The AFM report contains the right message: assess costs in context
On 1 April 2021, the AFM published the report “More attention is needed for the justification of costs by pension funds“. What are the costs and what do I get in return as a participant? Some of the costs are the result of policy choices by the board of the pension fund. The board can consciously choose to provide a high degree of service to the participants. This is offset by higher costs. Taking the risk into account, the board can also opt for investment categories that entail higher costs and are expected to have a higher and/or more stable return. These policy choices must be taken into account in order to be able to give a proper assessment of the pension fund's performance.
When writing the Recommendations for Implementation Costs of the Federation of the Dutch Pension Funds in 2011, we as a working group realized that calculating the cost level is a first step in the cost transparency file. Since the release of the Recommendations reporting the actual costs has generally been taken up quickly and well by the pension sector. The Federation of the Dutch Pension Funds rightly points out that we are among the frontrunners in the Netherlands with regard to transparent reporting of costs.
The next logical step is to compare the cost level with other pension funds so that the cost level of the pension fund can be properly analyzed. It had to be prevented that ranking lists with "highest and lowest" costs were drawn up.
At the request of and together with the sector, I have developed the extensive IBI Benchmark report that is fully in line with the Implementation Costs Recommendations. Much attention is paid to the reasons why costs differ. We also answer the question: What does the participant receive for this? In asset management this is the return and in pension management this is the level of service and a (complex) pension scheme. The report was primarily developed for the board of the pension fund. Based on our report, our clients have entered into discussions with the service providers and have been able to structurally save millions of euros in costs through optimization.
A nice side effect is that the IBI Benchmark Report also contains clear information to inform stakeholders about the implementation costs. It is important that the participants are properly explained why the costs of other pension funds differ. The level of costs does not determine whether a fund performs well or badly. Even low asset management costs can still be too high given the policy choices of the board. In recent years, our report has helped clients put costs into perspective and being able to report in context to the participants. In my view, a good and clear explanation for the participants is one of the most important points in the AFM report. A beautiful and challenging assignment for the board of the fund!
In the new pension system, the return after costs becomes one or the decisive factor for the amount of the ultimate pension. This makes the implementation costs even more important in the new pension system, where there are even different cohorts with different cost levels within a single pension fund. It is important that participants in the new system have insight into these costs, so that a discussion is possible about the costs and benefits.
The AFM report sorts for that and the AFM hits the nail on the head! Costs should be assessed in context.
Amsterdam, April 2, 2021
Written by Eric Veldpaus, director of the Institutional Benchmarking Institute