AFM: Three quarters of pension advice to small and medium-sized enterprises (SMEs) is insufficient

The quality of pension advice to small and medium-sized enterprises is substandard in over three quarters of the cases investigated. This is concluded by the Netherlands Authority for the Financial Markets (AFM) in its report entitled 'Quality Advice Second Pillar Pension'. Pension advisors obtain too little information, the advice is not in line with the information that was obtained and the advice is not laid down properly. In a number of individual investigations into the provision of advice the findings were so poor that the AFM may impose formal measures, such as fines.

Very poor to mediocre advice
Of the financial service providers investigated, 31% achieved a very poor score, 44% a poor score, 19% a mediocre score and only 6% scored reasonably as regards the pension advice they provide to employers. The main causes are:

  • Pension advisors fail to obtain sufficient information about the financial position, willingness to take risks, objectives, and knowledge and experience of the employer.
  • The advice issued to the employer is insufficiently in line with the information that was obtained.
  • The information obtained concerning the employer and the information on the pension insurance taken out is not structurally laid down, so that it cannot be demonstrated that the pension advice issued is suitable to the employer's situation.
  • Bad advice may mean that SME employees wind up with pension schemes that do not comply with the expectations raised.

AFM measures
Increasing the requirements as regards the knowledge of pensions
The AFM has established that a large group of pension advisors does not gain sufficient practical pension knowledge and skills because, in many cases, pension advice is only issued a few times a year. The AFM considers this undesirable. The products are so complex that a financial service provider can only attain the necessary skills if he regularly occupies himself with this subject matter. Moreover, only limited requirements as regards expertise apply to the provision of advice on these complex pension products. The AFM is of the opinion that the requirements for the provision of pension advice should be increased. This should preferably be achieved by including a separate Pensions product-service combination in the Financial Supervision Act (Wft) with appropriate expertise requirements linked to it. The AFM is conducting consultations with the Ministry of Finance for this purpose.

The report entitled 'Quality Advice Second Pillar Pension' is the result of a follow-up investigation of the random sample, which was published by the AFM in July of 2009. Based of the outcome of this random sample, the AFM published the 'Guideline Second Pillar Pension Advice' in the second half of 2009, containing guidelines for sound advice. The AFM urgently recommends financial service providers to use the guideline to improve the quality of their pension advice, and possibly to implement adjustments that are required on the basis of the law.

Pension insurers
The AFM urges pension insurers to critically test their pension products as regards the extent to which the interests of the client are central. In doing so, providers also have to ask themselves whether advisors are able, or have been enabled, to provide sound advice on the product. Trade associations can also contribute to an increase in the quality of pension advice by supporting their members.

Role of the employer and the employee
The AFM emphasises that employers must also take greater responsibility themselves in the advice process, and must inform their employees thereof. A pension scheme is an employment condition that is agreed between the employer and the employee. The employer is assisted by a (pensions) consultant. In order to arrive at a good scheme, both the employers and the employees are therefore dependent on good advice being provided to the employer.
Employees have to properly read their Uniform Pension Overview (UPO), which they receive annually, in order determine whether their pension complies with their expectations. This will allow them to take additional measures if necessary.

The AFM has investigated the quality of pension advice provided by 16 pension advisors, on the basis of 42 advice files. An average of 34 employees per advice file take part in the formulation of the pension product The investigation focused on the advice on directly insured pension schemes that are concluded with insurers through the intermediary services of advisors. This advice falls under the rules on advice contained in the Financial Supervision Act (Wft). No investigation was performed into the pension funds, because they do not have these products.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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