A lack of risk information leads to overestimates of pension outcome01-06-2012
Information about the income to be achieved after retirement may be too optimistic for certain groups, especially as the participant is further away from retirement. The risk of a disappointing pension income has various causes. For example, the quality of the pension scheme has considerable influence on the amount of pension payments. A maximum scheme can quickly result in 30% more than a modest scheme, irrespective of interest rates, share prices and life expectations. This was concluded after an investigation performed by the Netherlands Authority for the Financial Markets on the basis of data provided by Statistics Netherlands and DNB.
Other causes, such as lagging indexation, divorce or relatively high costs can lead to a considerable reduction of income upon retirement. Participants should not only have better insight, but they should also be actively encouraged to take measures, as is evident from behavioural-economic investigation.
The AFM investigated the actual accrual of and information on pensions on the basis of Statistics Netherlands and DNB data. When doing so, it asked the question to what extent a participant can obtain a realistic image, on the basis of the current amounts in the Uniform Pension Overview (UPO) and mijnpensioenoverzicht.nl, of the development of his future pension payments.
Current information on income after retirement does not fully represent the risk of an unexpected reduction in income after retirement. The closer to retirement age, the less uncertain the information becomes. Participants, and in particular young persons, should therefore be provided with better insight into that uncertainty and future income after retirement. For example, mijnpensioenoverzicht.nl, the only overall summary of income after retirement, should be able to encourage all participants to take action for their old-age income.
Provide more than 1 scenario
The UPO and mijnpensioenoverzicht.nl are and remain useful, because the mandatory pension information provides an indication of the income after retirement. That information becomes more certain as the participant comes closer to his retirement. It becomes clear at the same time that the current pension schemes contain various uncertainties and risks that are not or hardly visible on the UPO and in mijnpensioenoverzicht.nl. The consequences of these pension risks for the income are not clear enough for participants.
Pension administrators calculate the pension to be achieved by assuming continued accrual. Interim salary and indexation developments can turn out quite differently, however. For example, no account is taken of no or a limited increase of pensions due to inflation, or the possibility of a reduction of the pension. The AFM considers it undesirable for employees that pension administrators provide them with information based on merely 1 scenario that is based on unchanged accrual in an unchanged pension scheme.
The quality of the scheme has a significant influence
The quality of the pension in particular has a significant influence on the ultimate pension benefits to be received by a participant. In the event of a calculated maximum scheme, a participant will receive almost a third more in pension than in a modest scheme with a high franchise and a low rate of accrual. This is effect is not related to interest rate differences, investment results and life expectancy.
The analysis also shows the lagging indexation of recent years to be a pension risk. The current pension information does not take account of limited indexation. By way of illustration: employees up to the age of 40 with an average income are presented on the UPO with an average pension of €26,000, while said pension will only be worth €19,000 on average upon retirement in the event indexation is reduced by 1%.
Divorce, an old-age pension gap, major salary increases at the start of a career or other pension risks could lead to a major loss of income upon retirement.
The AFM has already pointed out the impact of the scale of pension funds on the costs of pension funds. The costs are also of influence on the ultimate amount in pension.
The AFM promotes fairness and transparency within financial markets. We are the independent supervisory authority for the savings, lending, investment and insurance markets. The AFM promotes the conscientious provision of financial services to consumers and supervises the honest and efficient operation of the capital markets. Our aim is to improve consumers’ and the business sector’s confidence in the financial markets, both in the Netherlands and abroad. In performing this task the AFM contributes to the prosperity and economic reputation of the Netherlands.