AFM makes the right connections
Next year, the Financial Markets Authority (AFM) will have the job of supervising the way that pension funds and insurers communicate their indexation policies to members and clients. Pension funds and insurers must supply their participants with accurate, comprehensible and complete information on their indexation promises in second pillar schemes.
Gerald Santing, managing director of AFM, says the supervision will be principles-based rather than rules-based. "Clarity and usefulness are the keywords. Instead of checking against rigid texts, we will base our supervision on principles. Efforts to get to the level of individualisation by the last millimetre will drive up costs without necessarily producing a better result."
The aim, he says, is to focus on funds with problems, rather than adopt a ‘scatter-gun' approach. "We won't be systematically knocking on everybody's door. Instead, our monitoring will follow the self-assessments results of the parties involved. Those who stay behind, and those who seem to be at risk, will get most of our attention."
The AFM's main challenge will be to help employees to appreciate the quality of their pension, Santing says. "A participant who is aware of the meaning of his pension can make a balanced choice, for example in case of a value transfer at the time of a job change. The same goes for a decision on the exchange of surviving relatives' pension for old-age pension."
The AFM will be using this year mainly for the preparation of its supervision, he says. A pivotal part of its task is the so-called indexation matrix for pension schemes and insurers, which has been developed by the financial watchdog and fellow regulator De Nederlandsche Bank (DNB). The matrix - part of the new financial assessment framework (nFTK) - has been designed to achieve a consistent combination of raised expectations, financing and feasibility of the conditioned indexation.
Pension schemes will use the matrix as a tool to establish not only the indexation target, but also the likelihood that this target will be realised. This likelihood will be indicated in several stages, to differentiate sufficiently. The information to participants must also be accompanied by an explanation of the indication of risk.
Pension schemes will have to communicate the indexation label - the standard of information on indexation - to their members. The AFM will check that this is being communicated accurately, comprehensibly and on time. Currently, the pensions sector, both regulators, the ministry of social affairs and the Labour Foundation, the Stichting van de Arbeid, is developing the indexation label, which takes effect on 1 January next year.
"We must develop the skills for an adequate view on this specific kind of communication, and how we can prevent things from going wrong," Santing says.
The AFM wants to set the criteria for its supervision, says Santing: "Together with the umbrellas of pension funds and insurers, and the regulator DNB, we will establish the best practice on the issue. Consecutively, we will send the pension schemes and insurers a self-assessment form, as a reference point, and to establish the standard.
"Our supervision will be based on risk assessment and signals. The more a scheme's self-assessment result deviates from the best practice, the more closely we will look at it. For a start, we will check if the schemes understand the rules properly. And for their part, pension funds will do themselves a favour by checking whether their participants fully understand their way of communicating.
"We assume that they have the best knowledge of the demands for information from their members and pensioners. So far, we have, however, noted that some pensions providers try to explain the pensions technique.
"From a point of clarity, it is important that the meaning of the pension and the yearly changes are properly explained," says Santing. "Many schemes just provide textual information, while a combination of text, figures and graphic information has proven to be the most effective".
The indexation label has not been finalised, so the pensions providers still have some leeway in their communication. This should not encourage pension schemes to delay implementation, says Santing.
"The AFM and DNB have considerably improved the comprehensiveness of the prescribed informative phrases of the indexation matrix. Providers will be allowed to present the information in another way, if it is understandable."
Santing says the AFM's supervision should encourage self-regulation. "Everything the sector can do by itself in improving the task, will drive down the costs of supervision."
He is confident that the introduction of the supervisory regime will be a smooth operation. "The sector is usually willing to comply. Merely raising the subject will probably be sufficient to get things on track," he says.
"Worldwide, the sector has a good reputation for reliability. But solidarity, as an important pillar of the Dutch pensions system, cannot work without transparency."
Santing does not share the pensions sector's scepticism about having two watchdogs on pensions or any worries about any overlap in supervision. He says he is convinced that the covenant with fellow watchdog DNB is watertight. "We will stick to DNB's prudential judgement on schemes, including their indexation, and DNB will follow our view on communication.
"We have had a covenant with the DNB on the monitoring of the financial sector for the past six years. Our special desk on double supervision hasn't received a single complaint so far," he adds.
There are several ways that the AFM can ensure it does not encroach upon the DNB's area of supervision, he says. "We will check our agenda with the DNB, for example on the self-assessment. Moreover, we will evaluate with the sector, not only on our finances, but also on the efficiency of our supervision. And at the end of the day, parliament will evaluate the effectiveness of two regulators within two years."
Santing believes that a separate watchdog on the communication is crucial. "The dynamics of supervision on conduct are principally different from prudent supervision. The first looks mainly at the external behaviour, while the latter focuses on internal aspects, for example solvency and liquidity."
The AFM has already built up considerable experience in monitoring investment schemes.
As of October 2006, financial products sold by banks and insurers must be accompanied by the so-called Financiele Bijsluiter, a leaflet that contains a ‘risk meter' on the risk-return aspects of the product. "By checking large volumes, we have become very efficient at supervising behaviour," says Santing. "This will keep the costs down, as an additional benefit."
Santing acknowledges that the AFM is on a learning curve. "We must get used to dealing with the specific aspects of the sector on pension products," he says. "We will hire additional specialists to get there. They will help us to become even more cost-efficient over time."