The right to retirement pension information (Madrid, 02-03 July 2013)

The right to retirement pension information (Madrid, 02-03 July 2013) Comments from AGE Platform Europe 1 Summary Maciej Kucharczyk AGE Platform Europe Representing pensioners associations across Europe, AGE wishes to contribute to the discussion on one of the key aspects regarding pension reforms in Europe: providing future pensioners with user-friendly, regular, reliable and transparent information about their pension rights. All relevant actors, governments, pension funds, employers, trade unions and the financial community should recognise their common duty in providing such information to people throughout the whole working life. Improving financial literacy and guaranteeing access to reliable information for both younger generations and pre-retirees are prerequisite for informed and forwardlooking retirement planning and, in fine, for the safeguard of citizens financial security and quality of life in old age. AGE Recommendations: Extent of the information Information about pension rights should cover all sources of pensions (state, occupational or private schemes), be communicated at the same time, be dynamic and available from the very beginning of one s working career this will provide citizens with the most realistic overview of their pension rights. Governments have the main responsibility in enhancing citizens knowledge about national pensions architecture and in improving people s financial literacy i.e. national strategies for financial education should be developed including training on pension planning. Provide workers not only with updates about future individual pension payments, but also with standardised information on potential risks of reduction in accumulated rights, administrative costs, pay-out options, internal and crossborder portability restrictions, default options, etc. of the various schemes and products available. Possible alternative should be clearly presented to facilitate and guide people in this choice. 1 Prepared for the Peer Review in Social Protection and Social Inclusion programme coordinated by ÖSB Consulting, the Institute for Employment Studies (IES) and Applica, and funded by the European Commission. ÖSB Consulting, 2013 1

Manner of the information Governments information about building-up pension rights over life-time should be regular, user-friendly and individualised as much as possible i.e. segmentation of the population to identify specific needs in terms of information different population groups may have (e.g. age, socio-economic status). Diversify information tools to ensure an informed choice for workers i.e. media, public websites, ombudsmen, financial institutions, professional advisers, financial institutions, employers, trade unions and senior people s organisations etc. and strengthen the independence of these information sources. Set-up an EU wide tracking system to enable citizens to access information about their accrued rights at anytime from anywhere in the EU building on the experience of member states who have national tracking systems in place. Target group of the communication Adapt the content of information, campaign tools and dissemination channels to target groups with identified needs/ priorities, such as young people entering labour market, workers with atypical working paths (women, employees on short-term contracts, disabled persons ) and those approaching retirement. Provide targeted information (with key messages on forward planning) alongside working-life career, for example at the entry to labour market, 15 years afterwards, in anticipation of retirement (10 years, 5 years and 1 year before); and at other transition/ pivotal moments of life such as: marriage, divorce, death of a spouse/ partner etc. Pay particular attention to younger generations i.e. relate information to different stages of life rather than to old age i.e. emphasising the importance of financial awareness and planning is more persuasive than talking about old age. Legal value and authenticity of the communication Set-up independent and impartial mediation mechanism, e.g. ombudsmen on pensions, considering complaints of maladministration by managers, employers and administrators in relation to pension schemes in order to strengthen citizens information and engagement in pensions through. Develop EU and national guidelines and common rules on pension information that will be provided and checked by an independent body; there should be a compulsory requirement for employers and pension funds providers to apply these rules when communicating with members should be also introduced. Involve older people s organisations in provision of information e.g. this can be helpful in in increasing understanding and trust, particularly in the area of occupational pensions. Organise and support at national level an active civil dialogue on pension reforms involving not only trade unions and employers organisations but also young and older people s organisations, in cooperation with educational bodies, in order to ensure, first, a good understanding and, later, the effective introduction, implementation, management and monitoring of the pension reforms. 2

1. Context Pension benefits depend on decisions throughout life, but many people think about every day. According to a study carried out in 2012 by the research company TNS NIPO for the Dutch Ministry of Social Affairs, 71 per cent of employees in the Netherlands are not receptive to pension communication. 2 At the same time, 63 per cent of pensioners said they were willing to receive pension communication. The study found that the four leading factors to this mind-set are: involvement with pensions; understanding the urgency of a good pension; people s own skills to deal with the information; and the assessment of the pension information. The vast majority of people also overestimate their pension rights. For example, according to a survey carried in Germany in 2011 by Fidelity International, 81% of Germans expect a pension of 60% or more of their net earnings, while over 40% expect 80% to 100% of their net earnings. However, at retirement Germans only reach 56% of their final salary. German employees also underestimate the value of their retirement income with regards to the part coming from occupational pensions. More than half (60%) have never heard of the three pillar model, while 70% of those who said they had, could not distinguish correctly between them. Young generations seem to be more realistic about the level of their pensions, but at the same time they are not aware, neither informed about how to build-up their pension in order to increase its level. In short, there is a general and persistent lack of understanding of pensions systems across the EU. Citizens do not understand their current pension systems both state and private because they are complex, have changed frequently and little information is available about future benefits. People also tend to mistrust the information they receive, find it too difficult to understand or feel that there is nothing they can do about it anyway. Very few understand the consequences that their decision or lack of decision will have on their income in old age. 2. AGE s comments AGE experts on pensions commented on the questionnaire that had been sent to member states participating in this peer review. AGE s comments are structured around four major topics raised in the questionnaire. Additionally, previous AGE positions and recommendations on how to improve citizens understanding about their pension rights and benefits have been also used to prepare the present paper. 2.1. Extent of the information People should have any necessary information to plan their retirement income in advance. Regular information about future entitlements is a necessity for everyone, whenever they come from state, occupational or private schemes, and it should be available from the very beginning of one s working career. Communicating on pension rights and benefits is still too often perceived as optional extra rather than an integral part of the administration of pensions across all their different pillars, whereas in fact, communication should be a strategic aspect of any pension initiative. 2 http://www.europeanpensions.net/ep/71pc-of-dutch-not-receptive-to-pensioncommunication.php# 3

When further national reforms are to be introduced, this must be based on the broadest possible consensus. Any new reform on pension systems should take into consideration the need for more information and transparency about the impact of the reform. For example, although it is generally understood that if one works longer she/he will get a better pension (state, occupational or private), those who could be subject to means testing have to consider whether they will gain financially from a higher pension or will merely lose means-tested benefits. Encouragement to work longer must not be detrimental to building up old-age income to achieve a better standard of living. The extent of information people need to access will grow even further as occupational pension schemes will be further developed and as workers mobility will grow i.e. both within country and across borders. Reliable and comprehensive information on quality and financial sustainability of funded pension schemes is essential to enable workers to make an informed decision whether or not to move to another job. Workers should be entitled to have full information about the solvency of the pension fund and of the company itself in order to assess the risk before proceeding with the transfer. An adequate response to mobility issues is crucial not only to improve cross-border mobility but also to build workers confidence and increase the take-up rate of occupational pension schemes. 2.2. Manner of the information In some European countries, there are central databases providing individuals with access to details about all pension sources, including a break-down of contributions and charges. For instance, in the Netherlands, users are able to log in to a database using their national insurance number to access this information. Such central register system is indeed very useful in tracking pension rights when moving from employer to employer. Forecasts on state pensions are also often available from the respective ministerial departments or national offices of pensions; information is sometimes sent to individuals; sometimes people have to request it. Some extra information on pension rights is provided by call centres, but this source of information needs to user-friendly e.g. if it is very difficult to get somebody on the telephone, the service does not fulfil its primary objective. But most often, when information is available to the public, people find it difficult to relate it to their own case. Very few people fall into the broad categories described in the information available to the public at large. Most people do not know how and do not wish to engage in the calculation of their own pensions. Women are especially likely to leave decisions to their husbands or partners. When ministry websites allow projections, calculations are often based on assumptions concerning earnings and staying in the same job. Moreover, although defined-contribution pensions are inherently unpredictable, that does not stop private providers from projecting optimistic returns, with the reservations in small print. Occupational and defined-contribution pension providers provide specific information if asked. However, in defined-contribution pensions it can be better to retire when the stock market peaks and no one can predict when this will be the case. Therefore, there is a clear need for independent and integrated information to help people understand their pension benefits from whatever the source of pension income will be. For example, in the UK, the Pensions Advisory Service (TPAS) is an 4

example of independent, voluntary non-profit organisation that provides free information, advice and guidance on the whole spectrum of state, occupational, personal and stakeholder schemes. The TPAS helps to understand how one s state pension interacts with supplementary pension plans an individual may have. Moreover, the changes in pension systems introduced are sometimes not even well understood by the pensions specialists (civil servants, social carers, private pension funds sale persons, financial advisers, etc.). Just like for income taxes, financial advisers do not always agree on the way pension rights will be calculated and what the outcome of the various options will be. This creates greater confusion among individuals seeking advice or information about their personal situation. Any irregularity and/or inconsistency in information on pensions are highly problematic for future pensioners as they have no longer clarity on how pension benefits will evolve, whilst further reforms are being introduced. Due to the on-going pension reforms, the information provided is also often outdated or the information system may be even temporarily suspended e.g. pension projections are no longer available through the Belgian pension system information www.toutsurmasurpension.be. Another recurrent problem is that information systems do not take into account the level of financial literacy among people. For example, in Belgium the FSMA (Financial Service and Markets Authority) has launched a web site called Wikifin, allowing to improve the knowledge about pension schemes, but it should be noted that there is a strong influence from insurance companies and all information are oriented to the 2nd and 3rd pillars. 2.3. Target group of the communication There is a great disparity as regards the age at which citizens receive information from the government on their state pension, ranging from 18 years in Sweden, Italy or Poland to 55 years and more in Belgium, Ireland or Spain. EU citizens engage into anticipating future pension at different ages at to a very different extent. Anticipating the build-up of pension should take place as soon as people enter the labour market. The channel and content of information should be however adapted to different age groups. For younger cohorts, the idea of saving for old age may be often irrelevant. People often do not think about pensions seriously until later in life, even though more and more people today understand the need to contribute/ save for pension from the earliest moment of working career. Therefore campaigns on pensions targeting young people should be related to different stages of life rather than to old age i.e. life-cycle approach. Emphasising the importance of financial awareness and planning, of which pensions is an important part, is more persuasive than talking about old age. Because some reforms will have a detrimental impact on specific population groups other than the youth, such as women, long-term unemployed, migrants or disabled persons who will face difficulties in building adequate pension rights the information on building-up a pension must target these groups. They need to be informed about possible solutions (if any) to counterbalance the negative impact closer link between contributions and pension entitlements will have on their pension. 5

A minimum of knowledge of economic mechanisms is required to understand notions of return on investment, inflation, allowance indexation, compound interests, etc. This should become part of the national education programmes and should be organised in the mandatory educational system (primary and secondary schools) to ensure everyone has access at least to basic information. In addition to general standardised information, regular updates about individual pension entitlements are a necessity for everyone. Providing easy to understand and transparent information will help citizens make better informed choices but, although financial education is badly needed, this should not relieve policy makers from their duty to introduce the necessary regulatory changes at EU and national level to ensure that information that is provided today remains valid in 20 to 40- year time. Regular information, on yearly basis for instance, by pension funds would allow workers to manage their investment decisions to get a decent amount of pension. A strong 1st pensions pillar remains the best protection of workers at old age, in particular those workers with low wages i.e. in the incapacity of investing and/or with lack of savings. 2.4. Legal value and authenticity of the communication Independence and transparency of the information source are crucial. If information on 2nd and 3rd pillars is provided by the pension funds, it will never be perceived to be reliable. At least as long as they follow their own guidelines and decide themselves what information to provide. If people do not understand their pension gap and possible solutions to cope with it, the overall social system is compromised. A coordinated action of all actors is needed: pension funds, governments, employers, trade unions and the financial community. There should be some common EU rules on the information that needs to be provided and checked by an independent body. This should be compulsory across the EU. To support transferability of workers investments, it is of utmost importance to have access to full and reliable information on funds performance and this should be treated as a right for the workers. The media are the main source of information for most people. This poses the question of the reliability of the information provided. Often media only pick part of the picture and present their own interpretation of the changes proposed, rather than the overall proposal and the full consequences that the change will bring about. Automatic enrolment with opt-out clauses and options by default are used in some member states to overcome workers disinterest and lack of financial awareness. This may have some merit but also calls for measures to reinforce public authorities liability in case of insolvency of pension providers and to tackle the impact of long vesting periods on short term contract holders, opt-out clauses, default options, early withdrawals, dormant rights, age and income threshold effects, lack of portability, tracking systems etc. Such approaches should also not relieve public authorities and pension providers from their duty to promote financial awareness and to facilitate access to independent financial advice, to enable individuals to make informed decisions and plan adequately for their retirement. 6

Accountancy of those who provide information on pensions is also crucial. The Belgian national Office for Pension (ONP) does not recognise the legal responsibility in case of a wrong prospect of simulation. Nevertheless, a Belgian labour court (Audenaarde) recognized in 2009 the legal scope in case of wrong estimation. Such measures should be further developed. 3. Conclusions Any further pension reforms should be based on a broadest possible consensus and understanding of the chosen direction and the modalities for pension systems. Because decisions on pensions have a long-term impact and concern also future generations, all relevant actors (governments, pension funds, employers, trade unions and the financial community) have a major role and a common duty in raising awareness about pensions and in providing all necessary information people may need to make informed a decision for pension planning. Older people s organisations can also help improve the understanding of pension reforms. Transparency and reliability are key elements to raise citizens awareness about pensions systems, as well as to build support for new approaches when reforming them. 7