From Our Perspective: How transparent?
Gerard van Olphen, CEO of APG, contends that the Dutch pension sector is in denial about the need for transparency. The same accusation could be levelled against pension funds in other places.
Certainly, there has been considerable progress in areas like member communication but many pension providers could still do better in conveying fundamental information about what they do and the way they operate, going beyond getting across the basics about investment returns and benefit levels. For instance, what are the institution’s beliefs? How are strategic decisions arrived at? How does it attract and retain its people?
Despite advances in member communication, many defined benefit pension institutions have not seen any great need for more transparency about their activities. Since DB pensions were more or less guaranteed in the past, there was little need to communicate the pension fund’s investment or risk management strategy. But that changes when the payment is not certain. In the Netherlands, the downgrading of benefits through reductions in future accrual or indexation has led to widespread dissatisfaction with pension funds – and a commensurate need for better information.
In the world of closed DB funds in the UK, where there are no longer any employer contributions and where shareholders are on the hook for large contributions, the need for transparency towards members seems lower. Yet DB pension entitlements collectively represent a huge stock of savings for UK employees to which they have often contributed for many years. Their savings are still at risk in the event of sponsor insolvency.
It might also be said that commercial considerations preclude giving away too much information about investment and risk management strategy. Given the number of special interest groups such as NGOs wishing to lobby individual pension funds about elements of their strategy, there may be strong reasons to keep a low profile. But intransparency does not in itself preclude downside reputational risks.
The general lack of interest in pensions among most of the working population should not affect transparency. In the UK, for instance, over 98% of the members of the auto-enrolment provider NEST use the default fund. Yet NEST has set a high benchmark in terms of openness and transparency and has also started a process of communication and debate about structuring the income phase.
Traditionally, the pension sector has communicated with its participants akin to the way the medical profession has communicated with patients: selectively, on a ‘need to know’ basis, and from on high. In the UK, for example, patients have only had access to their medical records for a relatively short time.
Yet in medicine there have been enormous strides in recent years in advancing public education and in rolling out screening programmes. Is it time for the pension sector to accept that it has a similar duty of care?
Given the dynamics in politics worldwide, there are strong reasons for a different way of operating. Populist politicians on right and left are fuelling an iconoclastic disregard for institutions, and the financial sector is an easy target for those on either side of the political spectrum. It is easy to lump pension funds together with banks and other institutions, which is partly why some pension funds have sought to highlight their credentials as long-term investors.
But pension funds should not just adopt greater transparency for reasons of reputational risk. Greater transparency should be fundamental to what they do and there is work to be done to improve it.