Correct Pension Administration No Guarantee for Correct Participant Communication

Correct Pension Administration No Guarantee for Correct Participant Communication March 2022 Report

2 Correct Pension Administration No Guarantee for Correct Participant Communication Summary This report shares the results of the AFM's exploratory research into the quality of pension administrations, focusing on the accuracy of communication to participants. With this research, the AFM follows up on the call made by the Minister of Social Affairs and Employment in the House of Representatives letter 'Quality of Pension Administrations' dated January 31, 2020, urging both pension administrators and supervisors to continue prioritizing the quality of pension administrations and pension information and to implement improvements.

The AFM recognizes the importance of correct pension administrations and pension information. The urgency of this is further heightened by the impending pension transition, which brings additional complexity to participant communication. Indeed, expectations based on incorrect communication in the past can undermine participants' trust during the upcoming transition. The AFM notes that attention to improving the quality of administrations among pension administrators has increased in recent times. The AFM welcomes the fact that the pension sector has sufficient awareness of this theme and draws attention to the translation of pension administration into communication.

A correct pension administration is a prerequisite for correct communication. However, a correct administration is not a guarantee for correct communication. The exploratory research shows that incidents during the creation of communication ('the translation') can still lead to incorrect communication. In more than half of the reports made to the AFM, the cause lies in this translation. As a result of an incorrect translation, errors can arise in legally prescribed communication outputs. These include errors on the Uniform Pension Overview (UPO), such as incorrect pension entitlements, incorrect display of indexation, or incorrect reporting of 'factor A' to determine the fiscal year space. This also includes reports about termination letters that were not sent, although they should have been at the time of leaving employment. In all examples of incorrect communication outputs, the sector-wide issue often concerns a small percentage of the total number of participants, but due to the large numbers, this quickly amounts to tens of thousands or sometimes even hundreds of thousands of participants (per year). Some of these participants are in a vulnerable situation.

The AFM calls on pension administrators to monitor the quality of participant communication and implement improvements before the pension transition. It is necessary that processes for communication to participants are adequately controlled and that extra attention is given to manual processes, or 'end user computing' (EUC). The exploratory research shows that the use of end user computing brings risks, partly because the implementation of control measures for consistency and traceability is more complex.

The AFM also expects pension administrators to draw up and make public a correction policy in which the policy regarding the handling of corrections is recorded. This is important because participants should know where they stand and what they can expect in the event of corrections. The data shows that only three out of ten pension administrators have drawn up a correction policy and that only 6% of administrators have made this policy public, despite the call to do so in the aforementioned House of Representatives letter. Finally, the AFM notes that not all active participants are provided with a UPO. When UPOs or other documents cannot be sent, the AFM expects the pension administrator to implement improvements. Service level agreements between the pension administrator and the Pension Fund Executive Office (PUO) in which UPO provision percentages lower than 100% are agreed upon are not in line with the legal standard.

In addition to this exploratory research, the AFM conducted research on the findability and accessibility of the complaint procedures of pension funds. When participants have dissatisfaction or questions regarding communication outputs, it is important that they can express this. The findings and recommendations from this research will be published shortly.

3 Correct Pension Administration No Guarantee for Correct Participant Communication Table of Contents 1 Introduction 4 1.1 Background of the exploratory research 4 1.2 The importance of a correct translation from administration to communication 4 1.3 Guide 5 2 Background 6 2.1 The translation from administration to communication 6 3 Approach 8 3.1 Data analysis 8 3.2 Interviews 8 4 Findings 9 4.1 Translation from administration to communication often the cause of incorrect information 9 4.2 37% of pension administrators are unable to provide all UPOs 10 4.3 There are at least twenty thousand settlements and recoveries in commenced pension payments where the payment is lower 11 4.4 Most pension administrators do not yet have a correction policy 12 4.5 Many administrators use EUCs in the creation of communication 13 5 Recommendations 15 5.1 Implement controlled processes around pension communication; do this before the transition 15 5.2 Ensure a correction policy and make it public 15 5.3 Monitor and evaluate the accuracy of communication and implement improvements 16 5.4 Ensure a continuous improvement process for non-sent UPOs 16 6 Conclusion 17

4 Correct Pension Administration No Guarantee for Correct Participant Communication 1 Introduction 1.1 Background of the exploratory research Following reports received by the AFM regarding incorrect information provided to participants, the AFM started an exploratory research in 2021 with the central question of whether communication to participants is in order and, if not, what the cause is. 1,2 This report presents the findings. The scope of the exploratory research is limited to the communication outputs and does not cover pension administrations themselves.

In the House of Representatives letter 'Quality of Pension Administrations' dated January 31, 2020, the Minister of Social Affairs and Employment affirms the importance of having pension administrations in order and providing correct information to participants.3 The minister also notes that incidents occur, that the impact on individual participants can be significant, and that it is difficult to form an image of the extent to which risks and errors in pension administration occur structurally. With this exploratory research, the AFM further follows up on this House of Representatives letter by investigating compliance with the legal requirements for providing information to participants.

In the coming years, a profound transition to a new pension system is taking place. For this, it is important that both the administration of pension entitlements and rights, as well as the provision of information to individual participants, are in order. During the transition phase to the new pension system, communication with individual participants will take place regarding changes in the pension scheme and the consequences for their personal situation. In addition, for a large number of participants, the pension entitlement will be converted into capital (the 'inward migration'). If information provision (in the lead-up to this transition) is not in order, incorrect expectations may be created among participants. Moreover, at the moment of transition, in addition to the changes in the pension scheme and their consequences, it must also be explained that communication in the past was incorrect. This may undermine participants' trust.

1.2 The importance of a correct translation from administration to communication Correct communication to participants is a prerequisite for creating realistic expectations among participants and helps them make (financial) choices. Incorrect information, insofar as the participant is able to assess and signal it, and insofar as it must be restored with retroactive effect at a later moment, can also damage participants' trust in the pension administrator or the sector as a whole. For correct pension information, it is important that the pension rights and entitlements of participants are administered correctly, and that the translation from pension administration to communicated amounts is correct. By the translation from administration to communication, we mean all processes and actions necessary to inform the participant.

1 Where 'participant' is stated in this report, for readability it can be read as active participant, former participant, and pensioner, unless explicitly stated otherwise. 2 By correct communication, we mean timely, complete, and correct communication that corresponds to the pension scheme. 3 https://www.rijksoverheid.nl/binaries/rijksoverheid/documenten/kamerstukken/2020/01/31/kamerbrief-over-kwaliteit-pensioenadministraties/tk-av-182063-kwaliteit-pensioenadministraties.pdf.

5 Correct Pension Administration No Guarantee for Correct Participant Communication If the pension administration contains errors, this leads per definition to incorrect communication to the individual participant. A correct administration of pension rights is therefore a prerequisite for being able to communicate correctly. The House of Representatives letter mentions four factors that influence the accuracy of administrations, namely: complex pension schemes and legislative changes, historical source data, data inflow, and the quality of administration systems. The solutions presented in the House of Representatives letter will therefore lead to improvements in communication. However, if the pension administration is correct, this exploratory research shows that it is not a given that the communication resulting from it is also correct. The translation of administered pension rights into communication contains various steps whose quality must also be secured to achieve correct communication.

Due to the overlap in mandate, the AFM has frequent contact with De Nederlandsche Bank (DNB) on this topic. DNB focuses its prudential supervision on honest and controlled business operations, while the AFM focuses its supervision on, among other things, the provision of information to the participant.

1.3 Guide Chapter 2 provides a brief explanation of the translation from administration to communication. Chapter 3 describes the activities carried out for this exploratory research. Subsequently, Chapter 4 presents the main findings, and the AFM makes several recommendations for improvement to the pension sector in Chapter 5. Chapter 6 provides a look ahead to the coming period.

6 Correct Pension Administration No Guarantee for Correct Participant Communication 2 Background 2.1 The translation from administration to communication A correct pension administration is an essential prerequisite for correct communication. However, a correct pension administration is not a guarantee for correct communication. Incidents in the translation from administration to communication still result in incorrect pension information. Chapter 4 contains examples of incidents in this translation. By the translation from administration to communication, we mean all processes and actions necessary to inform the participant correctly. This includes drafting a letter, at the right time, for the right group of participants, and with the right data. Some examples of common process components in the translation from administration to communication are included in Figure 1 and explained below.

Figure 1. The translation from pension administration to pension communication. Source: AFM

Determination of the correct population and the correct time Some pension communication, or parts of pension communication, is intended only for specific groups of participants at specific times. This includes communication upon employment, communication upon divorce settlements, annual information such as a UPO for active participants, a termination letter upon leaving employment, a grant letter upon retirement, or sending a recalculation letter upon a variable payment. Drafting communication for the right participants at the right time is a step in the translation from administration to communication. When a participant leaves employment, for example, this participant should be identified as a participant who should receive a termination letter.

Selection and transfer of correct information Data from the pension administration is input for the communication. For this, the correct data must be selected for a specific communication output. Usually, a selection is made from multiple information systems with a certain reference date. Pension entitlements, rights, and personal data may be administered in different information systems and, due to existing history, available for multiple reference dates. After selecting the correct data, the communication is generated with the selected data. A thorough recording of the creation of the communication then ensures that the information is traceable and reproducible.

Among other things: • Determination of the correct population and the correct time • Selection and transfer of correct information • Calculation of additional amounts • Use of external data

Administration Correct recording of pension rights and entitlements Translation Communication Correct pension communication

7 Correct Pension Administration No Guarantee for Correct Participant Communication Calculation of additional amounts In some cases, necessary information for a letter does not 'automatically' follow from the pension administration, but additional (manual) actions are required to calculate this information. This includes URM amounts for the navigation metaphor and factor A for calculating the fiscal year space. In common cases, specific tooling is used to calculate these additional amounts. Calculating the amounts increases complexity within the process and complicates the 'selection and transfer of correct information'. Furthermore, the tooling, like the pension administration itself, requires control measures to ensure traceability, reproducibility, and accuracy.

Use of external data In the creation of communication, data is needed that is not always included in the administration. This concerns input for the calculation of additional amounts, such as URM scenarios, or general data on communication, such as inflation figures. For this data as well, it is important that it is not only correct but also traceable, reproducible, and consistent.

Finally, in the creation of communication or in the calculation of pensions or other data in the administration, End User Computing (EUC) can be used. EUC refers to manual processes outside regular systems. This includes manual calculations or files delivered via email.

8 Correct Pension Administration No Guarantee for Correct Participant Communication 3 Approach This exploratory research rests on three pillars: analysis of the data provided annually by pension administrators to the AFM, analysis of reports received by the AFM, and a dozen interviews. Together, the analysis and the information from the interviews provide a broad insight into the theme and form the basis for this exploratory research. The components are explained in broad terms below.

3.1 Data analysis For this exploratory research, the AFM consulted the following data sources: • The data provided by all Dutch pension funds, pension insurers, and premium pension institutions to the AFM for the AFM Supervisory Report 2020.4 This report includes information on non-provided UPOs, the number of settlements and recoveries, and the presence of correction policies. This data relates to the reporting year 2019. • An analysis of the recorded reports received by the AFM from participants, pension administrators, and other stakeholders for the period June 2019 through July 2021.

3.2 Interviews Since numbers only tell part of the story and require context, the AFM conducted a series of interviews with various stakeholders in the pension sector in the autumn of 2021, in addition to the data analysis. The interviewees were involved in pension administrations in their roles. The conversations gave the AFM a better understanding of the current state of affairs, including: • causes of incorrect communication to participants, • measures the sector is already taking to mitigate risks, • how the accuracy of participant communication is monitored and improved.

Interviews were conducted with a dozen different institutions, including pension cooperatives, consultants, software suppliers, actuaries, advisors, and PUOs.

4 https://www.afm.nl/nl-nl/professionals/doelgroepen/pensioenuitvoerders/sectorbeeld-pensioenen

9 Correct Pension Administration No Guarantee for Correct Participant Communication 4 Findings This chapter shows the main findings emerging from the analysis of the data, received reports, and interviews.

4.1 Translation from administration to communication often the cause of incorrect information More than half of the number of reports received by the AFM regarding incorrect information is caused by incidents in the translation from administration to communication. In other reports, the cause of incorrect communication usually lies in incorrectly administered pension entitlements and rights. Incidents in the translation can arise in the components described in Chapter 2, such as termination letters not sent, incorrect communication about indexation, incorrectly calculated factor A, and/or use of URM scenarios with the wrong reference date. Although the negative consequences of incorrect or untimely communication vary per participant, the reports received by the AFM collectively affect hundreds of thousands of participants, including participants who are financially vulnerable.

Below are four examples to clarify reports received by the AFM regarding incorrect information provision.

Example 1. Non-sent termination letters It is a legal requirement that the participant receives a termination letter shortly after the termination of participation, in which the participant is offered the choice to exchange part of the old-age pension for a (higher) partner pension. The AFM has received reports indicating that due to an error in determining the population, large groups of leavers incorrectly did not receive a termination letter. In one report, it was known that upon discovery of the error, some of these participants had already passed away. Left-behind partners received no or a lower partner pension than if they had chosen to exchange. However, they could never make this choice due to the absence of the termination letter.

Example 2. Incorrectly calculated factor A The AFM received reports of a too-low communicated factor A on the UPO. This arose from the use of an outdated calculation factor. As a result, large numbers of participants overestimated the available year space. For participants who fully used the overestimated year space, there is a risk that the Tax and Customs Administration will impose a supplementary assessment at a later moment.

Example 3. Erroneous URM scenarios URM amounts, where the pension result is determined in three scenarios, give a participant insight into the height of the pension and the risks involved. The amounts are calculated according to the URM method, where it is legally established which economic scenarios must be used. The AFM receives reports of incorrectly calculated amounts, for example, because incorrect scenarios were used. The impact on the displayed amounts varies but in one report amounted to approximately 10% for half of the participants. Incorrect URM amounts can result in incorrect expectations among participants and possibly incorrect choices.

10 Correct Pension Administration No Guarantee for Correct Participant Communication Various trajectories are underway in the sector to improve the quality of pension administrations and data. In the interviews conducted by the AFM, it is noted that this is partly motivated by the impending pension system revision, the attention of supervisors, and the aforementioned House of Representatives letter. The importance of this is increasingly recognized by the pension sector, although it was noted in the interviews that there can still be significant differences between pension administrators. The conversations further reveal that attention is given to data quality and control of pension administrations, but relatively little attention is given to the translation into communication outputs. The conversations support the image from the analysis of reports that this part of the process requires further improvement steps.

4.2 37% of pension administrators are unable to provide all UPOs Pension administrators are required under Article 38 of the Pension Act in conjunction with Article 9a of the Decision on the Implementation of the Pension Act and the Mandatory Occupational Pension Scheme Act to inform active participants timely and correctly via the annual UPO.5 It appears that not all administrators are able to meet this obligation with regard to active participants (including disabled participants (AO)).6

Figure 2. Not all pension administrators are able to provide all UPOs to active and AO participants. Source: AFM

The data analysis shows that in 2019, at least 37% of pension administrators were unable to provide a UPO to all active participants (including AO) (see Figure 2). 8% of pension administrators were unable to report how many UPOs were provided (unknown). 55% of pension administrators reported to the AFM that all UPOs were provided.

5 Article 49 of the Mandatory Occupational Pension Scheme Act (Wvb) for occupational pension funds. 6 The AFM only requested from pension administrators how many UPOs were and were not provided for active participants (including disabled participants).

8% 37% 55% Unknown Not all UPOs provided All UPOs provided Number of pension administrators

Example 4. Errors in communication as a result of transitional arrangements Transitional arrangements, for example for employees who have been in service longer, result in complexity in

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