NEST CIO Mark Fawcett explains how the intermediary community evaluates an investment approach
Price is what you pay, value is what you get, according to Warren Buffett. But how easy is it to assess what you're getting? Particularly when it comes to pensions, which as long-term products might not reveal their full 'value' to the saver for many years.
According to the survey participants, their clients' number one concern is still ease of set up and ongoing administration. It's understandable that businesses, which between them have successfully auto enrolled over eight million pension savers in just five years, will be preoccupied with the administrative challenge of such a task. As auto enrolment becomes business as usual, will their focus shift more to what's going on under the bonnet?
According to intermediaries, employers already place the quality of a scheme's investment approach high up the priority list. It's second only to administrative ease and comes above clear communications or a well-known brand. To us, this makes sense. After all, these pensions are going to be one of the most important sources of income in retirement for millions of people. How hard the money works really matters.
Intermediaries play a key role in providing reassurance to their clients that the scheme they've chosen will deliver from an investment perspective. According to the research, more than two-thirds of respondents said that their clients tend to know vaguely what they wanted from an investment approach but look to the advisers for research and recommendations. A fifth of them receive no input from clients on this at all.
So what does a good investment approach look like to the intermediary community? First and foremost, they say, it must be value for money. This takes us back to price and value. Advisers are clearly scrutinising price. Low charges are the top indicator of value for money among survey participants. Followed closely by fund performance. Fund performance is a good measure of what you're getting, but performance needs to be assessed over the long term, and should be assessed in the context of how much risk is being taken. Pension savers aren't going to see the final outcomes of their fund's performance for potentially decades.
So what else do intermediaries look for? We're pleased to see that evidence of a high-quality default fund comes next on the list. The vast majority of auto enrolled savers are not yet engaged with their pensions. The policy was designed to overcome people's natural inertia when it comes to making big financial decisions. It's unrealistic to think that once they've been auto enrolled people will suddenly start making lots of active investment decisions, so the default fund is extremely important.
Advisers recognise this. To them, the number of fund choices a pension scheme offers is near the bottom of the list when determining value for money. They're looking for schemes that offer a suitable default fund for their clients' employees, show evidence of robust investment risk management and have the scale to drive cost efficiencies.
When asked how interested their clients were in where their money and their workers' money is invested, the results were less resounding. Only half felt their clients were interested and a similar proportion said their clients felt an obligation towards their workers to ensure they'll get a decent outcome at the end by choosing an appropriate investment approach.
We hope more employers will feel strongly about the quality of their chosen pension scheme's investments as pots grow larger and their workers begin to take more interest. Until then, intermediaries must continue to lead the way in scrutinising this vital aspect of value for money on their behalf.