Dutch reg' chides pension funds for lack of transparency on costs
Transparency is often depicted by financial market watchdogs as one key component to gain trust from individuals in the financial system. But despite regulations, especially those tightening reporting requirements, market players have a long way to go to reach the necessary transparency. AFM’s latest research is an example of this. The Dutch regulator sieved the annual reports published in 2019 by 166 local pension funds on their websites. Its main finding was that 90 (or 54%) of the pension schemes investigated did not report correctly on costs in their reports.
Mandatory information about costs was partially missing in one in five reports (20%) while in 34% of the annual reports monitored, mandatory figures on costs were present but not reported accurately. “For example, transaction costs are not broken down or a different unit than the one prescribed (amount per participant or percentage of invested assets) is used,” said AFM, terming the findings “worrying” because the non-inclusion of information or incorrect reporting on costs does not facilitate comparison between pension funds. The regulator added that cost ratios are often less missing than nominal amounts in the reports.
All Dutch pension funds together have costs of around €9bn per year, including business expenses, asset management and transaction costs, or almost 0.6% of all pension assets invested. The cost range varies from 0.1% to 0.8% of total assets invested and from less than €200 to around €1,200 per participant depending on the size of the pension schemes.
Lack of explanations to justify costs
AFM assessed there is room for improvement as for pension funds to explain and justify costs in their reports. Hence, if 74% of the Dutch pension funds considered for the study provided an explanation for the year-on-year change in costs in their 2019 annual reports, only 23% made the link between the costs and the level of service, the nature of the fund or the complexity of the scheme. Adding to this, only 43% displayed a cost benchmark in their reports and less than a third clarified how asset management costs are associated with higher risks and returns. Gross and net returns were reported together in only one in ten annual reports, the research highlighted. Lastly, in less than one in four reports checked (24%), the board gave its opinion on asset management costs.
AFM enjoined Dutch pension funds to “carefully follow statutory law” upon cost transparency reporting in their 2020 annual reports which must be ready by 1 July 2021. The financial watchdog recalled the importance of cost transparency as the Netherlands will soon shift pension systems, presumably from 1 January 2022. In the new system, costs incurred will be directly deducted from participants’ pension assets.
The federation of Dutch pension funds, PensioenFederatie, called on its members to take a critical look at AFM’s recommendations and that before they complete their 2020 annual report. The body said the pension fund sector is working hard to ensure all schemes are compliant with the mandatory reporting requirements. José Meijer, deputy chairman of PensioenFederatie, commented: “The Netherlands is in first place worldwide in transparency about costs, according to the Global Pension Transparency Benchmark . We can be proud of that. This does not alter the fact that cost accountability of the sector as a whole can be even better. ”