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Indexation label 'not strong enough' - Aon

NETHERLANDS - The new indexation label for pension funds' participants should not only indicate the expected quality of the future indexation, but also provide clarity on the entire pension arrangements, consulting firm Aon has argued.

Rajish Sagoenie, executive director of Aon Actuarial Services in the Netherlands, has claimed the present concept will create confusion because it doesn't take into account the nominal claims of promised benefits.

"Even if the quality of the promised indexation is good, if the underlying scheme is poor, the outcome will still be disappointing," he explained.

"Therefore, the indexation label should be aimed more at making clear which amount workers will receive when they retire. All relevant surveys show people are mostly interested in concrete net amounts," Sagoenie added.

The actuary acknowledges adding the suggested information would require more work to produce the label, and will increase the challenge of providing clarity too.

"I am not claiming to offer the perfect solution. But the proposed (simple) codes in the present concept might work for fridges and cars, though not for a complicated financial product as a pension," Sagoenie continued.

In the opinion of the Aon director, the proposed indexation label has more disadvantages. "It will make employers more cautious on their promises," he pointed out.

"In addition, following the accounting rules of IFRS, it will make companies keen to remove the pension liabilities from their balance, accelerating the trend from defined benefit schemes to defined contribution arrangements."

Leny van der Heiden, acting director the Association of Industry-wide Pension Funds (VB) strongly disagrees with Sagoenie. "The indexation label is not meant to provide a link with the quality of the scheme, but to offer clarity on the quality of indexation," she stressed.

"Moreover, Sagoenie's comments are very premature. The pension regulators DNB and AFM, as well as the three pension funds' umbrellas and the social partners are still engaged in discussions about the exact set-up of the indexation label," Van der Heiden added.

Jan van Miltenburg, manager supervision pension providers at AFM which is commissioned to check communication, also underlines that the indexation label is purely aimed at future indexation.

"We support information that provides an insight in the quality of an entire scheme as a next step. But this information should be shown in a different label," Van Miltenburg said.

The indexation label is part of the requirements on communication of the new Pension Acts. It will be mandatory as of 1 January 2009. However, pension schemes can use the label as of 1 July 2008.

Meanwhile, the €221bn civil service scheme ABP has granted its participants a 4% indexation next year. This includes a full indexation of 2.05%, plus an extra indexation of 1.96% to make up for a shortfall in the past years.

Moreover, ABP - with a coverage ratio of 148.3% now - will pay its 700,000 pensioners a €300 bonus in March. The scheme has decided to increase its participants' contribution by 0.4% to 19.6%.

Dick Sluimers, chief executive of ABP, told IPE this is not the first bonus the pension fund has paid, as it gave members a bonus of €100 at the introduction of the euro.

"With the post-indexation ('na-indexatie'), we will bring everyone to the same level as they would have been if we would not have shortened[ implementation between 2003 and 2006]."

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

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