European and national competent authorities are moving towards adopting more stringent rules on transparency for IORPs, UCITs and life-insurance products, and conducting closer supervision of the activities of private financial institutions.
A first move by the European Commission came in the shape of the Insurance Distribution Directive (IDD), aimed at ‘increasing transparency of price and costs of insurance products’ (see article). Then the UK Financial Conduct Authority demanded an all-in fee for asset management and increased transparency requirements with regard to investment objectives and charges (see article). Last, the EC requested the European supervisory authorities to report on the past performance and costs of long-term savings products.
Enforcement continues in favour of European savers. According to I&P Europe, the Belgian Financial Services and Markets Authority (FSMA) concluded an analysis on affiliate charges and fees applied to funds’ performances in the defined contribution (DC) occupational pensions sector. The study scrutinized the ‘elements having direct or indirect incidence’ on the employees’ complementary pension, i.e. ‘the pension regulation, the transparency report and the annual pension brochure’.
FSMA concerns explained
In DC Pension Plans, the underwritten contribution is fixed, but the pension amount at retirement is undetermined and dependent on the performance of the fund until maturity, the asset management policy and investment strategy.
As opposed to defined benefit plans, where asset managers undertake to pay a pre-determined pension at retirement (thus keeping skin in the game), risk in DC schemes is supported (almost)[1] entirely by the contributor, since the fund will only pay out what it made. This is why the contributor is highly dependent on the net returns generated by the fund.
In this case the affiliate will bear the consequences of high charges, especially in the case of poor performance of the investment fund.
FSMA conclusions
For these reasons, the affiliate should receive ‘complete and comprehensive information’ concerning fees related to and performance of his or her occupational pension plan. The study found that, from a selection of 100 funds, 33% did not disclose this data at all, whereas for the remaining funds the information is difficult to find or to decipher. The contributor should be able to easily find and understand how well a fund is performing and how much his or her pension is reduced by the fees charged by the pension institution.
With regard to pension plans that did not contain any indication of the aforementioned parameters, and that were therefore in breach of the applicable EU legislation (IORP II Directive; IDD; KIID Regulation), the FSMA announced that it had intervened to ensure a remediation of those situations.
Read here I&P Europe's article.
[1] Almost entirely since, thanks to regulatory provisions, the pension organisations undertake to pay out a minimum pension at retirement.