Regulation of information provision for pension choices: Australia and the Netherlands compared
Around the world there has been a shift in retirement saving/benefit arrangements from public to private provision, and from traditional defined benefits to arrangements where individual pension fund members are required or encouraged to take the responsibility for decisions about the accumulation and decumulation of their retirement savings. Australia was an early mover with the introduction in 1992 of compulsory employer contributions into individual accounts in private pension funds (called superannuation funds) under what is known as the superannuation guarantee. Individuals can choose their pension fund, the asset allocation of their retirement savings, whether to make additional member contributions (on top of the minimum 9.5% employer contribution) and how to take their benefits. Those who don’t choose their pension fund are placed in a regulated default fund (known as a MySuper product). Following recommendations of the 2014 Financial System Inquiry (FSI 2014), the government is working on a new decumulation design (MyRetirement) which will be accompanied by an information disclosure format to include presentation of longevity risk (Treasury 2016). The option to choose one’s own pension fund is not yet available in the Netherlands, but has been proposed by several Dutch political parties. As well, there are moves to allow Dutch pension plan members greater choice of their retirement benefits and payment patterns. In this context, the overall aim of this research project is to identify lessons for the Netherlands from the Australian experience with regulations on pension fund information disclosure designed to assist members with choices of pension funds, asset allocation and pension benefits. The regulation of information disclosure for pension choices
Australia’s initial attempt at information disclosure to assist choice of pension fund involved legislative requirements which were very broad and gave little guidance of content or format. As a result, the ‘first round’ financial product disclosure statements (PDSs) focussed on compliance and were long, detailed, complicated and hard to compare (Cooper 2010). In 2012 these were replaced by short form financial product disclosure which took a more prescriptive approach (Commonwealth of Australia 2011). The 2012 regulations specified both the length (maximum of eight A4 pages or equivalent) and structure (nine section headings for retirement saving products covering, among other things, information disclosure for fees, investment options, taxation and insurance). For example, the stipulated information for investment options covers: (a) Name and description; (b) a list of the asset classes in which the option invests and an indication of the strategic asset allocation of the portfolio; (c) the investment return objective; (d) the minimum suggested time frame for holding the investment; and (e) a summary risk level for the option (legislated as the Standard Risk Measure which describes investment risk as the anticipated number of years of negative returns in 20 years).
A third format for pension fund disclosure – a single page ‘dashboard’ – was introduced in 2013 for MySuper, a regulated ‘default’ plan for people who do not choose a pension fund (Commonwealth of Australia 2013). Plans offering a MySuper product must place an up-to-date dashboard prominently on their website which must show five pieces of information: (1) Return target over 10 years; (2) Returns for the past 10 years; (3) Comparison between the return target and returns shown on a graph; (4) Level of investment risk presented using the Standard Risk Measure; and (5) Fees and other costs presented in dollars. This approach is similar in concept to the summary prospectus for mutual funds required by the U.S. Securities and Exchange Commission (SEC 2007) and the Key Investor Information Disclosure (KIID) required in the EU (European Commission 2012). All formats summarize information about risks, fees, and returns. In the Netherlands, a form of pension fund disclosure – known as Pensioen 1-2-3 – was introduced under the Pension Communication Act of July 1st, 2015. The requirement is that every pension fund has prescribed information on returns, fees, risk in a correct, clear and effective way. Pensioen 1-2-3 presents the prescribed information to the participant about his pension using a layered approach and the participant can determine the level of detail he/she receives: from an outline (layer 1), enhanced with notes on the outline (layer 2) or detailed (layer 3). The layered structure of Pensioen 1-2-3 was designed for implementation in digital format. Pensioen 1-2-3 became mandatory in July 2016 and a complementary prescribed disclosure for former members/partners/beneficiaries – to be known as Retirement 1-2-3, will be available on pension fund websites by July 2017. This prescribed pension fund disclosure is complemented by mandatory pension information provision at the individual/pension participant level (Uniform Pensioen Overzicht) through an overview of the accrued individual pension rights as well as a simulation of the nominal pension flow to get under certain assumptions.
Short summary of relevant literature
The literature on information disclosure formats for pension choices is still emerging with papers questioning the effectiveness of information disclosure (Gillis 2015) and the impact of detailed versus short form disclosure (Beshears et al. 2011). More common are papers which attempt to assess the specific presentation formats for the items to be disclosed – fees, returns and risks – and the impact of text versus graphs versus experiential displays (see Bateman et al. 2016c for a summary). In the Australian context, Bateman et al (2016b) investigate alternative presentation formats for investment risk and find that the currently used Standard Risk Measures performs worst of nine alternative formats covering range vs tails, probabilities vs frequencies, and text vs graphs. Bateman et al (2016a) find that the prescribed presentation of strategic asset allocation in the Short Form (8 page) PDS encourages use of the 1/n heuristic. Finally, Bateman et al (2016c) conclude that people find the single page MySuper ‘dashboard’ hard to understand, particularly for returns information. An overall finding in many studies is that consumers do not use the prescribed information as expected by regulators (Navarro-Martinez et al. 2011).
Outline of proposed research
In order to address the issues discussed above, this project aims to do the following:
1. Explain, compare and contrast the regulations on information disclosure (presentation) formats for pension choices in use and planned for both Australia and the Netherlands.
2. Comprehensively survey the relevant literature, including studies testing the regulated information disclosure (presentation) formats used in Australia and similar countries, to inform the possible impacts of alternative design.
3. Draw conclusions for the design of effective information disclosure (presentation) formats for pension fund choice decisions in the Netherlands.
The overall outcome the proposed research will be an informative study evaluating the potential impacts of alternative information disclosure formats in the Dutch context drawing on lessons from Australia and the international literature. As well, the proposed research will provide the background for possible future projects testing alternative presentation formats (using lab, survey and field experiments) in the Netherlands.