Improper pension advice to SME’s by intermediaries angers MP’s

Collective vs semi collective

Article published in the Dutch Financial Times, February 2010

The political groups of ‘CDA’ and ‘PvdA’ have asked questions to MP’s Donner (ministry of Social Affairs) and Van der Hoeven (ministry of Economic Affairs) about the high brokerage fees of semi collective pension schemes.

Pieter Omtzigt of ‘CDA’ and Mei Li Vos of ‘PvdA’ wonder which costs MP’s find acceptable at a maximum for these kinds of pension contracts. They also want to know how an employee might obtain insight in the costs of his pension and where he might ultimately go to claim his rights if the brokerage fee received by the intermediary is too high.

The MP’s are surprised that the AFM (Authority Financial Markets) had never heard of the inappropriate pension advice by intermediaries. ‘I request clarification by the AFM. If inspections into the costs of semi collective policies are not yet customary practice, the AFM has to commence immediately.’

The Dutch Financial Times newspaper earlier reported on 1st February on these expensive semi collective policies, with which an estimated ten thousand companies have been burdened with.  A semi collective policy is a package of individual policies of which the costs structure is slightly more profitable than those of separate individual policies.

However, ultimately both employer and employee still end up paying huge brokerage fees for a semi collective policy that they would otherwise pay for separate policies. The brokerage for separate policies is much higher. In doing so an employee shall accrue less pension.

Actuary Henk van Embden, partner at actuarial firm Lane Clark & Peacock, has come across this sky high brokerage fee several times in practice. ‘These framework agreements involve large sums of money, as is shown in the case of airline company ArkeFly.’ Intermediary OBP Group received a brokerage of €995,000 for a pension scheme for over 400 employees of the airline company. Through the courts insurer Reaal reclaimed the fee, as a result of which OBP Group went bankrupt.

Although the conclusion of semi collective policies have declined recently, a lot of existing policies are continuing according to insiders. Director Wilbert Schellens of the trade organisation for financial advisors Adfiz reported earlier in this paper that in the past it used to be burdensome to convert these policies into collective contracts with insurers. According to Henk van Embden other motives are involved, ‘In converting semi collective contracts to collective contracts, the intermediary runs the risk that he will be obliged to pay back part of the brokerage, just as has happened to OBP Group. Often he is not willing to do so, as the money has been spent long since.’

Annemiek Vollenbroek of quality mark organization Register Pensioenadviseurs (registered pension advisors) underlines that the sky high brokerages appear less and less partly thanks to the introduction of the new Pensioenwet (Pensions Act) in 2007.  Employees had best appeal to their employer when they presume there are inaccuracies, says Vollenbroek. ‘The employer can then require openness from his intermediary. When in doubt he may ask for a second opinion with another advisor.’

The brokerage fees of a pension scheme consist of annual expenses, the so-called continuity fee, and a one off remuneration for the conclusion of the contract, the brokerage. The continuity fee for collective and semi collective policies is roughly similar. The difference is found in the one off brokerage, which is much higher for a semi collective policy than for a collective policy.

This can be illustrated with the following calculation example in a company with an annual pension of €2,500 per employee. For a semi collective policy the one off commission exists of 5% of the annual premium (in this example 5% of 2,500 = €125) multiplied with the duration of the pension contract. If the contract is concluded for 20 years, then the commissions are mounting to €2,000 per employee (€125 times 20). In a company consisting of 30 employees the one off remuneration amounts to €75,000 (€2,500 times 30). This is well over the brokerage for a collective policy, which is determined by negotiations between employer and intermediary. This is independent and unattached to premium and duration of the contract and usually lies between €5,000 and €10,000. It also occurs that not the duration of the contract, but the number of years that an employee will work until his pension date, is taken to calculate the one off remuneration. If a company has mainly young employees who have 36 work years ahead of them, the one off costs may rise to €135,000.