Inform Timely About Pension Adjustments

2 Inform Timely About Pension Adjustments
Contents
Summary 3
1 Background and Purpose of the Report 5
Operation, Characteristics, and Risks of Variable Payouts 5 Legal Framework 6 2 Inform About What Changes 7 All Pension Providers Must State the Amount of the Old and New Pension Payouts 7 3 Inform at Least One Month in Advance 8 More Than Three-Quarters of Investigated Pension Providers Do Not Inform Timely 8 One Month is the Minimum Term: Choose an Earlier Valuation Date if Necessary 8 Consistency with the UPO for Pensioners 10 4 Inform About Why the Payout Changes 11 Provide Insight into the Cause of the Recalculation 11 Provide Insight into the Elements Affecting the Payout Trend 12 Make Consequences for Survivor's Pensions Clear 13 5 Make the Information Personal 15

3 Inform Timely About Pension Adjustments
Summary
Pensioners with a variable pension payout are informed annually by their pension provider about the adjustment of their payout amount. The Dutch Authority for the Financial Markets (AFM) conducted research in 2023 regarding this information provision. This report contains findings and recommendations from this research. In the first half of 2023, thirteen pension providers offered variable pension payouts for at least one year. They had informed their pensioners at least once about the adjustment thereof. The information regarding the adjustment of the variable payout amount is, at a minimum, a mandatory part of the annual Uniform Pension Overview (UPO). In practice, all pension providers also inform their pensioners about the annual adjustment via a separate letter (hereinafter: the recalculation letter).

Inform at Least One Month in Advance
The AFM expects that information regarding both increases and decreases in the payout is provided to pensioners in a timely manner. This means that pensioners are informed at least one month prior to the adjustment of the payout – but preferably even earlier. With every adjustment of the payout, but certainly with a decrease, a pensioner must be able to take timely action. Not all pensioners will be able to immediately absorb adjustments in their payout, and furthermore, adjustments in the payout may lead to changes in allowances.

Inform About What Changes and Why
Furthermore, the AFM investigated to what extent pensioners receive understandable information about the change in payout amount. It is relevant for pensioners to receive clear information about why their payout changes in this manner. If pension providers adjust the pension and pensioners do not understand why, this can have consequences for trust in the pension provider and the pension sector. Additionally, a good explanation can prevent participants from having questions or complaints about their pension payout. For this, providing correct and non-contradictory information is important. This applies both to consistency within a letter and between different information carriers, for example between the UPO and the supplementary recalculation letter. In the supplementary letter, the adjustment of the payout is often explained qualitatively. This contributes to a good understanding of the payout adjustment. However, the pension provider must ensure that both information documents are consistent with each other. This also applies to information on, for example, the participant portal or information that the pension provider provided in previous years' recalculation letters.

Progress Compared to Previous Research
The AFM previously conducted research in 2020 on the communication to pensioners regarding the annual adjustment of their variable pension payout. At that time, it appeared that pension providers informed pensioners too short (less than one month) before the change in their monthly payout about the new payout amount. The AFM also saw then that not all providers stated both the 'old' and 'new' monthly amount in euros, but for example only the change in the amount in percentages. In this way, communication was not in personal amounts. The AFM pointed the relevant pension providers to this via a letter. From the 2023 research, it follows that each of the pension providers met the legal requirement to communicate personally, in concrete amounts, about the payout for the past year and the payout for the coming year. However, the AFM noted that ten of the thirteen investigated pension providers did not inform pensioners at least one month before the adjustment of the pension payout.

4 Inform Timely About Pension Adjustments
Avoid Double Adjustments
The AFM also saw that three pension providers, in the first payout after informing about the adjustment, processed the recalculation of the month or two months prior with retroactive effect. This can result in pensioners facing a potentially much larger – and therefore impactful – adjustment of the payout in one go (in the first month). The AFM considers this an undesirable situation and urges pension providers to design their systems such that pensioners are not confronted with double adjustments.

Take Note of Recommendations and Good Practice Examples The AFM expects that all pension providers currently executing variable payouts take the requirements and recommendations from this report to heart and implement improvements in their communication where necessary. The AFM has also included several good practice examples in the report that it encountered during its research, which can serve as examples for other pension providers. For pension providers that will offer variable pension payouts in the new pension system, the AFM requests that they take note of the recommendations in this report and take them into account where possible during the design of their processes for participant communication. The AFM notes that the obligation to inform pensioners annually about the recalculation also applies to pension schemes in the new system, even if it concerns a minimal adjustment due to the use of a solidarity or risk-sharing reserve.

5 Inform Timely About Pension Adjustments
1 Background and Purpose of the Report
As current pension schemes are being converted into new pension contracts, the majority of pensioners will receive a variable pension payout after pension date. In the solidarity premium agreement, all pensioners receive a variable payout; in a flexible premium scheme, pensioners can choose between a fixed or a variable payout on pension date. This has advantages: pension providers can continue to invest the pension capital with a variable payout after retirement. This is expected to yield a higher pension than with a fixed pension payout. But it also carries risks for pensioners: the payout can go up, but also down. 1 Not every pensioner will be aware of these risks. Therefore, it is important that pension providers inform them timely and in an understandable manner about the adjustment of the pension payout amount. The AFM sees that the amount of the variable payout can change annually by +20% and -20%, partly depending on the different characteristics of the scheme and the design of the investment policy at the different pension providers. In the new pension scheme, the use of a solidarity or risk-sharing reserve can dampen shocks in the payout phase. The design of the payout, and any choices pensioners may have made therein, thus have potentially (very) large impact on the amount of the payout. Moreover, questions may arise among pensioners when they hear that other variable payouts had a (larger) increase. It is for these reasons among others that it is important for pension providers to reflect on the explainability of their variable payout. Thirteen pension providers currently offer pensioners the possibility of a variable pension payout. The AFM previously – in 2020/2021 – also conducted research on the communication to pensioners regarding the annual adjustment of their variable pension payout.2 From this research, it appeared among other things that the majority of pension providers informed pensioners too short (less than one month) before the change in their monthly payout. It was also not the case that both the 'old' and 'new' monthly amount in euros was stated in every instance. The AFM conducted research again in 2023 on the information that the thirteen pension providers provided to pensioners with a variable payout regarding the most recent (valuation date March 2023) adjustment. They do this via the annual UPO, and often additionally in a 'recalculation letter'. The AFM investigated in the provided information to what extent it was provided timely. The information must also help pensioners to actually understand the recalculation of their pension for their personal situation (language use and the cause of the recalculation) and to place it in the context of their total expenses and income (representation in euros and not in percentages). Furthermore, the pension information must tell the honest story and prompt action (perspective for action).

Operation, Characteristics, and Risks of the Variable Payout With a variable pension payout, a portion of the personal pension capital is periodically, but at least annually, withdrawn from the total to purchase the payout for that year. With the remaining portion of the capital, the pension provider continues to invest. The expectation is that this continued investment leads on average to a higher pension payout.
1 The ultimate chance of decreases depends on the chosen contract content, in particular the content of the solidarity reserve.
2 Variable pension payout does not sufficiently align with participant (afm.nl).

6 Inform Timely About Pension Adjustments
The risks of disappointing (investment) results within the variable payout lie with the pensioners. Thus, pension providers will generally adjust pension payouts downwards in the event of disappointing investment returns, a decrease in interest rates, or an increase in life expectancy. The adjustment of the pension payout is based on the interaction between different elements in the pension scheme, including the investment policy, the method of allocating returns, and the application of any spreading period and/or fixed decrease or increase. Under the new Pension Act (Pw), the use of a possible solidarity or risk-sharing reserve can also influence the adjustment of the pension payout.

Legal Framework
The AFM is the supervisor on information that pension providers provide to pensioners.
Pension providers are pension funds, pension insurers, and premium pension institutions.
Article 63a, fifth and seventh paragraphs, Pw requires that the financial result (result from investments, life expectancy, and mortality) is determined at least once per year and processed into the payouts.
3
Article 44, first paragraph, part a, Pw requires that the pension provider provides the pensioner with a statement of his pension rights annually. Article 7b of the Decision on the Implementation of the Pension Act (BuPw) specifies that the statement of pension rights with a variable payout concerns: the payout for the past year; and the payout for the coming year. The information from Article 44 Pw is shown on the UPO in accordance with Article 9a BuPw. The adjustment of the payout is thus at least a mandatory part of the annual UPO for pensioners.
All information that the pension provider provides or makes available to pensioners must, based on Article 48 Pw, be timely, correct, clear, and balanced. In practice, the information about the recalculation is also sent to pensioners via a separate recalculation letter, in addition to the UPO. This offers the possibility to explain the adjustment qualitatively and thereby inform the pensioner clearly and balanced. The pension provider must also promote that provided personal information aligns with the information needs and characteristics of the participant and prompts relevant action. This helps the pensioner with the question of what to do with the information and what is expected of him. The pension provider can align the information with this by offering the pensioner as much perspective for action as possible. This applies to all information that the pension provider provides or makes available, including the information provided in the context of the annual information provision to pensioners. The recommendations that the AFM has included in this report can be applied by pension providers both to the UPO and to the supplementary (qualitative) information about the adjustment of the payout. The UPO model for pensioners indeed leaves room to add texts about the characteristics of the scheme. 3 For mandatory occupational pension schemes, the same legal framework applies, but based on the Mandatory Occupational Pension Scheme Act.

7 Inform Timely About Pension Adjustments
2 Inform About What Changes
The information about the adjustment of the payout must meet the information provision requirements of Article 48 Pw, including the requirement of 'correctness'. When assessing whether information is correct, the AFM looks at various aspects. Thus, the information must at least be substantively correct. A pensioner cannot be expected to be able to detect and assess errors in the information. He will rely on the information as provided by the pension provider and derive expectations from it. Because the information about the recalculation can form a direct reason for making adjustments in the financial situation, the AFM finds it important that the information provision goes well in one go.

All Pension Providers Must State the Amount of the Old and New Pension Payout Pension providers must inform pensioners about the amount of the payout for the past year and the amount of the payout for the coming year.4 The AFM has established that all investigated pension providers meet this requirement. At the same time, the AFM makes a number of recommendations that can contribute to a better understanding of the difference in payout amount.

• The AFM sees at three of the investigated pension providers that communication is exclusively in annual amounts. Stating annual amounts can be useful for fiscal purposes. The AFM expects pension providers to also communicate about what the recalculation means for the net monthly payout. By making the effect of the change as concrete as possible, the pensioner better understands what the change means for monthly expenses and budgeting.
• At five of the thirteen investigated pension providers, the monthly amounts were calculated net. In eight cases, it concerned gross amounts. As mentioned above, we expect the letters to contain the net payout, so that pensioners know exactly where they stand and can prepare well for the new monthly amount.
• Explicitly state how many euros the pensioner gains or loses monthly. Present the old and new payout amounts also near each other. At three investigated pension providers, the amount of the payout for the coming year was presented on a different page than the payout for the past year. By presenting these amounts close together, it is easier for the pensioner to compare how much he gains or loses.
• When the pension payout consists of a fixed and a variable part, the AFM expects that when stating the old and new payout, you also explicitly state the amount of the variable part of the pension payout was and will be. The AFM expects that not only the fixed and variable payout parts are presented merged. In that case, it is not immediately clear how much the variable part changes.
  4 Article 48 Pw jo. 7b BuPw.

8 Inform Timely About Pension Adjustments
3 Inform at Least One Month in Advance
It is of essential importance for pensioners that they are informed in a timely manner about changes in their monthly payout. From the AFM's research, it follows that the annual adjustment of the variable payout can be impactful. At three providers, the payout went down in the last year; at ten, the payout went up. With every adjustment of the payout, but certainly with a (significant) decrease, it may be necessary or desirable for the pensioner to act on it in a timely manner.
The AFM already drew attention in a previous research on variable schemes from 2020/2021 (Research Report on Variable Schemes) to timely communication about the recalculation.

More Than Three-Quarters of Investigated Pension Providers Do Not Inform Timely From the current research, it follows that 77% of the investigated pension providers inform pensioners less than one month before receiving the new payout about the change in their payout. This gives pensioners hardly any possibility to prepare for it.

One Month is Minimum Term: Choose an Earlier Valuation Date if Necessary The AFM interprets 'timely' such that a pensioner is informed at least one month prior to the start of the new pension payout. If a pensioner is informed less than one month prior to the start of the new monthly amount, this is at least not timely based on Article 48, first paragraph, Pw.
The term of one month applies as a minimum term, both for a decrease and an increase in the payout. Because one month will not be sufficient for many pensioners to make adjustments to their spending pattern if necessary, the pension provider preferably informs the pensioners even earlier. This gives the pensioner time to, for example, list potential shortages in their future expenditure pattern, cancel subscriptions, or apply for allowances if they qualify for them due to a decrease. Incidentally, informing too late about an increase in the payout can also lead to problems for pensioners. The possibility exists that they (temporarily) lose their allowances due to the increase, such as housing allowance. The AFM emphasizes that there may be situations where a term of one month may not be in line with the requirement to inform pensioners 'timely', for example in case of a sharp decrease. The AFM strongly advises pension providers to assess depending on the context whether they must apply a longer term, so that pensioners have sufficient time to make the necessary adjustments in their spending pattern. In this context, the AFM points out that, for example, Article 134 Pw stipulates that a pensioner must be informed three months in advance of a reduction in a claim. Although this applies to a different situation than the adjustment of the variable payout, it may still be advisable to align with this term. The underlying reasoning of this term in case of a decrease

9 Inform Timely About Pension Adjustments in the payout is that pensioners are directly affected in their income by the discount and must be able to prepare for this.
The AFM has heard from a number of pension providers that it would technically not be possible to provide information about the change at least one month in advance. The valuation date of the investment portfolio for the calculation of the new payout lies at these parties often on the first of the month, while the payout often takes place around the 22nd to 24th of that same month. They state that they usually need one to two weeks after the valuation date to calculate and announce the new payout amount for every pensioner, whereby the pensioner only receives the required information seven to fourteen days in advance. The AFM follows the reasoning, but emphasizes that one month is the minimum term that pensioners need to still be able to take some action if necessary, both in terms of cost savings and allowances. Therefore, the AFM expects pension providers to choose a longer period between the valuation moment and the first moment of the new payout if necessary. The valuation date can, for example, be moved forward by one month. From the research, it appears that in practice it is possible to inform pensioners one month prior to the start of the pension payout: three of the thirteen investigated pension providers were able to inform their pensioners timely about the adjustment of the payout. The AFM also notes that three parties work with retroactive mutations. They inform their pensioners prior to the deposit of the new payout. However, in this first payout, a double adjustment of the payout (with retroactive effect) is processed. The payout is, for example, adjusted per January, but the first deposit of the new payout takes place in March. In the March payout, the adjustment of the months of January and February is also processed with retroactive effect. To meet the timeliness requirement in this situation, it is necessary that pensioners are informed one month prior to the start of the payout (in the example in January). Pension providers do not meet the timeliness requirement if they only inform their participants one month prior to the first deposit (in March). Pensioners are also, by this retroactive construction, confronted with a potentially (too) impactful change in the payout, especially in the case of a decrease in the payout. The AFM considers this an undesirable situation and urges pension providers to design their systems such that pensioners are not confronted with double shocks. Furthermore, the AFM sees in the research results that in three of the thirteen cases, a prior announcement was sent in advance. The AFM finds it positive that pension providers use a prior announcement well in advance of the change.