The transition of pension funds to the Future of Pensions Act (Wet toekomst pensioenen, Wtp) is in full swing. The Netherlands Authority for the Financial Markets (AFM) is supervising this transition. How do they handle this? And what is the AFM’s view on the industry? We talk to Anne de Groot, head of Insurances & Pensions at AFM about the challenges, the expectations and the lessons learned so far.
The pension industry has many stakeholders. From social partners, administrators and politics to supervisors. What is their specific role, what is their view on the industry, how do they perceive and respond to the renewed system? The different parties tell their story in the series ‘Krachtenveld’ (balance of forces).
The transition to the new rules for pensions is pioneering for pension funds, administrators and supervisors. This is the first time for the AFM, for example, to look into the draft communication of the funds to participants beforehand. “We do so because this communication is a one-off exercise that has to be right the first time."
And, how satisfied are you with this matter?
“It could be better in some cases. The information provided to the participants has to be correct, clear, on time and well-balanced. Pension administrators must avoid creating unrealistic expectations with participants. And yes, the industry might feel the AFM is setting the bar too high. But I don’t believe that is the case. We want funds and their administrators to thoroughly think about what the participant really needs to know. What exactly will be changing for him or her? It is really not that strange that a participant for whom the expected pension payment increases by 200 percent is counting on an explanation. And that this explanation differs from an explanation to a participant whose payment is significantly decreasing.”
Isn’t it just too easy to think like that?
“I certainly don’t deny that this is a complicated process and requires a lot in terms of process design and administration for pension administrations. While there is already so much work to be done. But communication to participants is an essential and impactful process. Pension information often is the only tangible thing participants see when it comes to their pension. It is therefore important for everyone in the pension industry to start considering participant communications as an essential core process. Take enough time for the design and make sure to implement a careful process with checks and balances. Properly test in advance among groups of participants what is really needed. It involves personal communication, not a generic process.”
How realistic is that when you, like ABP, have three million participants?
“You are transitioning pension funds of participants and all of these participants have the right to be informed about the personal consequences of this transition. Especially because participants have no choice in the matter. Having said that, personal information is an enormous job and we were aware of that beforehand. However, it has to remain workable. The AFM is not blind to that fact. Design the process in a way that the information to participants is as personal as possible and that it is workable. So, make sure participants are not provided with text blocks and amounts that are not applicable to them. It is possible, for instance, to work with conditional text blocks. Should the participant be entitled to compensation, he or she will be presented with text block X. And utilize a layered structure. Don’t forget: Transition communication is free-format. You really have room to adapt the information to your participants.”
Personal information is an enormous job and we were aware of that beforehand. However, it has to remain workable. The AFM is not blind to that fact
How did the conversations on this topic go with the industry?
“There is always interaction, we don’t work from isolation. I can imagine that funds and administrators sometimes believe the AFM is setting the bar too high and that there is a sense of: There we go again. But at the same time, it is an important role we, as the supervisory body, fulfil during the transition. If we don’t say it, who will? We are and always continue to be in dialog with the industry.”
A lot of work is done with open standards. Don’t these open standards actually create uncertainty and noise?
“Open standards describe a goal you have to meet, not the road leading up to meeting that goal. It is the responsibility of the fund to determine that road. To illustrate this: the standard Guidance on Choice is an open standard. In a digital choice environment, we will not prescribe that the button for additional clarification has to be on the left or on the right-hand side. But the space is not unlimited. You have to clearly explain how you meet the standard. Explain how the participant communication aligns with the specific groups of participants. Explain why someone with a certain scenario amount is presented a certain explanation. We can also enforce open standards should it appear that the interpretation does not meet the goal of the legislation. How? That starts with a supervision letter and we can scale up to a fine. When working with open standards, we provide as much as possible clear guidance beforehand: guiding principles, messages in our transition bulletin to still present the tough subject matter in an accessible way. Moreover, we have had many conversations with the industry. This means the industry should know what we expect.”
Did you have to get used to the new standards and your modified way of working, where you look into the transition communication of funds beforehand?
“The Wtp has been in force for almost two years now and the road leading up to the implementation has of course seen a buildup for the AFM. From preparation and thinking along on how the legislation should look until the actual supervision. For instance, a number of new standards specifically relate to the transition to the renewed system, such as the communication plan. Some standards also apply afterwards but must be addressed for the first time during the transition, such as the risk preference survey and the complaint procedures. We thoroughly thought about the way for us to supervise this. That also required us, as a supervisory body, to rethink our approach.”
In what way?
“We always worked with a small group of people. In an industry managing 180 billion euro, only ten people were actively supervising the processes. That is very few. We have now grown to thirty people. It required us to carefully think about the way we were to design the supervisory activities. We hired many technically skilled people, such as actuaries and econometrists who have worked in the pension industry and who are familiar with the way administration systems work. That enables us to properly engage in conversations with the industry. We are meanwhile making full use of various data sources in our supervision: the annual supervision report, the Wtp monitoring questionnaire (with DNB), the Market Monitor consultants and intermediaries, and we pay attention to notifications and signals. These data help us better oversee the industry. It offers us the possibility to identify risks on time and to conduct our supervision in a better substantiated and effective manner.”
You combine supervision on the Wtp with supervision on the FTK (Financial Assessment Framework). How do you like that?
“In the old world we mainly looked at the Uniform Pension Statements (UPS), for instance. We had less contact with the pension industry. For the Wtp, we look at the transition communication beforehand and have a lot of contact with pension administrators in advance. In addition, the UPS in the DC world require more thought processes from the funds and their administrators. They also have to provide insight into the solidarity reserve, the costs, et cetera. That is all new to the industry and we make sure everything is shared transparently and correctly with the participants. But when you peel it off, the core of the substantive supervision has not changed. That supervision is based on: Do you treat the participant carefully? Is the communication clear, correct and on time? That was the case, is the case and continues to be the case.”
Four funds have transitioned so far. How do you see the upcoming period? There are still about 140 funds that need to transition.
“I am confident this will work out well. We can see that people learn from each other and that is really nice. We also learn from the conversations we have with the industry. We are becoming smarter, more efficient and better as well, and work more risk-based. Together with DNB, we periodically conduct a survey among all pension funds. That provides us with insights into the progress and the possible risks of the preparations the funds are making for the transition to the renewed pension system. We incorporate these insights in the prioritization of our supervision.”