AFM raises expectations for communication about compensation

At many pension funds, a compensation scheme applies when switching to the new pension system. This compensation arrangement differs per fund. The legislator not only expects pension funds to set up these schemes properly, but above all to actively and clearly inform participants about them, both before and after the transition. In a recent report, the AFM shared its observations following an exploratory review of five pension funds. In it, the supervisor mainly emphasized where communication can be improved.

Ensure clear conditions for compensation

The participant’s current personal situation at the moment of transition is often decisive for compensation. The AFM considers it important to record in detail when participants are entitled to compensation and when they are not. The supervisor also expects these agreements to be made available on the pension fund’s website. Therefore, it is important that pension funds refer in their communication to the background information on compensation. In our advisory practice, we also see that the AFM includes this aspect in its information requests regarding the projected transition statements that pension funds receive a few months prior to the intended entry date.

Communicate promptly about a lower funding ratio

Because most compensation provided by pension funds comes from the fund’s assets, the development of the funding ratio is an important factor in determining the level of compensation. For this reason, the AFM expects participants to be informed in a timely manner about the consequences of a lower funding ratio at the moment of transition for their compensation. The AFM also expects clarity on the financing method.

We recommend including in the projected transition statement not only the current funding ratio on the reference date, but also the minimum ratio required to make compensation possible. Participants can then follow, based on the fund’s published funding ratios, to what extent compensation is feasible.

Make risks transparent

The AFM has repeatedly stated that it expects participants to be informed at important decision points about the implications for compensation. For example, the timing of retirement or termination of employment may be relevant to entitlement to compensation. A difference of just one month can be decisive.

We advise pension funds to reassess their key process communication around (life) events. Participants should be informed in the run-up to the transition about the implications for compensation. The AFM has previously highlighted this more generally as a point of attention, but now explicitly links it to the statutory standard of choice guidance.

Interpretation of open standards

In the report, the AFM explains how it interprets the open standard in the law with regard to compensation. By doing so, it clarifies which legal provisions underlie the stated expectations and implicitly indicates that these are statutory obligations. For example, the AFM expects that in the case of multi-year compensation, participants who leave employment are informed about the compensation period and the termination of their entitlement. According to the AFM, the transition moment is a significant event, but so is termination of employment, which should make the impact on compensation transparent. Compensation is thus explicitly linked to the statutory standard for choice guidance.

Prevent disappointment

Whether one agrees with this interpretation or not, it is clear that compensation can significantly impact a participant’s pension situation. If, due to an uninformed choice, a participant misses out on a substantial compensation amount, this may lead to disappointment. As a pension fund that prioritizes the participant’s interests, this is precisely what you would want to prevent.

Questions

Do you have questions about the requirements regarding transition communication or choice guidance, or could you use support with the AFM’s information requests? We are here to help. Projective Group combines extensive experience in the pension sector with expertise in transition communication and AFM supervision.