What are the benefits?
The European Commission’s draft of the revised IORP II Directive was published at the end of March. Changes to the original proposals are intended to improve governance and transparency in occupational pension schemes, encourage cross-border activity and promote long-term investment.
However, proposals for communication with scheme members have caused consternation within the pensions industry.
The proposed rules would require a standardised pension benefits statement (PBS) to be sent to each member at least annually. The prescribed content is highly detailed, covering six pages of A4, while the benefits statements themselves are to be contained within two A4 pages.
The PBS should contain information on guarantees, current balances, contributions, costs, pension projections, investments and past performance. Certain supplementary details, such as where to obtain additional information, are also required.
Within the pensions industry, there is broad agreement that good quality member communications are a must.
“Overall, we believe that the common denominator for the PBS should be about empowering the scheme members so that they’re in a position to make prudent and timely decisions about their pension,” says Henrik Munck, senior consultant at the Danish Insurance Association (DIA). “And we strongly support the idea that all scheme members receive a PBS at regular intervals – at least annually.”
Gert Kloosterboer, spokesman, Dutch Pensions Federation also gives the proposals a guarded welcome. “In general, we think that the new text is a real step forward compared with the original proposal,” he says. “We agree with the EC that good governance and adequate information for participants are very important.”
But the best way to achieve all these goals is a thorny issue, one where the industry is largely at odds with the Commission.
“We do agree that pension schemes should provide good quality communications to members,” says James Walsh, policy lead for EU and international at the UK’s National Association of Pension Funds (NAPF). “However, we don’t think it will improve communication,” Walsh says. “The template for the benefits statement is highly standardised, down to the font sizes. But good communication is highly variable – it depends on the nature of the scheme and who the members are.”
And he points out that the relevance of information depends on the type of scheme. “For instance, members of a defined benefit (DB) scheme are not interested in their employer’s contributions, but in the level of benefits they will get. But with a defined contribution (DC) scheme, members want to know what their pot is worth,” he says.
Klaus Stiefermann, secretary general of aba, the German pension fund association, says: “The proposed PBS was designed with a pure DC scheme in mind, even though DC and DB schemes bring different benefits, choices and risks for their members. In addition, it would apply both to individual and collective schemes, ignoring that in the latter, decisions are taken with the involvement of member representatives and there is little to no choice at the individual level.”
In Germany, many schemes offer both invalidity and survivors’ pensions. “Members need to know what is relevant for them – not what is relevant to a DC scheme they don’t belong to,” says Stiefermann.
At a glance
• The new IORP II proposals contain rules for better communication between pension funds and members, including a detailed pension benefits statement.
• European pension funds contend that the one-size-fits-all template is impractical, as there are big differences between scheme types, and also national legislation.
• The pensions industry says the proposals could work if principle-based rules were enacted at EU level, with flexibility for national governments to tailor the quantity and type of information to their own pensions system characteristics.
Another basic problem with a uniform template is that requirements are usually different in different countries.
“One standard for benefit statements across Europe is not necessarily the best solution, as it might end up containing all the relevant information across all types of pension schemes, instead of focusing on the information relevant to the particular scheme in question,” says Munck. “The aim should be to empower the beneficiaries, not to give them information overload.”
Jerry Moriarty, chief executive officer at the Irish Association of Pension Funds, says: “The danger is that the directive will just require different, and not better, information to be given to members. This will come at a cost, as systems to produce the information and the processes around them will need to be changed.”
The model statement is also intended to allow more comparability between schemes, but Walsh says this misunderstands the nature of the pension plan concept. “Members are not going to compare one scheme with another – it’s the employer who chooses,” he says.
Associations at the fore
In fact, pension associations in a number of European countries have worked hard over the years to improve pension fund communications with members, adapting them to local needs.
For instance, the NAPF has established the pension quality mark (PQM) for occupational pension schemes attaining specified standards across a range of areas, including communications. It has also published a PQM guide to good communications which can be accessed at www.pensionqualitymark.org.uk.
Meanwhile, DIA members adhere to a self-regulated code that aims to provide an easy overview without information overload. Six key pieces of information – identified by asking scheme members – are presented at the first layer of the pension statement.
These are the benefit entitlement, contribution, cost, the risk premium of insurance coverage associated with the pension scheme, the return and the accumulated size of savings.
In Finland, all official information, regardless of format, is drafted as clearly and understandably as possible. “The most important thing is to know and understand the level of pension security and annual accrual rate,” says Ilkka Geitlin, legal counsel, Finnish Pension Alliance (TELA). “The contact point for further information regarding pension security is also extremely important.”
What do members need to know?
There is a consensus that the benefits statement should be as compact and short as possible, and also clear and categorical.
Kloosterboer says that the information should be sufficiently comprehensible to allow individuals to understand the following questions:
• What does the pension scheme offer?
• What does the pension scheme not offer?
• Which choices does the participant have?
• Which risks does the pension scheme run?
• When does the participant need to take action?
The Netherlands is reversing its previous position of providing complex and copious information to every participant. Now the preference is for a layered approach to cater for participants’ different needs.
Those who only need basic information can find it in the first layer, while in the second and third layers there is increasing depth of information.
“Members need to know what has been paid into their fund, what it is now worth, and what that means – for example, in pension terms,” comments Moriarty. “They also need to know what decisions they can make to change their arrangements, say, by increasing contributions, and where they can get more information.”
There are fairly detailed disclosure requirements within the Irish legislation.
But Moriarty says: “It is clear that disclosure and communication are very different things, and there should be a lot more focus on communication.”
Last year, EIOPA published a document entitled ‘Good Practices on Information Provision for DC Schemes’.
“If the Commission had followed the recommendations in this report, it would have been much more effective than the proposals in the directive,” says Moriarty. “It was a really clear document which set out good information practices for DC schemes. It said policymakers should only start drafting information requirements if they have thought through the behavioural purposes: what should people be able to ‘do’ with the information? Information which directly serves certain actions and decisions in the financial planning process is more effective.”
Angel Martinez-Aldama, director general, Spanish Association of Investment and Pension Funds (INVERCO), says that for individual pension schemes, the key information document could be used as a benchmark.
“However, we must take into account the recent agreement at European level about packaged retail investment products (PRIPS) regulation, which excludes pension schemes,” he says.
So how can the benefits statement laid out in the IORP be put into practice?
Martinez-Aldama recommends an approach based on different layers of information requirements.
“The first layer would focus on guidelines and principles, rather than on details,” he says. “Then each member state should be able to decide on national requirements, based on both national legislation and the type of the pension promise. This approach would keep the essence of the PBS, enabling flexibility for member states in order to avoid costly overlap with requirements already existing at national level.”
“More detail should have been set to examine whether some member states, such as Sweden and Finland already have the necessary statement practices in place, and make the PBS a model to emulate, where necessary,” says Geitlin.
Stiefermann, however, warns that the information requirements in the IORP II proposal are deemed necessary because of the move towards DC schemes across the EU. “While transparency is important, a model where all risks and investment decisions are left to the members is not satisfying from a social policy perspective,” he says. “To provide safe, sustainable and adequate income in old age, occupational pensions need to provide a minimum of security and in Germany, the employer, at the very least, has to protect the nominal value of contributions at the point of retirement.”
However, Kloosterboer acknowledges the EC’s willingness to take more time to execute the necessary quantitative impact studies: “The impact on the Dutch pensions sector could be very significant,” he concludes.