Better explanation of possible consequences of pension increases needed

Research into compliance with communication requirements regarding pension indexation

Update: November 2023

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Contents

Summary 3

01 Background and Approach 5
1.1 Legal Framework 5

02 Findings 7
2.1 Information on indexation was provided or made available in all cases 8
2.2 Information on indexation was not always easily findable or permanently available 8
2.3 Justification of the decision falls short 8
2.4 Generational effects are not always presented quantitatively 9

03 Conclusions 10
3.1 Quantitative effects at cohort level and explanation thereof 10
3.2 Balanced and clear communication 10
3.3 Link with the new pension system 11

04 Next Steps 12
4.1 Pension funds that used the Indexation Decree after October 12
4.2 New Indexation Decree in 2023 12
4.3 Outlook on pension transition 12

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Summary

The indexation decision also increases the chance of cuts if finances are tight and causes future indexations to be lower. Decisions to index are not necessarily unbalanced or inexplicable. However, it is important that the pension fund board explains why it considers its decision to index to be balanced and in the interest of the participants. Communication and accountability to participants regarding indexation is not the final step of the pension fund's decision; it is part of the decision-making process, and balanced communication to participants must therefore also have a place at the boardroom table. One of the reasons for changing the current pension system was transparency and restoring trust. This is achieved by explaining the relevant consequences of a decision and clearly demonstrating that the interests of all participants have been taken into account in the decision-making process. This is important now and will be even more important during the decision-making process regarding the transition and possible 'invoering' (transferring assets).

Research into communication regarding the surcharge decision

The AFM conducted research into communication about indexation based on the temporarily relaxed indexation rules, as this is the first tangible consequence for participants of the upcoming change to the pension system. Transparency is not an end in itself, but a means to prevent distrust and foreseeable disappointments among participants. Consequences of decisions taken by professional players on the financial markets, such as pension administrators, must be explained to the persons affected by these consequences. Especially when there is a different distribution of the total pension capital, as occurs when using the Indexation Decree, the pension administrator must be able to account for this to participants. The AFM pays special attention to this because it sees this as a litmus test for how pension administrators will communicate to participants during the pension transition regarding the consequences of their decisions.

Summary

In this report, you will find the results of the AFM's research into compliance with the communication requirements regarding the granting of surcharges (also known as the surcharge decision or indexation decision). Overall, the AFM notes that compliance with the requirements of the Indexation Decree by pension funds can and must be improved. In this report, the AFM elaborates on its research and makes recommendations to further improve communication to participants.

Pension funds were given the opportunity in 2022 to increase the pensions and claims of participants and pensioners (also known as indexation) under a relaxed regime. Through this temporary possibility, pension funds may index when a coverage ratio is at least 105% instead of 110%, and they do not have to take into account, among other things, the requirement of future-proofing. This temporary possibility anticipates the transition to the new pension system, in which pension funds are no longer required to hold financial buffers.

Pension funds that used the relaxed rules must have the intention to 'invoeren' (transfer assets) into the new system. Pension funds must also provide quantitative insight into the effects the indexations have for different age groups in their communication to claimants and pensioners (hereinafter: participants), and they must justify the decision to index.

The decision to use the possibility to index relaxedly (also known as the indexation decision) has positive effects for some participants and negative effects for others. By increasing the claims and benefits of participants, the financial position of the pension fund deteriorates. This means that there is less assets when the pension fund transfers assets into the new system; the total assets of the pension fund are indeed not increased.

Call to the pension sector: critically review communication prior to the transition

The AFM explicitly calls on the sector to critically review its communication regarding decisions that have consequences for participants' pensions, now and during the transition, and to improve it where necessary. Participants have the right to be informed about these decisions and the consequences the decision may have for them. Pension funds should explain why they consider the decisions to be balanced for their participants. Participants are, after all, obliged to entrust their pension funds to pension funds.

In this report, the AFM provides recommendations to improve participant communication. The AFM has taken enforcement action against the fourteen pension funds that violated the law. The AFM expects these pension funds to improve their communication.

More pension funds decided to use the temporary scheme for granting surcharges after October 2022. The Minister also decided in December 2022 to extend the scheme in 2023. The AFM expects that in all these cases, the legal requirements are met and the findings from this report are taken into account. The AFM expects that the recommendations and findings from this research are also taken to heart during communication regarding the pension transition.

At the beginning of October 2022, the AFM asked pension administrators to send it all information they had made available or provided to participants regarding the indexation decision if they had used it at that time. 39 pension funds indicated they had used the decision and provided the requested information to the AFM.

The research shows that more than one-third of the pension funds studied did not (fully) comply with the legal requirements. For these pension funds, quantitative insight into the generational effects of the surcharge decision was missing, for example. This is important information for participants to see what long-term effects the indexation decision may have for them. Deviation from the regular financial testing framework by using the Indexation Decree means a different way of distributing the collective pot of money, which does not get larger. Where participants gain because they receive more payouts earlier, there are also participants who fall behind.

The AFM expects pension funds to clearly communicate why the decision is considered balanced and in the interest of the participants by the pension fund board. In the information shared by pension administrators with participants, the AFM has primarily seen the positive consequences of the decision. However, because the capital is distributed differently by taking the decision, there are also participants for whom possible negative long-term effects may apply. It is therefore important that the pension fund board clearly explains that all relevant interests have been taken into account when taking the decision; also the interests of participants for whom the decision may have negative effects. From such justification, it follows and why the indexation decision is considered balanced and in the interest of all participants by the pension fund board.

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01 Background and Approach

During the upcoming pension transition, all pension administrators will communicate about the consequences participants experience from changes in pension schemes and, in many cases, also about the distribution of collective pension assets into individual pension pots ('invoering'). The recommendations from this report can also be taken to heart then.

1.1 Legal Framework

To be allowed to use the Indexation Decree, a number of conditions apply. For example, the pension fund must have the intention to 'invoeren' (transfer assets), and the coverage ratio may not fall below 105% due to indexation. There are also a number of other conditions, including regarding communication and information provision to participants. These information requirements and the explanation from the Explanatory Memorandum (NvT) are presented below. These requirements apply regardless of the height of the indexation.

Provide or make available

Pension funds must provide information about the use of the Indexation Decree in a timely manner or make it available. Providing information implies an active duty to provide. Information is considered made available if access is granted. From the Explanatory Memorandum accompanying the Indexation Decree, it follows that there must be active making available.

The fact that information must be provided or actively made available means that the pension fund must at least point out to participants that and where the information about the decision can be found. This means that a participant must be informed about the fact that the information is available and where the information can be found.

The relaxed indexation conditions are elaborated in a General Administrative Order: the 'Decision of 7 June 2022 amending the Decision on the financial testing framework for pension funds in connection with surcharges due to the proposed transition' (State Gazette 2022, 211), hereinafter: the Indexation Decree. This has resulted in Article 15c being included in the Decision on the Financial Testing Framework (Bftk).

The Authority for the Financial Markets (AFM) monitors the information that pension funds provide or make available to participants regarding the use of the Indexation Decree. If the Indexation Decree is used, this is the first moment where actual long-term consequences for participants occur as a result of the upcoming change to the pension system. The AFM considers it of great importance that transparent communication is provided to participants regarding changes and their consequences throughout the entire transition period, for which the Indexation Decree is a precursor. This transparency is a good starting point for an explainable transition and a transparent transition period.

In this report, the AFM presents the findings and recommendations resulting from the research into compliance with the information provision requirements of the Indexation Decree.

The recommendations in this report are relevant for all pension administrators, even for those who have (not yet) used the indexation possibility. First, because the indexation rules will likely be relaxed again by the legislator in 2023, allowing pension funds to take the recommendations from this report into account when using them. Second, because the recommendations in this report concern the justification by the pension fund board that the surcharge decision is in the interest of claimants and pensioners. It is important to pay attention to all, i.e., both positive and negative, consequences of the decision-making.

This last point can have negative consequences for some participant groups.

Information is correct if there is substantive accuracy and if no contradictory information is given via the various communication channels. Information is timely if the participant can take it in at the moment they must make decisions or when the information is relevant to them in another way. In the case of participant communication regarding the surcharge decision, the AFM expects this to be made available or provided as soon as possible after the decision is taken.

The AFM tested the participant communication of all pension funds that indicated as of October 1, 2022, that they had used the Decree on the following legal aspects:

• Whether the information was provided or actively made available and kept;
• Whether the information is findable and clear;
• Whether the quantitative generational effects at the cohort level are presented, and
• Whether the justification of the decision is included, whereby the AFM expects at least to see that it is justified that a balancing of interests has taken place and that the different consequences of the surcharge decision for different participant groups have been taken into account.

Additionally, the information must remain available on the website as long as it is relevant. This is at least until the new pension schemes enter into force. Pension funds are indeed required to indicate how the effects of this decision are taken into account in the decision-making process regarding the transition to the new pension system.

Quantitatively present generational effects at cohort level

Pension funds wishing to use the Indexation Decree must quantitatively present the generational effects at the cohort level. In principle, pension funds must do this per birth year, unless there are compelling reasons to deviate from this. If this is the case, the pension fund must explain this in the decision-making process. The legislator has not prescribed a method for how the pension fund quantitatively presents the generational effects.

Justification of the decision to index temporarily

Due to the different consequences for different participant groups, it is important to justify why the surcharge is granted in the interest of the participants. The fact that the decision has adverse effects for certain groups is an important part of the balancing of interests and thus of the justification of the decision. The balancing that pension funds make, taking into account the interests of participants, is therefore also part of the information shown to participants.

Correct, clear, balanced, and timely

All information that a pension administrator provides or makes available must meet the requirements of Article 48 of the Pension Act (Pw) (or Article 59 of the Mandatory Occupational Pension Scheme Act). The information must be correct, clear, balanced, and timely. Clear means that the information is understandable, but also that the information, when made available, is easily findable. Information is balanced if not only the advantages of a decision, but also the disadvantages (in the case of the Indexation Decree, the possible negative effects) are presented equally. Thus, the indexation decision means an immediate increase in the payout of pensioners on the one hand, but on the other hand, it means that the total assets of the pension fund are distributed differently.

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02 Findings

The calculation methodology must be used to calculate the generational effects. This leads to pension funds that do show quantitative generational effects doing so in various ways. Calculation methodologies are also applied from which it does not follow that the indexation decision has negative effects. This does not seem to align with the spirit of the Indexation Decree, and the AFM therefore makes the urgent appeal to those pension funds to revise the information shown in this light.

From Figure 1 below, it follows that 25 pension funds informed their participants about the indexation decision in line with the legal requirements. Two pension funds did not show the quantitative generational effects of the indexation decision, and seven pension funds did not sufficiently justify the decision. For five pension funds, there is a combination of the aforementioned violations.

Figure 1. Distribution of the 39 pension funds studied by type of violation of Article 15c, sixth paragraph, Bftk.

• Quantitative generational effects shown: 25
• Quantitative generational effects not shown: 7
• Decision not or insufficiently justified: 5
• Decision justified: 25
• No violation: 25

The AFM elaborates on its findings in this chapter, split into the four elements on which the AFM, as stated in the previous chapter, tested. Overall, the AFM notes that compliance with the requirements of the Indexation Decree by pension funds can and must be improved.

The AFM's research shows that about one-third of the pension funds studied did not meet the legal requirements set for information provision regarding the surcharge decision. It is striking that pension administrators often do not communicate sufficiently balanced regarding the consequences of the indexation decision. The focus is on the increase in payouts, but less explicitly on the fact that the total assets of the pension fund are distributed differently by the decision. The AFM expects pension administrators to explicitly make clear in the justification that the decision is in the interest of those involved, that the extra surcharge for groups of participants may also have negative consequences in the long term. It is important that transparent communication is provided to participants regarding decisions and their consequences throughout the entire transition period. Especially because, due to the reduction of buffers during 'invoering', there may not be enough money available to ensure that personal pension assets at least align with the current provision of the claims built up by participants. This may result in a worse starting position in the transition than if the indexation decision had not been used.

There is also much room for improvement in the presentation of the quantitative generational effects of the surcharge decision. For seven of the pension funds studied, the quantitative information on generational effects was missing. Some of these had included a qualitative description of the generational effects. However, this is insufficient to meet the legal requirement. As stated under the legal framework, the legislator has not prescribed with which calculation methodology the generational effects must be calculated. This leads to pension funds that do show quantitative generational effects doing so in various ways. Calculation methodologies are also applied from which it does not follow that the indexation decision has negative effects. This does not seem to align with the spirit of the Indexation Decree, and the AFM therefore makes the urgent appeal to those pension funds to revise the information shown in this light.

From Figure 1 below, it follows that 25 pension funds informed their participants about the indexation decision in line with the legal requirements. Two pension funds did not show the quantitative generational effects of the indexation decision, and seven pension funds did not sufficiently justify the decision. For five pension funds, there is a combination of the aforementioned violations.

2.1 Information on indexation was provided or made available in all cases

The AFM's research shows that all pension funds that used the Indexation Decree provided information about this or made it available. The AFM notes a clear difference between the content of the provided information and the available information. The provided information (the information sent directly to the participant, often by email or post) mostly contains only information about the height of the indexation. In the available information, it can then be found that the decision entails different effects for different age groups, and what the justification for the decision is. Moreover, in almost all cases, the provided information lacks a mention of what additional information about the decision is available, where it can be found, and why a participant should read this information. If reference is made to the website for additional information, it is often not to a specific web page, but to the general website.

2.2 Information on indexation is not always easily findable or permanently available

Most pension funds informed their participants by letter or email that the claims and payouts are indexed, and by what percentage. In about half of the pension funds, the AFM saw that for the remaining information, including generational effects and the justification of the decision, reference is often made to the general website, not to a specific location on the website. Participants must therefore search for the information themselves on the website. This made available information is sometimes difficult to find on the website. On some pension fund websites, the quantitative generational effects were, for example, only findable via the search function.

It is important for participants that important information about the use of the temporary scheme is available AND easily findable. By 'easily findable', the AFM means that a participant with a limited number of mouse clicks must reach the required information via the homepage, whereby in the choice menu on the homepage, it is evident what the participant must click to find the information. The research shows that this is not always the case. The AFM observed in its research that there were also some pension funds that had placed the information in a difficult-to-find location on the website. These pension funds have since made the location of the information clearer for participants. The AFM points out that if the information is not sufficiently findable, and the participant can only find the information, for example, via a specific term in the search menu, the requirement of clarity as intended in Article 48 of the Pension Act (Pw) is not met.

The AFM also observed in a limited number of cases that indexation was made possible because the pension fund first amended the pension scheme. For example, because the desired height of the indexation was not allowed under the old pension scheme. Regarding that amendment of the scheme, a participant must be informed, in addition to the information about the indexation decision.

It was striking that information about the amendment of the pension scheme was provided in the same information carrier as the information about the indexation. This does not contribute to the clarity of the information. It is important that mixing of messages is avoided as much as possible.

Finally, it struck the AFM during the course of the research that some pension funds had already removed the information about the surcharge decision from their website. For information that was only made available, and thus not directly provided, the AFM expects that it remains available at least as long as this information is relevant. Because the decision to index temporarily is connected to the pension transition and a proposed 'invoering' decision, the AFM expects that the information remains available at least until the new pension scheme enters into force.

2.3 Justification of the decision falls short

Pension funds that decide to grant indexation based on the relaxed conditions must justify their decision, and that justification must be part of the communication to participants.

2.4 Generational effects are not always presented quantitatively

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03 Conclusions

3.1 Quantitative effects at cohort level and explanation thereof

3.2 Balanced and clear communication

3.3 Link with the new pension system

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04 Next Steps

4.1 Pension funds that used the Indexation Decree after October

4.2 New Indexation Decree in 2023

4.3 Outlook on pension transition