performance and active management pitted against fees.
This is true as active management typically incurs higher fees than passive management, but do clients always feel they’re being overcharged?
This may not necessarily be the case, particularly if risk-adjusted performance is good, and they’re with a provider who’s proactively seeking to reduce their charges.
Does low cost always mean good value?
An example is perhaps illustrative. Corporate Adviser produces a quarterly study showing how different providers compare to one another on a risk/return basis.
The study also benchmarks said providers against the Corporate Adviser Pensions Average (CAPA). This is the average (mean) return delivered by defaults known to Corporate Adviser, over set time frames. It covers the performance of the strategies of more than 95% of the entire master trust market, as well as those of key life insurers active in the provision of workplace pensions.
For a younger saver with 30 years to state retirement age, the SEI Master Trust outperformed the CAPA index by 2.78% for the five-year period to 31 December 2023.
If we assume our saver had a retirement pot of £12,300, the average DC pot size given by the Pensions Policy Institute in its The DC Future Book (2023), then this difference is significant.
Over the five-year period, our saver would wind up £2,509 better off investing with SEI:
Member profile:
Source: SEI, for the five-year period to 31 December 2023, gross of fees, using data from Corporate Advisor. Gross returns are calculated by adjusting the monthly net return to exclude administration, trust and custody fees. Fees would reduce the returns shown. We have chosen an example member 30 years from retirement, as this is when capital appreciation is most important. We have chosen a pot of £12,300, for illustrative purposes, as this was given as the average DC pot size by the Pensions Policy Institute (PPI). Past performance is no indication of future success.
Now consider what this says about value. The table above shows our investment performance was above average.
There may well be providers who charge less than us in fees, but doesn’t that somewhat miss the point?
The 2.78% difference between our master trust’s performance and the UK average is worth more than a basis point or two in fees.
Hypothetically speaking, we could have charged members significantly more to achieve the UK average in the example above.
And not just a basis point or two more, but 278 basis points (the fee equivalent of 2.78%) – far beyond the point at which the charge cap would kick in.
So you see, ‘low cost’ doesn’t always equate to ‘good value’.
And if, after contributions, investment performance is the greatest driver of retirement outcomes for members, then surely that’s where we should be focusing our attention.
Important information
This is a Marketing Communication. This webpage has been created in relation to the SEI Master Trust, an occupational pension scheme which is authorised by the Pensions Regulator. The trustee of the SEI Master Trust is SEI Trustees Limited. SEI Trustees Limited has appointed SEI Investments (Europe) Ltd (“SIEL”) as investment adviser to the SEI Master Trust and pursuant to its investment advisory agreement. This information is issued and approved by SEI Investments (Europe) Ltd (“SIEL”) 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. This advert and its contents are directed at persons who have been categorised by SIEL as a Professional Client and is not for further distribution. SIEL is authorised and regulated by the Financial Conduct Authority. While considerable care has been taken to ensure the information contained within this webpage is accurate and up-to-date and complies with relevant legislation and regulations, no warranty is given and no representation is made as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. The information in this webpage is for general information purposes only and does not constitute investment advice. You should read all the investment information and details on the funds before making investment choices. Please refer to our latest Prospectus (which includes information in relation to the use of derivatives and the risks associated with the use of derivative instruments), Key Investor Information Document, PRIIPs KID, Summary of UCITS Shareholder rights (which includes a summary of the rights that shareholders of our funds have) and the latest Annual or Semi-Annual Reports for more information on our funds, which can be located at Fund Documents. And you should read the terms and conditions contained in the Prospectus (including the risk factors) before making any investment decision. If you are in any doubt about whether or how to invest, you should seek independent advice before making any decisions. The UCITS may be de-registered for sale in an EEA jurisdiction in accordance with the provisions of the UCITS Directive. Past Performance does not predict future returns. Investment in the range of the SEI Master Trust’s funds are intended as a long-term investment. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested. This document and its contents are for Institutional Investors only and not for further distribution.
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