More than half of Dutch pension funds do not report correctly on their cost figures in their annual reports, financial markets regulator AFM has found.
Because pension funds also provide little detail about their costs, it is also hard to understand why the cost levels of pension funds vary so widely, according to AFM.
The regulator based its conclusions on an investigation of the 2019 annual reports of 166 pension funds. It found reporting mistakes with 90 of these funds.
Dutch pension funds are required by law to report separately on three cost components: administrative costs, investment management costs and transaction costs.
They should publish both the costs in euros of all these three components, but also as a percentage of assets under management (investment management and transaction costs) or per member (administrative costs).
According to AFM, “20% of funds do not report all the mandatory cost metrics, which makes them in violation of the law”. In most cases (29) the missing data involves transaction costs, although there were also six funds that failed to report all the required data on investment management costs and four funds that did not provide all mandatory information on administrative costs.
However, another 34% of pension funds do report the required data but do not publish the right information.
“For example, costs per member are not being shown in the right way,” noted AFM. “This is for example the case if administrative costs are divided by the total number of members, including former members.”
This means that in total 54% of pension funds provide incorrect or incomplete cost figures. AFM director Jos Heuvelman said he is “worried” by these findings, because incorrect reporting prevented members from comparing costs between pension funds and forming a judgement about whether the costs level is fair.
Responding to AFM’s research findings, José Meijer, interim-president of Pensioenfederatie, the Dutch association for pension funds, noted the Netherlands’ first spot in the Global Pension Transparency Benchmark, a new disclosure transparency ranking.
“We can be proud of that. Nevertheless, cost reporting in the pension sector can still be improved,” she said.
0.6% of AUM on average
An average Dutch pension fund spends 0.6% of its assets under management on administrative costs, asset management and transaction costs, the AFM has found. The total cost bill for Dutch pension funds adds up to €9bn a year, according to the regulator.
While total administrative costs come down once pension funds grow bigger as these are calculated on a per-member basis, AFM did not find a relationship between the size of a pension fund and their investment management costs.
Investment management costs varied between 0.10% and 0.80% of assets under management. There are both small pension funds with very low costs as well as very large funds with higher-than-average costs.
“Since costs vary so widely between pension funds, it’s important for funds to be transparent about their costs. After all, there can be good reasons for higher than average costs, such as a higher service level,” said AFM’s Heuvelman.
However, less than a quarter of pension funds in practice relate costs to the service level they provide or to the complexity of their pension arrangements. And less than a third of them makes clear how investment management costs relate to risks and returns.
“Such information can help a pension fund’s stakeholders to form an opinion about the cost level and to ask the right questions,” added Heuvelman.