Exploratory Review of the Mandate Confirmation — AFM — NL

Exploratory Review of the Mandate Confirmation Five Guidelines for the Final Step of the Mandate Acceptance Process October 2024 Report

2 Exploratory Review of the Mandate Confirmation

Table of Contents
In Brief 3
1 Map the impact and suitability of the pension scheme independently of the transition 5 2 Address both individual elements and the pension scheme as a whole 6 3 Elaborate on impacts, including for non-average participants and specific situations 7 4 Elaborate on the justification of suitability and address pension fund considerations 9 5 Test whether the document is navigable for the reader 10 Supervision and Research Accountability 12 Conclusion 13

3 Exploratory Review of the Mandate Confirmation In Brief Since 1 July 2023, following the amendment to the Pensions Act through the entry into force of the Future Pensions Act (Wtp), pension funds must prepare a mandate confirmation when establishing a new or modified pension scheme. In this document, the pension fund informs the parties involved in establishing the pension scheme, the social partners, about the choices made in the pension scheme and their consequences for participants.1, 2 The AFM conducted an exploratory study into the mandate confirmation of ten frontrunners and found the results to be predominantly positive. With this publication, the AFM aims to provide a guideline to the parties working on the mandate confirmation, so that they can elevate the implementation to an even higher level. The mandate confirmation forms an anchor point in time through a complete picture During the mandate acceptance process, the pension fund makes choices regarding the design of the pension scheme, building on the choices and objectives already made by social partners. In practice, this is usually a joint and iterative process. The mandate confirmation forms the formal conclusion of the mandate acceptance process and aims to formulate a jointly supported picture of the mandate. It provides a complete picture of the final design of the pension scheme and the considerations behind it. In this way, it is clear to all involved parties how the individual and combined components function, and it also serves as an anchor point in time for future reference. What choices has the pension fund made, what are the implications for (groups of) participants, and to what extent does the chosen implementation suit the pension fund's population? In a pension system with individual wealth where a complete contract is set up in advance (i.e., little to no discretionary room for the board), this is all the more important. In short: the mandate confirmation is a (non-public) information document that ensures a shared picture among all parties, thereby preventing surprises and disputes afterwards. Exploratory study following the guideline yields predominantly positive image and provides useful insights and tips Last year, the Dutch Authority for the Financial Markets (AFM) published the guideline for the mandate confirmation, outlining the expectations for the mandate confirmations to be prepared by pension funds and the focus of its supervision.3 In 2024, the AFM conducted an exploratory study into the first actually prepared mandate confirmations. In this study, discussions were held with parties from the sector, and the mandate confirmations of ten frontrunners were assessed and discussed. Overall, the AFM is positive about the implementation given by the pension funds under investigation, also considering the fact that these pension funds did not yet have concrete examples to base themselves on. Because this is the first time this obligation is being implemented,
the AFM logically also sees areas that could be improved next time. 1 By social partners, this report refers to the representatives of employers or employer associations, employees or employee associations, occupational pension associations, or participant associations. 2 By participants, this refers to participants, former participants, other entitled parties, and pension beneficiaries. 3 See: Guidelines and policy rules (afm.nl)

4 Exploratory Review of the Mandate Confirmation Most pension fund boards experience the mandate confirmation as a logical and useful addition to the mandate acceptance process The mandate confirmation is viewed by the majority of the pension fund boards spoken to as a positive addition, despite the associated effort. They give the following reasons, among others:

The mandate confirmation is a comprehensive reference work. It also enables future board members, who were not involved in the design or modification of a pension scheme, to read back why choices were made. Board members who were not involved in preparing the mandate confirmation endorse this view.
The mandate confirmation helps pension fund boards monitor and exercise their own role and responsibilities in a longer process where intensive collaboration with social partners sometimes occurs. This allows them to document how they have fulfilled their tasks.
The implementation of the mandate confirmation varies between pension funds The exact implementation of the process for establishing a scheme varies between pension funds. The type of pension fund plays an important role here. For an occupational pension fund, there is no distinction between employer and employee; for an enterprise pension fund, the distance between the pension fund and employer/employee is usually smaller than for a sectoral pension fund with multiple employers; and for a general pension fund, there are multiple circles each with their own pension scheme. Given these differences, it is logical that the mandate confirmation is largely format-free. Thus, pension fund boards can present the required information to social partners in a way they deem most appropriate. However, this also means they must make their own assessments, for example regarding the manner and timing of sharing information with social partners. It is important that boards keep the objectives of the mandate confirmation in mind when drafting, namely: 1) bringing together the design of the mandate chosen by the pension fund and the justification thereof, and; 2) ensuring that social partners and the pension fund have the same picture in advance regarding the mandate and the consequences of, among others, employment condition choices.4

Leveraging five guidelines
Following the overarching observations above, the remainder of this report focuses on five guidelines for a thorough mandate confirmation. The AFM hopes that the experiences of the first pension funds preparing the mandate confirmation will be valuable for those that still need to do so. According to the joint Wtp monitoring questionnaire of the AFM and DNB, a large group of pension funds and circles expects to finalize their mandate confirmation in the autumn of 2024.5 The primary goal of this publication is therefore to proactively provide these parties with more information and guidance. For this reason, the findings, good examples, and points of attention from the exploratory study are central to this publication. 4 Staatsblad 2023, 217, p. 56. 5 Wtp inquiry: peak in mandate confirmations by end of 2024 (afm.nl)

5 Exploratory Review of the Mandate Confirmation 1 Map the impact and suitability of the pension scheme also independently of the transition The mandate confirmation provides a picture of the considerations regarding, and impacts of, the design of the new pension scheme. Additionally, if applicable, it also substantiates the balance of the transition to the new pension scheme. The AFM emphasizes that for a good picture of the functioning of the pension scheme, the participant impacts of the choices made in the new pension scheme must also be elaborated without the transition impacts. That is, independently of the effects of windfall and compensation provided for the consequences of abolishing the average accrual system. In this way, it is prevented that impacts of the new pension scheme only become visible later because they were overshadowed by transition impacts in the mandate confirmation. Therefore, both the request for windfall and the new pension scheme must be assessed by the pension fund on their own merits. It could be that, due to the compensation provided, the transition to the new pension scheme has different (more favorable) consequences for existing participants than for new entrants. By addressing the new pension scheme as such in the mandate confirmation, without any potential compensation and windfall effects, it becomes clear to all involved parties what the consequences are and what choices were made in designing the pension scheme. In the exploratory study, the AFM also observes that in certain cases, the impacts of the pension scheme as a whole are only elaborated as a percentage difference compared to the current pension scheme. Although it may be logical for pension funds to make this comparison, progress relative to the current pension scheme does not necessarily mean the new pension scheme is suitable. The AFM therefore expects pension funds to at least also elaborate the participant impacts of the new pension scheme on its own merits. Tip(s) based on good examples seen by the AFM in the study:

Use representative participant profiles to make the impacts of purely the new pension scheme visible. For example, a participant who joins shortly after the transition and is therefore not affected by transition impacts.

6 Exploratory Review of the Mandate Confirmation 2 Address both individual elements as well as the pension scheme as a whole To comply with legal requirements, pension funds must assess both the entire pension scheme and the elements listed in Article 28d, first paragraph, of the Implementation Decree on the Pensions Act and Mandatory Occupational Pension Scheme (BuPw) separately. In its study, the AFM observes that some pension funds only provide information about the pension scheme as a whole in their mandate confirmation, and do not address the impacts and justification of the degree of suitability of all individual components. Conversely, the AFM also sees that some pension funds have elaborated a somewhat more concise explanation of the pension scheme as a whole. If the explanation of the individual components of the pension scheme is in-depth, a somewhat shorter exposition of the impacts and suitability of the entire pension scheme may suffice under certain circumstances. It is up to the pension fund itself to make this assessment. Regarding the individual elements to be elaborated, the AFM notes that the BuPw only mentions allocation rules. This is a term that fits the solidarity premium scheme (SPR). Where it concerns the flexible premium scheme (FPR), the lifecycles and the collective allocation mechanism are equivalent to the allocation rules in the SPR. They therefore must be elaborated in the mandate confirmation. For other individual elements that differ between the SPR and FPR, the solidarity or risk-sharing reserve, and the projected return or fixed decline, this is also indicated in the BuPw. An example that the AFM considers insufficient is the following:

A pension fund states in the mandate confirmation that 'the components are inextricably part of the pension scheme. The impacts per component are therefore not taken separately but combined into the impacts of the pension scheme on the pension expectation.'
Why? This does not comply with legal requirements. Considering the individual elements separately can yield valuable insights that do not emerge or are less pronounced when only the pension scheme as a whole is viewed. For example, because opposing effects often, but not in all situations, cancel each other out. By considering elements separately, the pension fund can make a well-considered and justified choice between the different design options per element. Think, for example, of a spreading period of 3, 5, or 10 years in the payout phase: what impacts do the different choices have, and how do they affect the scheme's outcomes?

7 Exploratory Review of the Mandate Confirmation 3 Elaborate on impacts, including for non- average participants and specific situations A thorough explanation of participant impacts makes the consequences of the choices made in designing the pension scheme concrete, and gives the reader of the mandate confirmation a feel for the functioning and possible consequences of considered and chosen option(s). The use of representative participant profiles and attention to specific scenarios and/or life events ensures that not only average outcomes are examined. In this way, actual insight is provided into the functioning of the pension scheme, and the pension fund can subsequently make well-founded statements about the degree of suitability. Do not only address impacts for active members, deferred members, and/or pensioners, but also highlight potentially adverse impacts for specific groups or in specific situations. This can occur even in the case of a relatively homogeneous composition of the participant population. Thus, for (groups of) individuals, there may be both a deviating outcome regarding the impacts of the pension scheme design and the suitability of the pension scheme. Because pension schemes are collective, a pension scheme will never perfectly suit every participant in every situation. Insight into which groups or in which situations the pension scheme may be less suitable or riskier is important so that it is taken into account in decision-making, and the pension fund can optionally follow up on this with targeted communication and choice guidance. The box below contains examples from the exploratory study of elaborated situations and participant segmentations. The risk appetite and allocation rules:

Insight into the year-on-year volatility of assets and/or benefits.
The possibility and probability of assets reaching zero if the borrowing restriction is lifted.
The rules regarding the solidarity- or risk-sharing reserve:
The consequences in case of individual value transfer.
The consequences for (younger) participants if new inflow into the pension fund stops.
The probability of the solidarity reserve being depleted (insight from the balance sheet analysis).
The projected return or fixed decline:
The consequences for the probability of increases and decreases.
The consequences for the payout trajectory and the inflation resilience of the benefit.
The increased probability of inadequate benefits at older ages when applying a markup to the projected return.
The spreading system:
The (reduced) alignment with economic developments.
The lower resulting benefit following consecutive negative returns.
The collective payout phase:
The consequences for a participant's payout trajectory when entering the payout phase.
The functioning and consequences of the so-called 'backstop'.
Examples from the study regarding segmentations
Distinction between subgroups 'stayers' and 'movers'.
Specific attention to participant groups that stood out in the RPO (e.g., 'preference for very low risk' or 'very low risk tolerance').
Special attention to survivors.
Examples from the study regarding elaboration of individual elements

8 Exploratory Review of the Mandate Confirmation Pension funds do not need to account for all possibilities, but it is important that social partners are included in the mandate confirmation regarding obvious trade-offs. Precisely because pension schemes are designed for the long term and there is limited room for mid-course corrections, it is important that all involved parties have a picture of the possible consequences of choices made. Tip(s) based on good examples seen by the AFM in the study:

Start by making the impacts visible with a brief explanation of the element's functioning, the implementation options available, and a description of the global impacts.
Use a set of representative participant profiles that does justice to the diversity within the participant population.
Show not only the impacts of the chosen implementation, but also of other considered options.
Pay extra attention to consequences during life events and corresponding choice options.
Do not limit the information to the average outcome alone, but rather also show what happens in more extreme scenarios. Deterministic scenarios can help here.
An example of an elaboration that the AFM considers insufficient:
A pension fund only notes in the mandate confirmation that the impacts were assessed in an ALM study.
Why? This only makes clear that the impacts were assessed, but does not involve the reader in what the impacts actually are.

9 Exploratory Review of the Mandate Confirmation 4 Elaborate on the justification of suitability and address pension fund considerations Within the framework of the mandate given by social partners, pension funds are responsible for further designing the pension scheme. The different possibilities are elaborated and analyzed, and subsequently a well-considered choice is made. The mapped impacts for individual participants play an important role here, as do considerations such as explainability and executability. Ultimately, the pension fund is independently responsible for justifying the degree of suitability of the pension scheme for the participants. It is therefore important to document the pension fund's own considerations regarding the choices made. How pension funds justify the degree of suitability is largely format-free. The mandate confirmation must, however, contain certain substantive elements. Pension funds must in any case explain why they made certain choices and how the consequences of those choices for different groups were weighed, and that information available to the pension fund about its participant population was used. The pension fund justifies why the impacts of the chosen option are suitable for the specific participant population (or at least more suitable than alternative choices). Think, for example of: were there alternatives to lifting the borrowing restriction, and how would they have played out? Or: how was explainability factored into the choice for a collective payout phase? It is important here that the pension fund provides an independent justification of its own choices, and thus does not refer to the transition plan prepared by social partners. In the study, the AFM observes various implementations. Some pension funds formulated their own objectives, principles, and/or conditions to which they tested the outcomes of the pension scheme implementation, optionally in addition to the social partners' objectives. Other pension funds jointly formulated starting principles with social partners at the start of the process to arrive at a new pension scheme. Both forms are possible, provided the pension fund provides its own reflection on to what extent it considers the (elements of the) pension scheme suitable, given the participant impacts.

Tip(s) based on good examples seen by the AFM in the study:

Provide insight into the characteristics of the participant population so that the judgment on the degree of suitability is easily traceable.
Use a fixed, structured framework that consistently reappears. This framework can be used for both justifying the suitability of individual elements and that of the pension scheme as a whole. Elements the AFM sees recurring in the exploratory study include executability, explainability, balance, and risks for specific participant groups.
Justify the degree of suitability based on own principles and/or objectives. Or clearly explain how the pension fund board, armed with the participant impacts of the choices made, reflects on starting principles or objectives jointly formulated with social partners. Refer to own documents in doing so.
Explicitly state how explainability was factored into justifying the degree of suitability. An example from the study: the pension fund explains that the use of dynamic

10 Exploratory Review of the Mandate Confirmation 5 Test whether the document is navigable for the reader Because the mandate confirmation aims to promote a jointly supported picture of the mandate between the pension fund and social partners, it is important that the mandate confirmation is understandable and has a clear structure. The AFM understands the challenge in balancing readability of the mandate confirmation itself against accounting for all nuances. In the study, the AFM observed that all pension funds have awareness of this. A mandate confirmation can never paint an all-encompassing picture, but must provide the reader with sufficient information and reference points to form a picture of the whole. Even if this reader did not attend the entire preliminary process. In the mandate confirmation, a lot of information comes together that has been discussed over a long period in a often intensive process with social partners, based on many documents and underlying analyses. This intensive involvement and collaboration sometimes leads to certain matters or details relevant to the mandate confirmation being assumed as known, or only included very implicitly. The AFM also regularly sees general/broad references to underlying documents containing relevant information. The consequence can be that not-directly involved or future board members and social partners may struggle to follow the mandate confirmation. Generally referring to a multi-page document turns the mandate confirmation into a complicated search for (future) readers. The AFM expects at least that the relevant information is clearly included in the mandate confirmation itself, or that concrete references (for example, with paragraph or page numbers) are made to underlying documents. The AFM observes in the mandate confirmations assessed in the exploratory study that references are not always clear or complete, or that explanations are missing for some components. Regardless of the choice for references or a standalone readable piece – both are possible – it is important that the mandate confirmation is structured so that the essence can be reached quickly, also for the less experienced reader. Im