Supplementary Decree on Indexation and Bridging Plan: Supervisory Report

SUPERVISORY REPORT OCTOBER 2024

Summary

1. The importance of balanced and timely participant communication 5
2. Research and key insights into the relaxed indexation rules explained 7 2.1 Active provision of information still too often fails 8 2.2 Negative consequences are often only mentioned in deeper information layers 10 2.3 Justification and consequences of the decision not always easily findable 12 2.4 All pension funds show quantitative generation effects; explanation can be improved 14
3. Research and key insights into the bridging plan explained 16 3.1 Timely information crucial for the possibility of submitting observations by participants 17 3.2 Risks are often only mentioned in deeper information layers 19 3.3 Embed participant communication and explainability in the decision-making process 21

Participants have the right to the full story

In short: In this report, the AFM shares its findings from the investigations into the participant communication of pension funds regarding the application of the relaxed indexation rules and the submission of a bridging plan. We see a clear improvement in communication regarding relaxed indexation rules compared to last year. However, from both investigations, it appears too often that information about the risks and/or negative consequences does not reach the participant.

Participants have the right to the full story 2

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Summary

1 See the published report "Better explanation needed when increasing pensions".

Improvement visible, but information about negative consequences and risks still too often does not reach the participant

Pension funds take various decisions in the lead-up to the transition to the new pension scheme that directly or indirectly affect participants, former participants, other entitled parties, and pension beneficiaries (hereinafter: the participants). For example, when a decision adjusts the participant's entitlement or payout. Pension funds must communicate about this in a timely, clear, correct, and balanced manner. This is especially important during the pension transition period, where participants are faced with a lot of information on various complex financial topics. The topics are impactful, and the various decisions may interact with each other, leading to stacked effects for participants.

In this report, the Authority for the Financial Markets (AFM) shares its findings from the investigations into the participant communication of pension funds regarding the application of the relaxed indexation rules and the submission of a bridging plan. The insights from both investigations largely correspond. We see a clear improvement in the information regarding the relaxed indexation rules compared to our investigation last year; for instance, now all pension funds show generation effects, and a larger portion of pension funds has clearly paid attention to involving the participant in the justification and consequences of the decisions in a balanced and understandable manner.1 From both investigations, however, it appears too often that information about the negative consequences and/or the risks of the decision does not reach the participant. When using relaxed indexation rules, a quarter of the pension funds did not point out all participants to the information made available, or placed the information about the negative consequences in such a hard-to-find spot on the website that the participant cannot logically reach this information. Only one-third of the pension funds mention the negative consequences in the first or second information layer; the other pension funds hide them in deeper information layers. This is striking given that these pension funds often prominently state that the board has carefully weighed all interests and considers the decision balanced. In the communication regarding the bridging plan, the emphasis in the first layer was often on the opportunities and benefits, and participants were only pointed out to the risks in deeper information layers.

Call to the pension sector: communicate transparently about the consequences of the decision and the trade-offs made, and ensure that all relevant information reaches all participants

Participants have the right to be informed about decisions and the consequences these decisions may have for them. Participants are, after all, obliged to entrust their pension funds to pension funds, which manage the funds on their behalf. Pension information is a prerequisite for knowledge about one's own pension and the possibility of control and recalculation. In doing so, the pension provider also accounts for the accumulation and development of participants' pensions.

Pension funds should explain why they consider the decisions to be taken to be balanced for their participants. A balanced justification of the decision entails that it must at least be made clear that a trade-off of interests has taken place and that the decision has positive and negative effects (pros and cons) or risks for certain participant groups. This also includes a conclusion as to why, given the aforementioned effects, it is still balanced to take the decision. Our research shows that this conclusion is sometimes missing, and that information about the negative consequences still too often does not reach the participant.

Participants have the right to the full story 3

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The insights from this research are broadly applicable to participant communication during and after the pension transition. The AFM therefore calls on the pension sector to use the findings and recommendations from this research to implement improvements in all (transition) communication to participants where possible.

The most important lessons are:

Embed participant communication and explainability in the decision-making process

By thinking in advance about how a decision can be explained to participants, board members ensure that decision-making takes place more from their interest. The AFM calls on board members to investigate themselves to what extent they can give a more explicit place to the participant's interest and explainability in the decision-making process. This can be done, for example, by explicitly returning explainability to the decision-making process, making communication a fixed part of the preparatory documents, and assigning responsibility for communication.

Point out all participants to relevant information made available on the website

If pension funds choose to make the information available (digitally), the AFM expects that the pension fund actively and concretely points out all participants to which relevant information has been made available and clearly indicates where this information can be viewed. This can be done, for example, by including a direct link in the email to participants that links to the specific web page where the relevant information is made available.

Involve participants in the trade-offs made and ensure that relevant information is easily findable for participants

Pension funds are required under Article 48 of the Pension Act (Pw) to ensure that the information is clear for participants.2 Hereunder is understood that the information is findable and understandable for the participants. The AFM is of the opinion that, to meet the findability component, at least a logical manner and place must be used to refer to the information made available, and relevant information should not be shown in a place where most participants will not take notice of it. A logical place to make known that the decision has positive and negative consequences for different participant groups is, for example, at the place where it is stated that the board has weighed the interests and considers the decision balanced. The AFM recently revised the Policy Rule on Information Provision (the Policy Rule).3 The revised policy rule contains more (general) explanation about which elements the AFM takes into account in its assessment of whether a pension provider complies with Article 48 Pw.

Give a balanced picture of positive and negative consequences in every information layer

The AFM is positive about layered information provision to participants. It is important, however, that the information is balanced both as a whole and per information layer. Not all participants will consume the information in the deeper information layers. It is therefore important that every communication gives a balanced picture on its own of the positive and negative consequences of the decision. And that it is clear what information participants can read in deeper layers and why that is relevant to them. The AFM expects concretely that from the first information layer, the positive and negative consequences and risks of the decision are mentioned in a balanced manner, and appropriate to the level of detail of the layer.

Ensure that the qualitative explanation of taken decisions and their consequences is sufficiently clear

The AFM finds it important that the explanation of the consequences of a decision for a participant is understandable without background knowledge. Too often, participant communication contains jargon and complex explanations. The AFM expects that you periodically test that the information, including the layering, is sufficiently clear and understandable for the participant population and thereby complies with Article 48 Pw. This is especially important in this transition period, in which the participant receives information about various topics frequently.

Participants have the right to the full story 4

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Inform the participant in a timely manner about taken decisions and their consequences

The AFM emphasizes that it is important that information about the indexation decision is also made actively available in a timely manner. This means as soon as possible after, but in any case within one month after the decision has been taken. At the moment that participants search the website for additional information, they must be able to find all relevant information. For pension funds that submit a bridging plan, they must inform participants upon submitting the plan to De Nederlandsche Bank (DNB), but no later than one week thereafter.

Participants have the right to the full story 5

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1. The importance of balanced and timely participant communication

The decision to use relaxed indexation rules and the transition-ftk, for which a bridging plan must be submitted, has consequences for the manner in which the pension wealth is distributed. It is therefore important that pension funds inform their participants in a transparent and balanced manner. This also applies to the yet-to-come decisions in the pension transition. The various decisions may interact with each other, leading to stacked effects for participants.

Participants have the right to be informed about decisions and the consequences the decision may have for them. Pension funds should explain why they consider the decisions to be taken to be balanced for their participants. Participants are, after all, obliged to entrust their pension funds to pension funds. Therefore, the AFM also paid attention this year to the importance of good and balanced information provision.

Providing information to participants goes beyond fulfilling a legal obligation of pension providers. Pension communication has various goals. Of course, there is the informing of or involving participants in information relevant to them. Think of the UPO (Uniform Pension Overview), which aims to inform a participant about their current and future pension situation and the uncertainty associated with it. Or the transition overviews, which must ensure that participants are personally involved in what the transition means for them. But information also aims to account for the decisions that the pension fund board takes in the interest of the participants.

Pension participants have different information needs at different moments. This can bring challenges: how do you ensure that your information aligns as much as possible with the participant's information need? For example, when the pension age approaches, at a life event, or during financial planning. When information provision does not directly result in a reaction from the participant, that does not mean that such a reaction will never occur and that the communication was not necessary.

Information provision from pension funds, and transparency in general, has multiple functions. It is good to keep this in mind. The AFM distinguishes an accountability, trust, and signaling function. These are explained below.

1. Accountability

At the board table, many complex financial decisions are taken whose effects work through on multiple levels for a long time. Transparency about the decisions taken and the justification thereof works disciplinarily on the quality of the decision. Therefore, involve explainability as early as possible in the decision-making process. Pension funds must be able to justify that taken decisions are in the interest of the participants.

2. Trust

Transparency has a trust function, at the individual level and at the collective level regarding the trust of the Dutch population in the pension system. Lack of transparency or unclear information is a seed for distrust. Not (being able to) explain what is happening, and why certain choices were made, can foster distrust because the participant might think that information was deliberately withheld, or wonder why certain decisions were taken (all the more so when those decisions have potentially adverse consequences for that participant). The interest here is significant as it may concern hundreds of thousands of euros of the participant's pension capital. Good explanation of what you do, why you do it, and why this is or is not in the interest of different (and which) (age) groups of participants – and why this is still considered balanced in the context of the transition by the pension fund – can therefore secure or even improve trust in the pension fund in the long term.

3. Signaling

Pension schemes or certain individual situations can be complex. Despite the presence of sound control measures, errors may occur. Participants must therefore be enabled to, if desired, check the pension fund and their own pension and signal errors. Developments and changes in the pension, including those resulting from the transition, must therefore be reconstructible for the participant, even later in time. Upon retirement, participants must, for example, be able to use an expert who can more easily penetrate more complex matters. The information provided by the pension fund must suffice to do this.

Research

The above underscores the importance of clear, balanced, and timely pension information. In 2024, the AFM therefore conducted research again into the participant communication of pension funds regarding the application of the relaxed indexation rules and the submission of the bridging plan. The investigations yielded important insights that are broadly applicable to information provision during and after the pension transition. In this report, we therefore link the findings from both investigations back to the broader pension sector.

To provide insight into how the AFM, as a supervisor, looks at certain topics and what we expect from pension providers, we have elaborated on a number of themes. We clarify what the legal requirements are, what attention points we see, and what steps pension providers can take to improve their participant communication. The AFM gives examples of good practices, compliance with the law, attention points, and violations. The lists are not exhaustive.

We use the following four levels:

• Good practice: The AFM sees this as a good example for the sector.
• Sufficient: The AFM qualifies this as sufficient, but there is still room for improvement.
• Attention point: The AFM has an attention point and expects improvement.
• Violation: The AFM observes a violation.

Disclaimer

The examples are solely intended to provide insight into the manner in which the AFM looks at certain topics. Facts and circumstances of a specific case may result in a violation, even if the case seems to fall under the description of the example. Secondly, the AFM notes that a good practice regarding findability can only be seen as a good practice for that requirement, but not, for example, for the balance of that same information. It is important that one requirement can influence compliance with another requirement. For instance, information about the justification and consequences of the decision can only be findable when participants have been pointed out to the information made available. It is ultimately up to the pension providers to assess the information as a whole.

Participants have the right to the full story 6

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Participants have the right to the full story 7

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2. Research and key insights into the relaxed indexation rules explained

4 For pension funds, this provision is based on Article 137, third paragraph, part c, of the Pension Act (Pw) and Article 132, third paragraph, part b, of the Mandatory Occupational Pension Scheme Act (Wvb). 5 Staatsblad 2023, 130 (Explanatory Memorandum or NvT).

Like in 2022, a pension fund could use the relaxed indexation rules (hereinafter: Indexation Decree 2023) in 2023 in the lead-up to the pension transition. The decision to use Indexation Decree 2023 has consequences for the manner in which the pension wealth is distributed. It is therefore important that pension funds inform their participants in a transparent and balanced manner.

Legal Framework

Article 15c of the Decision on the Financial Testing Framework for Pension Funds (Bftk)4 lists a number of safeguards to which the pension fund must comply at and following the taking of the indexation decision. The pension fund must also inform the participant in a timely manner about the decision. That information must be correct, clear, and balanced to comply with Article 48 of the Pension Act (Pw).

Compared to last year, the legal communication requirements in the explanatory memorandum have been clarified on a number of points.5 It is important, for example, that it explicitly follows from the chosen manner in which the generation effects are made visible that the decision involves redistribution and that the decision also has negative effects for certain groups of participants. It has also been clarified that making information available must be done actively. Hereunder is understood that participants are at least pointed out that relevant information is available for them and where it can be found.

Research Justification

The AFM conducted research in 2024 into the participant communication of 62 pension funds and circles regarding the use of Indexation Decree 2023. The AFM tested whether the pension fund complied with the conditions from the aforementioned legal framework.

Furthermore, the AFM provided pension funds in the research population with insight into how the other pension funds that used Indexation Decree 2023 complied with the aforementioned norms. For this purpose, the AFM assigned a qualitative score based on the outcomes of this research. The following pages contain an explanation of the different topics the AFM looked at and the manner in which the AFM established the scores, as well as an image of the different scores assigned to the research population. The assigned scores are solely aimed at providing insight into how the AFM looks at certain themes, the good examples we have seen in this research, and what pension funds themselves can do to improve participant communication.

The fund-specific findings were fed back to all involved pension funds. The AFM sent a supervisory letter to nineteen pension funds that did not comply with the legal requirements.

Participants have the right to the full story 8

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2.1 Active provision of information still too often fails

Pension funds can choose to provide mandatory information or make it actively available. If pension funds choose to make the information available (digitally), for example on the website, the participant must be pointed out that relevant information has been made available, and where this information can be viewed. This can be done, for example, by means of a direct link to the specific web page where the relevant information is made available. Information must remain available on the website as long as that is relevant. This is at least until the new pension schemes enter into force. Pension funds must, after all, in the decision-making process regarding the (balanced) transition to the new pension system, explain how the effects of (among others) this decision were taken into account.

The AFM notes that almost all pension funds choose to make the mandatory relevant information available, with some pension funds providing all relevant information (by post) to participants who have expressed a preference for physical mail. In the active provision, more than 60% of pension funds referred participant groups to the website via a direct link or instruction. However, the AFM notes that pension funds do not always point out all participant groups to the information made available or provide them with the relevant mandatory information. This is a violation of Article 15c, sixth paragraph, Bftk.

Pension funds do not always point out available information

Twelve of the 62 pension funds and circles investigated did not point out all participants to the information made available on the website regarding the justification and consequences of the indexation decision, thereby violating Article 15c, sixth paragraph, Bftk.

Legend

Good practice: All participants are informed about the indexation decision, with a direct link to the relevant web page included and it is stated that a justification of the decision and generation effects can be found there.

Sufficient: All participants are informed about the indexation decision, with a...