Inform Participants Promptly and Specifically About Compensation

ANALYSIS REPORT SEPTEMBER 2025 Inform participants promptly and specifically about compensation

In short: Participants can receive compensation if they suffer a disadvantage for their future pension accrual due to the abolition of the average accrual system. The amount of compensation depends on many factors, such as age, choices made within and outside the pension scheme, life events, and differences in agreements regarding compensation between social partners. The AFM requests pension funds to involve participants in the agreements made regarding compensation and their consequences as early as possible.

ANALYSIS REPORT Table of Contents Summary 3

1. Background 5 1.1 Reason for exploratory research 5 1.2 Approach and scope of the exploration 6
2. Importance of information provision 10 2.1 Impact of changed situation on compensation varies per pension fund 10 2.2 Incomplete elaboration of compensation scheme hinders timely and clear communication 13 2.3 Communicate timely about consequences of a lower funding ratio 13
3. Inform participants promptly 14 3.1 Risk of no or less compensation in specific situations 14 3.2 Make consequences of individual changes concrete 15 3.3 Include compensation in choice guidance 15 3.4 Prevent misinterpretations and expectations 16 3.5 Collaborate with the employer 16
4. Explain how compensation is determined 17 4.1 Transparency regarding the compensation scheme can be improved 17 4.2 Ensure reproducibility of the compensation amount 17 4.3 Place compensation in the broader picture 18 4.4 Elaborate information provision in the communication plan 18

Inform participants promptly and specifically about compensation 3 ANALYSIS REPORT Summary 1 See Q&A “How does the pension fund substantiate the amount of compensation per age cohort?” – De Nederlandsche Bank. The Dutch Authority for the Financial Markets (AFM) considers it important that participants are informed about their compensation scheme and its personal consequences. This responsibility lies with both employers and pension funds. This publication addresses the role pension funds play in this. The AFM has conducted research in the past period into how pension funds communicate with their participants about the compensation scheme and how different designs of the compensation schemes can impact this communication.

In almost all pension funds switching to the new pension scheme, a compensation scheme is in place. Compensation is intended for active participants who suffer a future disadvantage from the switch to a different premium system. It is not mandatory to grant compensation, and the law does not prescribe which calculation method or method of granting must be applied. Social partners therefore determine whether compensation is granted and how the compensation scheme is designed. The agreed compensation arrangements are recorded in the transition plan. The pension fund then assesses whether the compensation is adequate and fits within a balanced transition.1 If compensation is regulated within the pension scheme, pension funds must inform their participants about the compensation and its financing.

With this report, the AFM emphasizes the importance of involving participants in the compensation scheme, including the conditions for eligibility. In practice, this may mean that pension funds inform their participants about the compensation scheme earlier than one month before the transition moment (the latest moment for sending the first personal transition communication). By informing participants promptly about the compensation scheme, foreseeable disappointments can be prevented, particularly in specific situations, including (un)paid leave, voluntary continuation, seasonal work, and varying employment contracts. Participants in such situations may receive no or less compensation than they would have in a different choice scenario. This can have significant consequences for some groups of participants, as compensation can amount to a substantial sum (see the example calculation on page 4).

This publication discusses three observations and points of attention that the sector can use to help participants, both before and after the transition moment, gain insight into what compensation means for them. The AFM calls on the pension sector to take these points of attention to heart and carefully consider ways in which groups of participants can be informed about compensation. This can be done, for example, via the website, a brochure, or in collaboration with the employer.

1. Importance of good information provision Because social partners determine whether compensation is granted and how it is designed, compensation schemes can vary significantly between pension funds. Not all pension funds grant compensation at the same time, as they switch over at different moments. Moreover, the majority of pension funds choose to grant compensation at one moment, rather than spread out. The methodology for determining the amount of compensation and which participants receive compensation also varies per pension fund. For example, there are compensation schemes where participants receive compensation from age 28, while in other schemes this starts from age 46. The agreed compensation arrangements can raise questions among participants, making information about the concrete consequences for participants even more relevant.

Inform participants promptly and specifically about compensation 4 ANALYSIS REPORT 2. Inform participants promptly Ensure that information about compensation reaches participants well before the transition. By informing participants promptly about the consequences of individual choices and life events before the switch-over on their compensation, you reduce the chance of disappointment. Good collaboration with the employer can help with this. Information about compensation reaches the participant more easily when the employer also makes it available. Furthermore, include compensation in choice guidance if the participant's choice has relevant consequences for the compensation, for example when choosing voluntary continuation of the pension scheme.

3. Explain how compensation is determined Before the transition moment, the exact amount of compensation is not yet known. For participants, it is therefore often difficult to establish how the compensation scheme works in broad terms and what this means for them. Therefore, be as transparent as possible before the transition moment about the agreements made. For example, make clear which participants do or do not receive compensation and what factors this depends on, such as funding ratio, age, or status. After the transition moment, make it possible for participants to trace how the definitive personal compensation amount was determined. For example, make available the percentage that each age group receives in compensation and point out that they can request information about the calculation. It may help to place the compensation in the context of other transition choices, such as filling the solidarity reserves, in a deeper layer.

Figure 1: Example calculation of compensation impact.

Inform participants promptly and specifically about compensation 5 ANALYSIS REPORT

1. Background 2 Where this report mentions an article from the Pension Act, the corresponding article from the Mandatory Occupational Pension Scheme Act must also be read, in this case Article 145i Wvb. Active participants who suffer a “disproportionate disadvantage” due to a change in future pension accrual when switching to the new pension scheme can be compensated for this. What is disproportionate is not further specified by the legislator. It is therefore up to social partners to determine whether compensation takes place and how it is designed. Based on the calculated transition effects per age cohort, social partners determine whether and for which age cohort there is a disproportionate disadvantage. If this is the case, social partners must draw up an adequate compensation scheme. The compensation can be financed in various ways, for example via a premium surcharge, from the fund assets, or outside the pension scheme (or a combination thereof).

Pension funds must inform their participants about the compensation and its financing if agreements have been made within the pension scheme, in the personal transition communication that must be provided both before and after the transition moment (Article 150j Pension Act (Pw), hereinafter also referred to as the forecast or definitive ‘transition overview’).2 This information must be correct, clear, balanced, and timely, and must align with the information needs and characteristics of the participant. The information must also provide insight into the consequences of important events and choices within the pension scheme on the pension (Article 48 Pw).

The AFM supervises how participants are informed about the compensation scheme and how compensation (if relevant) is involved in choice guidance (Article 48a Pw).

1.1 Reason for exploratory research Pension funds must inform participants personally about the compensation, regardless of whether they are eligible for it. This can lead to customized communication in transition overviews (for example, target group communication). These overviews must be provided no later than one month before the transition moment (Article 46a, sixth paragraph, Decision on the Implementation of the Pension Act and the Mandatory Occupational Pension Scheme Act (BuPw)). This period may be too short for participants if they make choices that influence the compensation. It may therefore be desirable to provide general information about the (impact of the) compensation scheme at an earlier stage, in order to maintain trust among participants. If participants feel afterwards that they were not informed promptly and well about compensation, and therefore receive less or no compensation, this can lead to complaints and disputes, resulting in a loss of trust in the pension system.

To gain insight into compensation schemes and the communication about them by pension funds, the AFM conducted an exploratory research in early 2025. This report contains the most important insights from it, including good examples and points of attention. These examples are not exhaustive and can help in designing the information for participants about compensation.

Inform participants promptly and specifically about compensation 6 ANALYSIS REPORT 1.2 Approach and scope of the exploration The AFM held conversations with various pension experts and requested information from five pension funds. Furthermore, we formed an initial picture of the design of the compensation schemes based on transition plans. Insights gained from this are summarized on page 12.

The focus of the research was on compensation for the average accrual system in pension funds switching from a benefit agreement to a premium agreement. The AFM requests pension funds to review the points of attention in this report and use them to improve communication about compensation. The insights in this report may also be relevant for premium pension institutions (PPIs) and insurers. The statutory information obligations also apply to compensation when switching from a progressive to an age-independent premium. This switch presents similar points of attention regarding communication about compensation.

Inform participants promptly and specifically about compensation 7 ANALYSIS REPORT

Inform participants promptly and specifically about compensation 8 ANALYSIS REPORT

Inform participants promptly and specifically about compensation 9 ANALYSIS REPORT

Inform participants promptly and specifically about compensation 10 ANALYSIS REPORT 2. Importance of information provision Because social partners themselves determine whether compensation is granted and how it is designed, compensation schemes can vary strongly between pension funds. Additionally, participants depend on the moment their pension fund switches to the new pension scheme for (the amount of) compensation. This can raise questions among participants. This makes the importance of information about the concrete consequences for participants even more relevant.

2.1 Impact of changed situation on compensation varies per pension fund The AFM inquired at five pension funds how they handle individual changes before the transition moment (see an overview of possible ‘changing situations’ below). The research shows that the impact of a changed situation on the compensation amount varies per pension fund.

Some changes, such as leaving employment and retirement, result in the participant no longer having an ‘active’ status at the transition moment. Pension funds administer such events differently. As a result, for example, participants with voluntary continuation after leaving employment are not covered by the compensation scheme at all pension funds. We also see different ways in which the status of these participants is administered in the case of unpaid (care) leave, where the participant temporarily no longer pays premiums. Furthermore, employers do not always report status changes in a timely manner, and the date on which the participant's status is determined varies (for example, December 31 or January 1). This creates the possibility that in one pension fund, the participant, whose status is determined later, receives compensation, while in another pension fund, they do not.

Figure 2: Examples of situations that can impact the compensation amount of an individual participant.

Inform participants promptly and specifically about compensation 11 ANALYSIS REPORT Other changes, such as working part-time, result in a lower labor percentage and thus a lower pension base. To align with changes in the situation, four of the five pension funds use a form of averaging when determining the base for compensation, for example, an average pension base or average labor percentage. Differences lie further in the period over which the average is taken (ranging from a few months to one year before the transition date) and whether salary increases or decreases in the period before the transition date are included.

Point of attention: situations that do not fall under compensation at all pension funds Pension funds handle unpaid leave, voluntary continuation, and zero-hour contracts differently. The way of administering and reporting by the employer can play a role here. The AFM draws attention to such specific situations and urges pension funds to prevent uncertainty.

!

Inform participants promptly and specifically about compensation 12 ANALYSIS REPORT

Inform participants promptly and specifically about compensation 13 ANALYSIS REPORT The overview above (page 12) provides insight into the differences between pension funds regarding the granting of compensation, financing, and the percentages of the pension base used. This information is based on 44 public transition plans of pension funds switching to the new pension scheme in 2025 or 2026. The insights below are based on the information from these plans.

2.2 Incomplete elaboration of compensation scheme hinders timely and clear communication The degree of elaboration of the compensation scheme varies per transition plan. The AFM urges pension funds to hurry up with concretizing the compensation scheme in collaboration with social partners, so that it is known well before the transition how compensation plays out in different situations for participants and they can be informed about it in time. The pension fund benefits from steering towards a prompt further elaboration of the details where necessary, so that the translation to participant communication can be made.

In 24% of the transition plans reviewed by the AFM, it was not clear whether compensation is granted in one lump sum or spread out. However, this is important for participants who make choices around the transition date.

An indication of compensation percentages for the different age cohorts (also known as the compensation ladder) was missing in 37% of the transition plans. Although the exact amount cannot be determined in advance, the indication provides insight into redistribution effects and contributes to communicating as accurately as possible about compensation in the transition communication.

Furthermore, some transition plans did not explicitly state how compensation is financed, while a pension fund must communicate this to participants if compensation is within the pension scheme. This is relevant because financing can impact the personal pension wealth of all participants.

2.3 Communicate timely about consequences of a lower funding ratio Social partners may choose how to finance and grant compensation. From the transition plans reviewed, it appears that 95% prefer to finance compensation from assets; 71% wants to grant compensation in one lump sum, rather than spread over several years.

How high the exact compensation amount will be depends on the economic conditions and financial situation of the pension fund at the transition moment. With a lower funding ratio, full financing of compensation in one lump sum from assets is not always possible. Then, spread-out compensation, a lower compensation amount, or financing from the premium or outside the pension scheme is often chosen. In the extreme case, compensation may be waived. It is important that pension funds make clear to participants in advance what the possible impact of a lower funding ratio is at the transition moment. Do this timely and as accurately as possible, for example, via communication on the website or a brochure, or another method that suits your own population. The employer could also play a role in this.

Inform participants promptly and specifically about compensation 14 ANALYSIS REPORT administering participants with leave as active to prevent reduced or no compensation in certain cases. A pension fund has no influence on agreements between employers and employees, but does include compensation in the acceptance and confirmation of the mandate. By engaging in dialogue about the trade-offs made by social partners, they can help social partners design a compensation scheme that best fits the participant population and is considered fair by them.

Good example: multi-year compensation At a pension fund where there are varying and short-term employment contracts, social partners chose multi-year compensation to better align with the characteristics of the participant population and thus reduce the risk of disappointment from not receiving compensation. This can help with explainability to participants.

Good example: average pension base Explanation from a pension fund with many seasonal workers where social partners chose an average pension base: “The compensation amount is determined by the average pension base and part-time degree during the year preceding the transition date. This partially mitigates the risk that a participant misses out on compensation because, for example, they choose to work less towards the transition date.” This choice of the pension fund can contribute to explainability to participants.

3. Inform participants promptly Compensation within the pension sector only applies to participants who are still employed and paying premiums: it is, after all, compensation for future disadvantage. A change in the situation of an individual participant can result in a significantly lower compensation amount. As noted earlier, there is a risk that participants may be disappointed if they receive no or less compensation. One can think of lower or no compensation due to (temporary) part-time work, partial retirement, retirement, unpaid care leave, or varying employment contracts where the status is (temporarily) ‘not active’ at the transition moment. It is also no guarantee that a participant who leaves employment will receive compensation under a new pension scheme, although they may suffer disadvantage from the abolition of the average accrual system.

3.1 Risk of no or less compensation in specific situations Because 71% of pension funds choose one-time compensation, there is a great dependence on status and pension base at one specific moment. This increases the chance that participants receive no or less compensation. This is acknowledged in multiple transition plans, but the administrative challenges of spread-out compensation usually weigh heavier.

Participants will not always be aware of the compensation scheme themselves, let alone the consequences of their (labor) choices on compensation. Sometimes there is no or less choice, for example, with care leave and varying employment contracts. Although good information provision can prevent foreseeable disappointment among participants, the pension fund can also make agreements with social partners on the method of granting compensation. In this research, the AFM saw, for example, that pension funds chose an average pension base, spreading compensation over multiple years, or

Inform participants promptly and specifically about compensation 15 ANALYSIS REPORT 3.2 Make consequences of individual changes concrete By informing participants in advance about compensation when they change their situation, the pension fund can prevent foreseeable disappointment among participants. Make this information as explicit, concrete, and understandable as possible. For participants, it will not always be clear what is meant by the status “active” and what the term “pension base” entails. A participant may then have difficulty assessing the impact on their compensation amount if their situation changes. Therefore, make clear in the communication what is meant by these terms. This can be done, for example, by treating specific situations in Q&As or by giving examples.

The outer deadline for providing the forecast transition overview is one month before the transition moment. But participants often cannot adjust their choices within a month. Therefore, the AFM requests pension funds to inform their participants (much) earlier about the consequences of (labor) choices on potential compensation. This can be done, for example, by (in collaboration