Wednesday 21 December saw the appearance of the article entitled ‘Pensions lower than projected’, in which Lane Clark & Peacock pinpoint the causes of this development. The most important are hidden investment charges, higher life expectancy and pie-in-the-sky projections. The premium pension institution (PPI) BeFrank offers a transparent solution in the form of a modern pension.
From a historical perspective, it is not so strange that actual pensions undershoot the projections. Current legislation and regulations assume an expected return of more than 4%. However, the maximum pension contributions for DC schemes are based on an expected return of only 4%. Any returns in excess of this level could be used to index the pensions.
Today, returns above 4% with an acceptable risk profile are no longer realistic. This implies that indexation is also no longer realistic. Even so, in the Netherlands it is still obligatory to base pension schemes on these optimistic assumptions. As a result, the level of the actual pension on retirement is generally presented in too rosy a light.
To compound the problem, not all pension administrators are transparent about the investments, charges and risks. In short, many pension members have no idea what level of pension they can look forward to.
Given all the confusing communication, it is hardly surprising that many people take little or no interest in their pension. Thankfully, a better alternative is already available.
BeFrank, a fresh modern pension administrator in the Dutch market, tackles the causes described by Lane Clark & Peacock and offers a different approach within the existing frameworks. For instance, all BeFrank pension members have their own pension account, which they can view online at any time to check the balance and transactions. Moreover, thanks to clear information on the current value of the investments, the funds that the contributions are invested in and the associated charges, they can always keep track of their pension accrual. BeFrank is entirely transparent about the returns and the charges.
In addition, BeFrank offers a Pension Planner tool. Pension scheme members can use this tool to calculate projections of their future pension. Alongside the chart based on the prescribed actuarial interest rate, a second chart reflects the actual investments and expected returns. Using the most recent interest rates and mortality tables, the Pension Planner provides members with a realistic projection of their pension accrual. Members can also use the Pension Planner to calculate the effects of changes in their investor profile, additional contributions or earlier retirement. Apart from the expected return, the chart also shows the degree of risk: after all, communication about risks is essential in providing employees with a clear understanding of their pension.
All in all, the miscommunication about pensions as sketched by Lane Clark & Peacock is a real problem, but new initiatives such as BeFrank are definitely a breakthrough from which the customers stand to benefit.
Folkert Pama, BeFrank CEO