Clear communication boosts pension awareness

Interview with Folkert Pama and Frank van Wessel, BeFrank.

Published in Vermogensbeheergids on Monday 12 November 2012.

“Clear communication boosts pension awareness”

Since its launch in mid-2011 as the first-ever premium pension institution (PPI) in the Netherlands, BeFrank has focused on providing defined contribution schemes for employers and employees (2nd pillar). On entering the pensions market, PPIs initially met with a good deal of scepticism from the pension professionals. Which is hardly surprising, considering that pensions are all about long-term commitments based on trust, whereas PPIs are bringing renewal and innovation. Meanwhile, the PPI has gained acceptance among pension professionals and the first successes are becoming visible. BeFrank is the winner of the ‘Pension Product of the Year’ Award and many businesses, large and small, have already opted for a pension scheme at BeFrank, including OC&C Strategy Consultants, Brunel, Bol.com and Accor Hotels. What were BeFrank’s experiences in the past year? How does BeFrank view the developments in the pensions market? An interview with Folkert Pama and Frank van Wessel.

Has the launch of other PPIs led to strong competition?

Folkert Pama, BeFrank CEO: “With eight PPIs vying for the customer’s favour, the defined contribution pensions market has become fiercely competitive. However, as the first mover, we enjoy a competitive edge. BeFrank was born from a very clear philosophy. Back in 2008, we recognised the need for innovation and clear communication. Our infrastructure was attuned to that need. To make pension and investment information readily available to customers, you need a powerful partner like BinckBank. And Delta Lloyd’s pension expertise and distribution network are also immensely important. Both parent companies contribute invaluable expertise to BeFrank. After being operational for one year, we are seeing appreciation for this approach. In a Motivaction survey among pension professionals, BeFrank scored high ratings for competitive pricing, relationship management, clear communication to pension scheme members, administrative performance and efficiency. That’s a result we are proud of.”

Are PPIs now widely accepted?

Folkert Pama: “The PPI is being embraced by the pension professional, though some parties are still testing the water. That’s not strange; after all, we are in the middle of an economic crisis and a general breakdown of trust, while a PPI is a new concept. A PPI brings simplicity, where complexity was the rule. It introduces whole new dynamics for employers and employees and this needs explaining. The old way of thinking was: we pay our contributions and the rest is guaranteed. This attitude has landed us in all sorts of problems. Anyone who believes that minor changes will get us out of trouble is mistaken. We think outside the box and take the problem-solving process from there.”

“To claim that employees bear all the risks in a PPI is overly simple, incorrect and totally lacking in nuance!”

Is the criticism of PPIs justified?

Frank van Wessel: “We’ve noticed that the resistance to PPIs generally goes hand in hand with a lack of knowledge of the various possibilities offered by the PPI itself as well as defined contribution (DC) schemes. Too often, our DC system is wrongly compared with foreign DC systems, such as those in the UK and the US. That’s understandable, because we in the Netherlands are more used to defined benefit (DB) schemes. The PPI itself is nothing other than a new way of providing pensions. Its arrival has by no means led to a new pension system.

“To claim that employees bear all the risks in a PPI is overly simple, incorrect and totally lacking in nuance! When hearing the word ‘pension’, most people think of the accrual of capital for a retirement pension. But they forget the capital protection element in the form of surviving dependant’s pension and occupational disability pension. These insurances constitute an integral part of the pension scheme. In the case of death or occupational disability, employees or their surviving dependants receive a guaranteed benefit. These are risks that individuals cannot bear themselves, which is why they are insured collectively. You can compare it with the risk of your house burning down. You cannot bear that risk individually either, so you pay a premium to the insurer. In other words, two of the three elements in the pension scheme are based on solidarity. Interestingly, the employees do not carry the entire risk for the retirement pension either. Obviously we take measures to control the risks. The lack of knowledge about the possibilities offered by the PPI itself and DC schemes has given rise to all sorts of DC myths. Unfortunately, refuting these myths requires a huge effort on our part.”

Are individuals able to bear the pension risks?

Folkert Pama: “Yes, but this is separate from the DC scheme and the PPI. Every pension contribution in the Netherlands is invested and investing is risky, no matter how well you manage the risks. Because the risks inherent in pension schemes were not always clearly communicated, this uncertainty now mistakenly appears to be a new phenomenon. Were people ever informed of the possibility of non-indexation and pension reductions? Not to my knowledge. No wonder the introduction of uncertainty into pensions has caused much alarm.

“BeFrank stands for clear communication. The employee runs a pension accrual risk. We are honest about that. By investing smartly, we control part of this risk and, given the long investment horizon, individuals are able to bear the remaining risk. So in our view, it is only logical to place this risk with the individual members instead of with the group as a whole – provided, of course, that employees are also given influence over this risk .

“From our perspective, it makes no sense to place responsibility with the employer for the employee’s lifelong well-being after retirement. And yet that is precisely what many existing pension schemes do. Employees should be largely responsible for their own pension, and the employer must help them on the right road. But not to the extent of giving them a guarantee until death.”

“Every pension contribution in the Netherlands is invested and investing is risky. Because the risks inherent in pension schemes were not always clearly communicated, this uncertainty now mistakenly appears to be a new phenomenon.”

How does BeFrank deal with the pension accrual risks?

Folkert Pama: “The actual level of the pension payout depends on two key factors: the size of the pension capital and the level of the interest rate at which the pension is purchased. The size of the capital depends on the investments, and interest rates are difficult to predict. This uncertainty regarding the exact level of the pension is a risk for the employee. By investing smartly, we at BeFrank manage both the investment risk and the interest rate risk.

“Depending on the employee’s age, we invest the pension contributions according to a specific asset mix, an approach that is also known as life cycle investing. An active life consists of 40 years of service and is equal to the period over which the pension is accrued. Initially, we take a little more risk, to give the employee a chance of generating good returns. If the investments are disappointing at the beginning, there is still ample time to make up the shortfall. By adjusting the asset mix to the age, we reduce the investment risk as the retirement date draws nearer. In this way we control that risk.

“To manage the interest rate risk, we have incorporated a pension stabiliser into the life cycle method: as the retirement date comes closer, we increasingly buy long-term bonds, taking care to approximately match the durations with the expected payments. If interest rates fall, the value of the investments rises, thus limiting the impact on the actual pension pay-out.”

Frank van Wessel: “But there is no such thing as one hundred per cent certainty. That’s why we offer the employee investment choices. You always start in a neutral life cycle, but can then switch to an offensive or defensive life cycle. Each life cycle has its own asset mix, so every employee can choose the risk/return ratio they feel comfortable with.

“Apart from investing in the life cycles managed by BeFrank, pension scheme members can also opt for self-select investing. In this case, the contributions are paid into an individual pension account. The employee can invest in a range of funds of large fund houses. If an employee temporarily prefers to run no investment risk, he can leave the money in the individual pension account and will receive interest on the balance. Incidentally, an individual pension entitlement, as accrued with BeFrank, does not mean the contributions are invested individually. Investments are made collectively, which offers all sorts of advantages, such as pooling and netting of transactions. Highly efficient, in other words.

“The trend in the Netherlands is to shift risk to employees. So if this is what’s happening, we should be honest about it: BeFrank! Show people where they stand. That’s what we do with the Pension Planner.”

What does the Pension Planner offer?

Folkert Pama: “The Pension Planner is an ALM tool that is applied to the individual employee and provides insight into the level of risk, translated into the size of the pension. If you change your asset mix from neutral to defensive, the planner shows a lower projected capital at maturity with a higher level of certainty. The outcomes are presented in charts as well as in numbers. This gives the employee a chance to experiment, as it were, with his pension possibilities. Over 1,000 scenarios can be calculated in the model. Before employees take investment decisions, we show the effects of a decision in terms of expected return and level of certainty. In this way, the employee has the correct information for working out his decision before making a definite choice.”

Are employees prepared to take risks with their pension?

Folkert Pama: “Pension funds commissioned Motivaction (2010) to carry out a survey into this aspect. The survey, which was entitled ‘Higher pension versus 100% certainty’, showed that 73% of Dutch people want certainty about the level of their pension, and that they are prepared to pay a bit extra for this certainty. However, as soon as the impact of the certainty on the level of the pension was explained, 46% changed their choice and were prepared to take more risk with their pension plan investments. Employees are no longer scared off by a certain degree of uncertainty as long as they know the level of uncertainty in advance, and are able to influence that level in a clear and simple manner. This was one reason why we developed our Pension Planner.”

Is communication the challenge?

Frank van Wessel: “Communication is indeed the challenge. Pension awareness is alarmingly low in the Netherlands. This is strange, because many people consider a pension their most important financial product. For years, people were told not to worry about their pension. The claim that ‘the Netherlands has the best pension system in the world’ instilled confidence and lulled the Netherlands into a false sense of security. Pensions appeared to be guaranteed, so why worry? The fact that employees were not free to choose their own pension administrator also discouraged any sense of personal involvement. Anyone interested in knowing more about their pension only had the Uniform Pension Overview to turn to. And that document is full of jargon.

“My view is that this has been disastrous for people’s involvement in, and awareness of, pensions. Thanks to media reports about the need to work longer and cut pensions, people are now awakening from their slumber. The demand for clear pensions is greater than ever. We at BeFrank are striving to increase employees’ involvement with their pension.”

How can you further improve the communication with pension members?

Frank van Wessel: “Pensions are less complex than they may seem. There is a lot of pension expertise in the Netherlands and because of this expertise, pensions are often unnecessarily complicated. BeFrank uses its knowledge to make pensions simple and understandable. Barriers that keep employees from taking an interest in their own pension must be eliminated, or at least lowered.

“We are working hard to raise pension awareness among employees. Our efforts to get them to log in and become involved are bearing fruit. With the tools we offer, such as the online portals, the Pension Planner, our pension community and our use of social media, we are trying to communicate in clear language, using technologies that employees are familiar with. BeFrank gives you access to your pension details whenever you want.

“We are also open to any suggestions and ideas to make our services even better. Our online community WeFrank was set up precisely for that purpose. It’s a space where employees can share their ideas, tips and suggestions for BeFrank. Or vote on ideas submitted by others. These are assessed by BeFrank and developed further to improve our services.”

Summary

In 2012, De Nederlandsche Bank (DNB) and the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten / AFM) granted a licence to BeFrank, making the pension administrator the first premium pension institution (PPI). A PPI is a new type of pension service organisation on the Dutch market. Up to 2012, pension provision was restricted to pension funds and insurers. Folkert Pama, CEO and Frank van Wessel, of BeFrank say BeFrank is the first pension administrator to offer employees and employers real-time insight into their pensions. We work entirely online. An employee can see the actual value of his pension at any time. In addition, employees can use the Pension Planner to calculate how their pension will develop in time. The unique Pension Planner provides outcomes of the pension calculation and indicates the probability of those outcomes. “Using advanced technology, BeFrank makes pensions more understandable for employees,” added Pama.

BeFrank combines the efficient online technology of BinckBank with Delta Lloyd’s pension and investment know-how. In the summer of 2011, both companies announced they were joining forces in the joint venture BeFrank. BeFrank’s services fit in well with our endeavour to offer innovative and simple solutions to employers and their staff. BeFrank is leader in the sector and takes the provision of customer-oriented services very seriously. BeFrank makes pensions easy and clear. Employers can make the choice between active investment funds and passive investment funds using ETF’s. In addition, employers can decide to offer investment possibilities to their employees, enabling employees to invest their own contributions through reputable fund houses.

Besides the control over their investments, employees also want some level of certainty. For this reason, BeFrank offers solutions for controlling various risks, such as interest-rate risk management, through pension stabilisation funds. BeFrank has brought about a major change in the pension market by offering a pension product that is simple, accessible and administered at little expense. Low costs will lead to higher pension accrual for employees who, moreover, will be able to experience their pension as a comprehensible financial product due to our online service provision.  Around eight PPIs are now active in the market. BeFrank services organisations with a group pension scheme based on defined contributions. BeFrank can also service businesses and pension funds that want to switch to a defined contribution scheme. Both large listed corporates and medium-sized enterprises have chosen for the BeFrank pension solution.