“A word like ‘solidarity buffer’ is not very clear”

What do employees think of the fact that their pension payments may fluctuate under the new pension system, depending on investment returns? And what other questions do they have? To find out, APG interviewed a select group of people over the age of 55.

The Dutch pension system is undergoing changes. Under the new system, pension payments may change every year, depending on the returns of the investments made by pension funds. What questions do employees and retirees have about this? APG wants to know, so that it will be able to inform participants about the new pension system as accurately as possible. To gain more clarity, APG had extensive conversations with fifteen employees (between the ages of 55 and 65, who had various degrees of knowledge of both the current and the future pension system). According to Joyce Augustus, researcher at APG, to some of the interviewees it makes sense that the current pension system is simply no longer sustainable, now that people’s life expectancy has risen, and the population continues to age. “But they don’t really like that the pension payments may change every year. That gives them a sense of insecurity and dependence on the pension fund.”

More insight into personal pension assets

In the new pension contract, you will be able to see more clearly what the returns of the pension investment are and what the costs are. In other words, there will be more transparency. Augustus: ”Everyone experiences that as positive. At the same time, this transparency also leads to questions, for example, about those returns and those costs.” The interviews also revealed that most people realize that their pension payments will fluctuate more than they do now and that under the new pension system, more can depend on the investment returns and the economy. Pension funds may make additional choices, however. The investment results can be included in the design of the pension system, so that it matches the preferences of the participants more.

“Some of the people we spoke to reasoned that they will now become more dependent on the investment qualities of the pension funds and that the fund must be held accountable for this.” According to Augustus, some people APG spoke to want an explanation if they see that their pension fund had a negative investment return in a particular year, which will result in a decrease in their pension payments. “They are comparing the pension fund’s revenues to the revenues of other financial agencies, like a saving account at a bank or someone’s own investment account.”

Jargon should be explained

This research also showed that pension jargon can cause a lot of confusion. Take a word like “solidarity buffer”, for example. Many people think that this means there is a “pot”, so that everyone will be able to receive their pension. A sort of solidarity from high incomes to low incomes. That is not the correct understanding, Augustus says. “A solidarity buffer means that we can save and reserve some of the investment returns from economically good years, so that we can use them in bad years to keep paying out the pensions. It is therefore very important to use communication that makes sense to the participant. Even though ‘solidarity buffer’ is technically the correct term, the participants are interpreting it differently. It is therefore better if we use a different word. Another example of where respondents feel the need for an explanation: in the new system, the returns will be ‘apportioned’ according to age. This means that young people will be apportioned more returns, positive or negative, than older people. This was devised to lessen the risk for older people, so that their pension payments will not fluctuate too much. Augustus: “The seniors that were presented with this without any explanation, could not understand why this should be so. They thought it was unfair. But once they heard the argument, they had a better understanding.”

Good information

Pension funds and administrators like APG should therefore always ensure they use comprehensible communication, Augustus emphasizes. “That is why we are testing in advance to see if our letters, newsletters and other communication to the participants and pensioners is comprehensible. And where needed, we want to keep refining it until it is comprehensible. We consider that to be part of our responsibility.”  

What else is APG going to do with the results of this research? Augustus: “We have more of an idea now about what kinds of questions the new contract evokes when we communicate about it. And we are even more aware of the fact that certain terms or concepts evoke questions or can be interpreted the wrong way. We are looking at how and how often we are going to inform our participants about the new pension system. Not too often, because most people are not interested in a detailed explanation. But often enough so that there will be no misunderstandings.”

And did the interviewees have any advice for APG? “Yes, they want us to inform them clearly and personally. And they want us to take good care of their money.”

This is what people over 55 think of the new pension system:

• It is understandable that the current system is not sustainable now that people are living longer.
• The new pension system is much more transparent.
• But it is also less secure, because their pension payments may fluctuate, depending on the investment returns and the economy. On the other hand: pensions are currently fluctuating too.
• The dependency on (the(investment performance of) their pension fund will feel greater.
• Participants therefore want more insight into the investments. Pension funds should also be held accountable if the assets drops.
• The solidarity buffer and the fact that younger people will receive a higher return both require explanation.
• The new pension system requires good – clear and regular – communication from the pension funds.