Folkert Pama (a.s.r.): 'Employers Must Deal with Pensions'
Folkert Pama, Director of Pensions at insurance company a.s.r. since 2016, is an “old hand” in the pensions world. His career began at the sector pension fund Beon. He then worked as a pensions consultant, set up pension IT systems and served as a board member of both defined benefit and defined contribution (DB and DC) plans.
In 2010, he was one of the founders of BeFrank, the Netherlands’ first premium pension institution (PPI). A characteristic of these providers is that the pension plan is always a DC plan: With a fixed contribution — which is invested —, but without promises about the size of the future pension, because that depends on factors like the return on investments and life expectancy on the retirement date. Mr. Pama explains his motivation at the time: ‘The DC market was emerging and we predicted that the entire system would be based on DC plans. It has taken a little longer than expected, but it is on its way now.’
As a result of the pension agreement concluded in 2020, DB plans, with a pension benefit promised in advance, will indeed disappear in the future. As of 2027, two contracts will be possible: The “flexible” contribution plan (very similar to current DC plans) with relatively many options for participants (such as freedom of investment and the choice between a fixed or variable payment) and the “solidarity” contribution plan with less freedom of choice and a mandatory solidarity reserve. In both contracts, pension funds no longer make promises about future benefits. Instead, employees save up a “personal capital” through an age-independent contribution — which they then use to buy their pension. Mr. Pama: ‘I expect industry pension funds in particular to start looking at solidarity plans. Most employers are expected to opt for flexibility, i.e., a flexible plan. Instead of developing their own flexible pension plan, in the future they will usually join a general pension fund, an insurer or a PPI. The number of pension funds will therefore continue to decline as a result of the new system.’
Confidence in the Dutch pension system is not very high at the moment. Do you see the new system as an opportunity to regain that trust and, moreover, make the system more understandable and accessible for employers and employees?
‘You cannot make general statements about that lack of confidence. I certainly do not see it reflected in customer satisfaction surveys among participants in our own DC plans. That is probably partly because people have more opportunity to influence their own pension benefits. In that sense, the new system will indeed offer opportunities. In addition, the current lack of confidence is related to expectations created by others. We make no promises about the level of the benefit and always clearly communicate that the outcome is uncertain. In DB plans, such promises are being made but not always being kept now that there has been no indexation for years. The value of those pensions has therefore declined enormously, which understandably results in disappointment.
I doubt that the solidarity contribution plans will be an improvement in that respect, but time will tell. The mandatory solidarity reserve in those plans raises many new issues. Whose money is it anyway? What happens if you transfer your pension to another provider? Will you then receive a piece of that buffer? Probably not, so as a participant you are still left with the feeling that something you have built up is being snatched away from you. Moreover, due to the compulsory nature of industry pension funds, participants cannot choose to leave. If you feel that things are not going well, but at the same time you cannot do anything about it, it makes you passive and distrustful.’
Would it be better to abandon this obligation as we currently know it in the new system?
‘I no longer see the necessity of such an obligation. One argument for retaining it is that it guarantees solidarity, but that would mean you are confusing the concepts of collectivity and solidarity. We cannot bear risks of death and disability individually and we also show solidarity with each other during the payment phase, under both the old system and the new system. Solidarity is the very basic principle of insurance. I certainly do not want to undermine the solidarity contract, but I do call for a bit more market involvement and scope to be able to push certain buttons when it comes to investment. A much bigger problem — the real blind spot, as far as I am concerned — is that increasing numbers of people do not have a pension plan at all. In that sense, I see greater value in a compulsory membership of any pension plan than in an obligation through a sector association or collective labor agreement.’
In many ways, the flexible premium plan under the new pension system resembles the DC plans that PPIs or insurers already offer. You have extensive experience with those plans. What advice can you give on that basis to employers who still have DB plans?
‘They must be aware that the financial position of their employees will change drastically, and that will require a huge amount of communication to effectively guide them through that process. Of course, it is primarily the responsibility of the participants to familiarize themselves with their pensions and make well-informed choices, but employers will also need to step up to the plate. Since they are a trusted party for their employees, they can encourage them to actually take action and facilitate them in every way possible.
I think that the effort that entails is still underestimated. People need to have a thorough understanding of the implications of their decisions. We need to prevent them from saying in ten years' time: "I did not know that and if you had told me, I might have made a different decision." In that sense, the pensions profession is really turning into a communication profession, and since communication is very expensive, you need to carefully think about which aspects of it that you can digitize. As pension providers, we are becoming more like communication and IT companies over time. There is no question that we still need to be able to do math and make good investments, but something has been added to that formula: Communication.’
What could encouraging and facilitating employees involve in practice? What is a.s.r. doing, for example, to inform participants about their pension accrual?
‘80% of employers and employees affiliated with a.s.r. are already covered by a DC plan. Over the past ten years, we have therefore gained a lot of experience in advising on decisions and communicating risks and expected returns. We notice that participants’ understanding is increasing and they are actively immersing themselves in the subject matter. At least 70% of our participants log in once a year to view their personal pension situation. The Pensions Register is also visited very often, so people are really involved. We encourage that by putting a greater focus on the subject with every change in the plan, pension commitment or process structure.
By making it accessible, ensuring that it is very well structured in practical terms and adding an element of fun, you can easily activate people to take action. Nowadays, our presentations to participants sometimes include a pension quiz. Anyone who becomes our client because their employer has concluded a contract with us always receives an activation email containing an interactive personal welcome video. You can then click the link, which takes you directly to the portal where you are supported with your first log-in process. There, you provide all the correct data in a few simple steps. By that time, much of the work is done. It is all very easy, but we notice that many more people log in if you give them a helping hand.’
You often hear that life events such as the birth of a child are the moments in the new system to ask participants to review their pension situation. Do you agree?
‘In practice, it seems that people are preoccupied with other things during life events such as a birth, moving house, divorce or death. So that is actually not the best time to point out the implications for their pension. That will come up at a later stage. I think it is better to look at other events. In fact, a pension plan concerns the relationship with your employer. That is why, for example, a work anniversary would be a logical time to check that all the arrangements are still in place as appropriate to your situation.’
Many people are financially “illiterate”. How can you provide them with effective guidance in making decisions?
‘First of all, employers and providers need to think carefully about the default, that is: The standard option that participants are automatically assigned if they do not make a decision. Is it suitable for the majority of the target group? A good example is our variable pension product, which allows you to continue investing after your retirement date. We have decided not to offer this plan to the smaller capitals, because the profit to be gained is too small in relation to the risk that somebody would run. So, in that case, we make the decision. Making the decision actually depends on the risks someone is willing or able to take.
A difficult dilemma in this context is how to handle accrued rights under the old system. In a DC plan, it is clear – the accrued rights consist of your accrued capital. In a DB plan with a pension fund, this is more problematic, because you then have more or less guaranteed benefits. If, under the new system, the entire pot is put into an individualized form of investment, that can be very risky for people whose careers are largely behind them. Imagine that you start saving 25 years' worth of pension accrual with a pension fund when there is a war in Europe, and then in a single day you could lose 10-20% of your accrued pension (ed.: the interview was conducted before the Russian invasion of Ukraine). It is currently unclear whether participants themselves will have any say in whether or not their old rights can be transferred into a pension fund. The expectation is that pension funds will soon be allowed to decide on this and that participants will be given a negative option. What do you do with people who say "no"? If 99 people want to convert and one person does not, are you going to maintain a separate system for that one person? Are you going to compensate? Time will tell how this plays out.’
The Future of Pensions Act is expected to be sent to the Dutch House of Representatives around this time. Only then will the details of the new system become clear. That makes it difficult for employers and advisers to take the reins right now. How do you envisage the role of the pensions advisor at this stage?
‘If employers are not yet sufficiently aware, advisors will have to point out to them that it is high time they identified their wishes regarding the new plan. I estimate that insurers and PPIs alone will have between 50,000 and 100,000 employers whose plans need to be amended. That will not be done and dusted by 1 January 2023, when the new pension law takes effect. Nor can it wait until 1 January 2027, when the transition period is complete and all pension plans must be adapted to the new system. Given the limited advisory capacity, a distribution is required. Advisors therefore need to carefully identify which employers they are currently serving, which contracts will expire and when, and start planning when they can work with which organizations. It would also be sensible for them to make effective process agreements with the administrators now, because for us, converting thousands of employers to the new pension system is also going to be quite a task.’
You have worked in the world of pensions for over 25 years. Why does this sector appeal to you, and why did you switch from PPI BeFrank, which you founded, to a.s.r.?
‘The pension business really appeals to me because it is very dynamic. It has legal and fiscal aspects, it involves investments and calculations and it is relevant to society. Communicating that to the client in an accessible way is a challenge. That is why I made the conscious choice to enter into it after I completed my studies. I have always enjoyed working in this sector. My move to a.s.r. was partly prompted by my vision of the future of pensions. For a long time, pensions were the most important financial product for employees. The question now is whether that will remain so. With the new pension system around the corner, the overall financial picture will be much more important. That includes matters such as the Dutch General Old Age Pensions Act (AOW), savings, expected inheritances, covering disability risk and mortality risk, etc. I can anticipate that transition more effectively at a broad financial service provider than at a PPI. At a.s.r., I am also responsible for the Ik denk vooruit (Thinking Ahead) program. That is not related to pensions at all — it is an investment undertaking with two goals: Firstly, to set up a tool that helps people to understand their financial situation in 12 minutes, and secondly, to offer solutions. We offer this tool free of charge because, as an provider, we place great importance on financial self-sufficiency and financial self-sufficiency begins with gaining insight.’
This interview was published in Management Scope 04 2022.
This article was last changed on 13-04-2022