Risky pension? PPI finally makes pension risks transparent

BeFrank
4 Jan 2012

The premium pension institution (PPI) is asserting itself in the pensions market. There are already six PPIs operating in the Netherlands. And they are attracting growing attention. Unfortunately, the reporting on pensions and PPIs is still riddled with inaccuracies, particularly regarding guarantees and risks – because making risks visible does not mean that pensions are risky. BeFrank communicates clearly and tells the true story. 

In the Netherlands, employers can offer employees a pension in the form of a defined contribution scheme. These are pensions where the contributions are fixed, but the level of the pension on retirement depends mainly on the value of the investments and the interest rates applicable on the actual retirement date. In other words, the ultimate level of the pension is uncertain. Such schemes were already an option before the PPI. So the PPI changes nothing in this respect. It is merely a new type of provider for an existing type of pension.

The new Pension Accord shifts the risks within traditional average and final pay schemes from the employers to the employees. In the Netherlands, this development is running parallel to the rise of defined contribution schemes. The advantage for the employer is that it is easier to budget for such pension schemes. But it also makes the actual pension on retirement more uncertain for the members. However, uncertainty has always been inherent in pensions. Only this uncertainty was never clearly communicated, and therefore mistakenly appears to be an entirely new phenomenon. Was anyone ever previously informed of the possibility of non-indexation and pension reductions? Not to my knowledge. So no wonder the introduction of uncertainty into pensions has caused so much alarm.

Guarantees
What guarantees still exist? How should the risks be handled? How do you communicate about these risks? The arrival of the PPI creates an opportunity to offer a modern pension at low costs and to communicate in crystal-clear terms about contributions, investments, costs and the level of risk. The PPI is gaining in popularity and is already widely accepted as an attractive alternative to traditional pension schemes, particularly now that these, too, are  increasingly surrounded by uncertainty.

To answer the questions about guarantees and risks, it makes sense to distinguish between retirement pension, surviving dependant’s pension and disability pension.

When it comes to the PPI, it is frequently said that the surviving dependant’s pension and disability pension must be arranged separately, because the PPI is not allowed to run any risk of its own.

However, BeFrank is licensed to act as an authorised agent and is therefore able to offer, accept, manage and communicate about risk insurance products. The entire pension scheme is arranged in a single contract and BeFrank is the sole point of contact. In case of death or disability, the level of the payout is guaranteed. The result is a comprehensive pension product and nothing needs to be arranged separately.

Dealing with risks
In the case of a PPI, the pension contributions are invested and no guarantees are made for the return on the pension plan assets. BeFrank is perfectly up front about this and deals with these risks in a responsible manner, coming up with innovative online solutions.

For instance, investment risks are mitigated by investing in a prudent age-dependent manner, which is also known as Life Cycle Investing. By taking a little more risk in the initial period, the employee has a chance to generate a good return. The investments risks are then progressively reduced in a sensible way. Moreover, by investing in pension stabilisation funds, the interest rate risk is steadily reduced as the employee’s retirement age draws nearer. In this way, BeFrank gradually builds more certainty into the pension capital that can be achieved on retirement date.

Apart from reducing the risks, BeFrank also provides clear insight into the level of risk. This is new in the market. Precisely because employees are the ones who run the risk, we think it is important for them to have insight into and influence over their own risk by making their own investment decisions. With BeFrank, employees can choose between three forms of life cycle investing: neutral, defensive or aggressive. Employees can also opt to self-invest their pension contributions. Finally, employees who are reluctant to invest can put their contributions into a savings account.

By giving employees influence over their own pension, BeFrank ensures that the risk/return ratio is always tailored to the individual employee, and not to the entire group.

This is the first time that risks are clearly communicated and employees still need to get used to this. BeFrank limits the uncertainty and offers employees online insight into their pension plan performance. By making their own investment decisions, employees can influence their pension accrual and determine the optimal risk/return ratio. In this way, BeFrank makes pensions transparent.