23.5.2023

Occupational Pensions: Information Requirements of Product Providers

This article is an enlarged version of a presentation given at the EIOPA Workshop on IORPs II Review Consultation on 11 May 2023.

I. Introduction

Following to the Call for Advice by the Commission and EIOPA’s Consultation Paper  there are three main issues to be taken into consideration in this section:

  • The evaluation of the functioning of the annual Pension Benefit Statement for members and beneficiaries;

  • The adequacy of the pre-enrolment information documents to prospective members;

  • Additional information provision requirements related to transparency of costs and benefit projections as well as explicit conduct of business requirements mainly related to the shift from DB to DC pension schemes.

II. Pension Benefit Statement (PBS):

Unfortunately there are no additional empirical data available on good or less good functioning of the PBS in the EU member states than those which are outlined in the Consultation Paper itself. In consequence EIOPA's conclusion may be justified that - due to the lack of complaints - the supervisory experiences were – I quote - "slightly positive" with regard to the use of the PBS.

Nevertheless it is obvious that - because the two PBS models published by EIOPA in 2019 are only voluntary - a variety of formats and designs of PBS published by IORPs surely coexist. This status quo is probably creating confusion for members and beneficiaries taking into consideration that most of them will accumulate pensions with several IORPs during their working career due to changes of employers.

Therefore the comparability, comprehensiveness and transparency of information put together in the PBS should be strengthened as much as possible. Until now most EU citizens will receive occupational pensions from IORPs only in one member state, in consequence the standardisation at the national level is more crucial than at the EU level. Therefore we agree upon EIOPA's proposal that "Member States shall specify the format and structure of the pension benefit statement to ensure comparability across different IORPs…".

In another section of the Consultation Paper the importance of the crucial shift from DB to DC pension schemes in the EU member states is outlined. Given this fact we additionally support EIOPA’s proposal to include “information on the return on investments at least over the past 12 months where members bear investment risk” (in article 39 (1) of the current directive), as it is already elucidated in EIOPA’s PBS models of 2019. The concept of information layering should be used with regard to the information on the possible selection “between investment options, including the number of options selected,… and an indication of the risk level in summary form.” In the PBS there should be included an exact hint where this information on investment options can be found straightforward.

This approach of information layering should be used in the same way for the information on sustainable investments. As outlined in EIOPA’s advice, the PBS should include “a very short summary” on the extent to which the IORP either makes sustainable investments, or at least promotes sustainable investment objectives. Again, in the PBS there should be included an exact hint, where any additional information beyond this short summary can easily be found on the ESG investment strategy of the IORP, for example related to nuclear and gas disclosures.

III. Transparency on costs and charges

The issue of enhanced transparency on costs and charges is related as well to the PBS as to the pre-enrolment General Information to prospective members, particularly of DC pension schemes.

EIOPA’s advice proposes to disclose "all costs incurred, directly and indirectly, by members and beneficiaries over the previous 12 months, indicating at least the costs of administration and the investment costs incurred in connection with the management of assets and portfolio transactions. These costs shall be shown at least in monetary terms". And there should be added "an estimation of the impact of the costs incurred by members and beneficiaries on the final benefits".

If we take a look at EIOPA’s PBS models published in 2019, we discover that in model 1 “administrative costs” and “investment and transaction fees” shall be disclosed, and in model 2 at least costs “withheld from contributions” as well as “withheld from assets in your pension account” shall be shown. So, these new requirements are not very new ones, in fact they just substantiate the already existing provisions.

They are fully based on the Decision of February 2023 and on the previous Opinion of October 2021 of the Board of Supervisors on the reporting of costs and charges of IORPs, in which the "classification and definitions of IORP costs and charges" are clearly outlined.

As far as we can see, issues which are crucial from the perspective of IORPs are included herein, such as smooth and long-term implementation and the alignment of reporting requirements between NCAs and EIOPA. As the majority of NCAs have not developed additional rules, from the perspective of the supervisors there seems to be a need to specify further these cost disclosure provisions in the Directive.

In addition, as stated by EIOPA, the experience of NCAs shows that - requiring cost transparency as well for reporting and as for disclosure based on a look-through approach - has a positive impact on the cost levels of IORPs, as it drives costs down.

From the benificiaries perspective, understandability and comparability of various pension products (occupational and private) through cost transparency are of utmost importance. Therefore the alignment with other financial EU regulations (mainly IDD, PEPP and MIFID II) should be realized as much as possible.

Again, in order to avoid information overload especially in the PBS, the concept of information layering should be applied - particularly in relation to additional cost figures of multi-optional investments.

IV. Projections of potential retirement benefits

The issue, how to further develop the requirements on the approach of future benefit projections, concerns of course as well the pre-enrolment General Information as the annual PBS. In the Consultation Paper EIOPA clearly outlines proposals, how the existing provisions can be made more substantial:

  •          By the inclusion of at least three scenarios (a more favourable, a best estimate and less favourable scenario);

  •          By showing the estimated retirement benefits in real returns;

  •          By an indication that variable retirement benefits may be chosen, where applicable;

  •          By consistency as much as possible in the approach for modelling used for risk management and information purposes.

Again if we take a look at the two PBS models already published by EIOPA, we can exactly find these figures either in the section “What could you receive when you retire?” (model 1) or in the section “How much money could you get when you retire?” (model 2).

Therefore we consider these proposals as the minimum requirements on the approach to projections in the information documents (option 1), but we recommend at the same time to use the concept of information layering in order to voluntarily implement option 2 by an IORP (on the website of the IORP in case that different investment options are offered). As EIOPA has emphasized, the two options are "not mutually exclusive".

Of course, there should be as much consistency as possible between the approaches used for risk management and information purposes, but flexibility should not be excluded for IORPs. This is all the more important in times of strongly changing fundamental macroeconomic conditions (from low-interest rate phase to suddenly strongly higher inflation scenarios). Whatever approach might be chosen, most important are clear and reliable indicators for prospective and current members, which approach is chosen and which are the underlying assumptions.

But we all know that projections are only related to probabilities, and therefore especially prospective members need unequivocal information in order to be enabled to make a “well-informed decision”. That is why information on past performance is needed, and we propose that the period to be considered should not be limited to five years but extended to ten years (cf. article 37 (1) (g) of the current directive).

V. Other Business Conduct Requirements

The Call for Advice by the Commission is very clear on this issue. The ongoing shift from DB to DC schemes – I quote -  “results in a shift of investment risk from pension providers to pension savers and an erosion of the collective level of protection in occupational pension systems”. Therefore EIOPA shall evaluate “possible options” not only for prudential but also for governance and business conduct requirements. These are possible new requirements, because the current directive for example in Chapter V explicitly mentions only “prudential supervision”, although in the scope of this prudential supervision “information to be provided to members and beneficiaries” is included (cf. article 46 (j) of EU/2016/2341).

Following to the Consultation Paper EIOPA emphasizes two mains areas, where these conduct of business requirements shall be implemented. The “Investment Rules” based on article 19 of the current directive shall explicitly include the collective risk tolerance of the members of the IORP as a part of the long-term risk assessment. Additionally a “duty of care principle” shall be adopted following to which “Member States shall ensure that every IORP registered or authorised in their territories acts fairly and in accordance with the best interests of members and beneficiaries, and provides prospective members, members and beneficiaries with the necessary tools to properly assess the choices or options provided by the IORP.”

Here again we concluded that these requirements are not completely new ones, but they mainly substantiate already existing provisions (cf. article 19 (1) (a) and (c), article 25 (3) and article 41 (2) of the current directive). We see two main reasons, why these substantiations seem to be useful nevertheless: the first one is supervisory consistency especially with regard to the design phase of pension plans, as similar requirements exist in the Product Oversight and Governance requirements of IDD, PEPP and MIFID II. The second one consists in the current and urgent needs of the beneficiaries, as they are bearing more and more the investment risks under dramatically changing new macro-economic conditions, as already mentioned.

VI. Conclusions

As a conclusion I would like to emphasize again that from our perspective EIOPA’s draft advice in this section reflects the experiences of the already existing models of the PBS and is fully based on the former Decision and Opinions of the Board of Supervisors on Long-Term Risk Assessment and on the Supervisory Reporting Requirements. From the perspective of the beneficiaries with regard to information given by IORPs or any other product provider, most important are understandability and comparability of the offered contract. The main criteria should be reliable benefit projections, past performance, disclosed costs, risk exposure and the overall return on investment. These criteria are all the more important in the current challenging times in which the long-term purchasing power of savings is endangered ever more. Therefore we clearly advocate to fully implement EIOPA’s draft advice of this section for the review of the IORPs II Directive.

Über mich

Ich heiße Christian Gülich (Jg. 57) und war schon immer an Kontakten ins Ausland interessiert. Während meiner Zeit an der Universität Bielefeld (Fachbereich Soziologie) war ich zu Studien- und Forschungszwecken in Aix-en-Provence, Paris, Strasbourg und Brüssel. Da liegt es nahe, dass ich mich beim BdV hauptsächlich um die EU-Kontakte (Konferenzen, Stellungnahmen o.a.) kümmere. Hier im Blog möchte ich über diese Aktivitäten berichten. Denn leicht ist es, über die EU als Moloch zu lamentieren, viel schwieriger ist es, diese komplexen Zusammenhänge verständlich darzustellen.