EIOPA Consultation paper on Methodology on value for Money Benchmarks

The background to this consultation of 15. Dec. 2023 you find here on the page of EIOPA

Answers of Axel Kleinlein – 15 March 2024

Q1: Stakeholders are invited to provided inputs and views as to how value for money benchmarks should work and their usefulness for product comparability.

While I have followed the discussions about POG and VfM in former times as president of Better Finance and as spokesman of Bund der Versicherten e. V. I am glad to give my opinions now as independent actuary.

I support that EIOPA is promoting a more consumer-centric approach towards product development and product testing (2.1. in the consultation paper). The idea to follow that via benchmarks is a strongly valuable approach.

In Germany we already have some kind of a benchmark mentioned in the “Guidance Notice on Aspects of Conduct of Business Supervision for Savings Products” published on 8 May 2023 by the German NCA Bafin There Bafin refers to the ECB inflation goal of 2 % as necessary efficiency. (https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Meldung/2023/meldung_2023_05_08_Merkblatt_Wohlverhaltensaufsicht_VA_en.html ):

I had the opportunity to use this benchmark in a study I did as leading actuary together with “Finanzwende research” a Consumer Association. There we examined a broad part of the German pension offers if they fulfil this benchmark or not (https://www.finanzwende-recherche.de/unsere-themen/riester/kundennutzen-bei-riester-und-ruerup-renten/ ). We examined the accumulation phase as well as the payout phase.

While some actuarial details in our methodology to adapt the benchmark is discussed among actuaries, the basic concept of using a benchmark to analyse the VfM is not questioned.

Therefore, I underline the applicability of the concept of using benchmarks to analyse the VfM.

Q2: Stakeholders are also invited to share whether they agree on what the benchmarks are and are not.

I clearly oppose to the view that benchmarks should not be used as consumer disclosure tool (3.6.). In contrary benchmarks are charming because they can offer an easy-to-understand way to disclose the VfM for the consumers. My experience with the application of a benchmark in a study to examine the VfM for actual products has shown the strength of using benchmarks to disclose the VfM (cf. my comment on Q1).

I want to outline, that Benchmarks should not be considered “a safe harbour” (3.2.). In this sense, to fulfill the requirements of the appropriate benchmarks should be seen as necessary, but not as sufficient.

For example, if the benchmark of 2 % efficiency is understood in the way that this benchmark should only be reached in the accumulation phase, it is obviously not sufficient if a product reaches this goal. Because a good result in the accumulation phase can be destroyed by bad conditions in the payout phase – especially if it is mandatory that the pay-out phase only provides annuities, and a lump sum is not offered (that is the case for the so called Rürup- and Riester-private pensions in Germany).

Q3: Do you already have similar tools in your market that would serve the same purpose?

As you have already mentioned in footnote 8 of the consultation paper, the Bafin already has published guidelines to examine the “Kundennutzen” –  the Bafin-translation for VfM. It is not publicly known if and how the Bafin already uses these guidelines. But some citations of Mark Branson, the Chair of Bafin, give strong signs, that Bafin is willing to follow some ideas of these guidelines.

Unfortunately, the guidelines do not cover the whole concept of the VfM as I already have expressed in the consultation for the guidelines (https://www.mathconcepts.de/aktuelles/stellungnahmen/stellungnahme-zum-merkblatt-zu-wohlverhaltensaufsichtlichen-aspekten/). While the Bafin-Guidance Notice have a strong focus on costs, the idea of the VfM consists of more components (like efficiency, effectiveness and a fair treatment of the consumers).

Fortunately, the final version of the Bafin-Guidance Notice includes an explicit hint that the payout phase has to be taken into account, too. Although it is not clear if and how the Bafin already takes this aspect into consideration

In the study of the “Bürgerbewegung Finanzwende Research” about the VfM of more than 100 pension products we have introduced an actuarial approach to include the pay-out phase in the examination of the VfM (cf. my comment on Q1).

In summary with the Bafin-Guidance Notice we already have a German approach, but so far as it is developed it only touches some parts of the idea of the VfM.

Q4: While EIOPA indicated that initially it will not publish the benchmarks, stakeholders are also invited to share views as to whether the benchmarks should be published or not already in the first initial phase.

I strongly support that the benchmarks should be published already in the initial phase.

As already outlined in Q 2 the benchmarks offer an easy-to-understand way for consumers to understand whether the given products offer a VfM or not.

The discussion of the benchmarks offers a great opportunity for all stakeholders to define more precisely, what necessities have to be provided for a VfM. Such a discussion about the benchmarks and the methodology how to use them will happen on expert level. Nevertheless, such an open discussion would provide that all stakeholders could add their expertise. It would be undermining the concept of the VfM if after the application of the benchmarks the whole concept of VfM gets in doubt.

Q5: Stakeholders’ views on the approach to product clustering are sought.

The “consumers’ needs principle” as outlined in 4.6. of the consultation should be the main idea behind a clustering. For the consumer it is not important how sophisticated the actuarial technique is within the product. For example, if a consumer wishes to have a guarantee for him (or her) it is not important how the manufacturer reaches to build that guarantee. It is important that the guarantee is of value – not through what technique the guarantee is provided.

The less fragmented the clustering is, the better.

In Germany I have witnessed in the past that some manufacturers impeded transparency through creating extremely complicated products. In the same way a too fragmented clustering could hinder the aim to find useful benchmarks for investigating the VfM.

Therefor I suggest including only as few characteristics as possible related to the diversity of the products offered.

Q6: Do you agree with the essential and additional criteria for product clustering? Should additional criteria be collected?

I mostly agree, but I want to outline some comments.

The VfM concept mainly stresses out the question if there is a fair return of money in relation to the money invested. Therefore, special aspects of a product that are not related to the “saving”-process should be considered separately – especially biometric risks (death, invalidity). The  Guidance Notice of Bafin already follows that idea.

Also service-features like an “advice service” or “digital features” have an importance for the customers in the whole contract, but they do not touch the idea behind VfM. Therefor I recommend focussing the aspects of VfM solely. The more aspects of a contract you want to include the less applicable it will be.

Last, I want to stress out that not only the accumulation phase should be considered. The payout phase is very crucial. If the accumulation phase is formidable but the following annuities are poor, then the whole product does not offer a proper VfM. For the study of the “Bürgerbewegung Finanzwende research” (cf. my comment on Q1) I had to examine exactly that situation: An acceptable performance in the accumulation phase combined with poor annuities. Therefor the benchmarks should consider the payout phase into account, too.

Q7: Do you agree with the proposed approach to use the additional criteria to either develop more detailed clusters or to provide qualitative considerations on how to take these elements into account when looking at the benchmarks?

As outlined in Q5 and Q6 I suggest a less fragmented clustering and the focus on the core ideas of VfM including the payout phase.

If following to these ideas some aspects of a product are not covered qualitative considerations should be preferred  in order not to alienate the benchmarks methodology from the core ideas of VfM.

Q8: Do stakeholders think that for MOPs Option 1 would suffice or that Option 2, which would be more substantial in terms of reporting but also more precise and granular, should be preferred?

Neither Option 1 nor Option 2 is feasible.

Both Options are based on the idea of a well-informed consumer who has the capability and capacity to use and understand the MOP. This very rarely the case. The average consumer normally chooses one option that is recommended by the intermediary and does not change his decision. Therefor the decision is often triggered by other objectives than the increase of a VfM.  For example in Germany we had to experience that intermediaries recommend the investment in special assets because they get an extra incentive by the provider of that asset.

If you look inside a MOP, you often find optional assets that would not be easy to buy by the consumer under the rules of Mifid, because the consumer has not the necessary experience and knowledge about these assets. Therefor it is not understandable why in the case of an even more complicated product like a MOP the consumer should be considered as having a sufficient capability and capacity to use and understand the MOP.

The best solution to solve this problem is to examine MOPs in the worst-case scenario, i.e. to use the option with the highest costs and the worst options for the consumer.

Q9: For Option 2 do you think the clustering approach should be revised by focusing more on the underlying options and less on some of the other essential product features?

Referring to my answer to Q 8 the “worst” underlying options should be considered and other essential product features should be added in the clustering.

Q10: For Option 2 do you think that the inclusion of the profit participation investment option in the asset class feature is appropriate for a correct interpretation of hybrid products?

If option 2 is chosen (what I do not recommend) it would be appropriate.

Q11: Stakeholders are invited to provide feedback on the use of VfM Methodology Level II indicators, are these a good fit for the benchmarks? Should Level I indicators be used?

Level I indicators should be used, especially those based on Solvency II.

From my point of view, the biometric aspects of a product (death and invalidity) should be analysed separately.

Q12: Stakeholders’ views on the proposed indicators are sought, including on the intervals at which the indicators need to be assessed.

“Surrender Value / Premiums Paid”: The meaning of this figure is highly dependent on the RHP. Therefor it is difficult to use this figure to compare products with different RHPs.

“IRR”: This is a very appropriate figure. It also can be used to include the payout phase and is therefore highly recommended (cf. my comment on Q13).

“RIY”: The meaning of this figure is highly dependent on the RHP. Therefor it does not allow a proper analysis of the VfM.

“Total costs paid / Premiums paid”: This figure is easy to understand and offers a good way to analyse the VfM. It is necessary to underline, that for MOPs the costs for the assets should be included.

“Entry costs / total costs payed”: This figure gives a good understanding of the importance of the entry costs. It also can be seen as indicator for a Conflict-of-Interest for the intermediary.

“Minimum average yearly return required to break-even”: It is not clear what is meant. If the return is understood as the necessary return for the underlying assets, this figure carries valuable information (but is difficult to calculate). If the return is understood as the necessary return after costs of the assets, the information loses a lot of value.

 “Year of break even with the surrender value”: Very interesting figure. It should be taken in comparison with the average holding period including the average surrender.

“Total costs / surrender value”: I agree to the given explanation.

Considering the necessary assumptions that have to be taken for calculating these figures I recommend to take these that lead to the worst results, especially for MOPs (cf. my comment on Q8). A VfM should be given to the average consumer (who often is lead to choose bad options) and not only to those who are exceptional used to financial products.

Q13: Stakeholders are invited to also provide feedback as to which indicators works best for which cluster/product features.

In addition to Q 12, I want to outline the strength of the IRR. Especially because it is an already used figure that allows to include the payout phase for annuities.

This can be done by looking at an average cash flow for a given collective. For this, you can calculate how many of the members of the collective are still alive in the accumulation phase to pay the premiums and after entering the payout phase how much annuities flow to the members of the collective. Trough that you get a cash flow for the whole collective. The related IRR to that cashflow then describes the IRR of the product including the payout phase.

This methodology has been used in the study of the Bürgerbewegung Finanzwende (cf. my comment on Q1) as well as in other studies.

Q14: Do you believe additional indicators should be measured?

To include the VfM of the pay-out phase I recommend to use the IRR (cf. my comment on Q13).

To give a hint for the VfM in the payout phase I recommend introducing one additional figure:

“The longevity assumption” as the average life expectancy that is underlying of the calculation of the annuity.

For products that include biometric aspects I recommend to introduce an additional set of figures:

“The Premium partition” consists of three figures:

  1. The average part of the premium used to cover the biometric risks
  2. the average pat of the premium to cover costs
  3. the average part of the premium that provides the saving part or annuities.

This partition is a well-used technique to analyse the importance of these three parts of the premium.

Q15: In case option 2 for MOP is chosen, do you think that more appropriate indicators applicable only to the single investment options should be identified?

Referring to my answer to Q 8 the “worst” underlying options should be considered and be the base for the calculating of the indicators.

Q16: Do you agree with the proposal of using PRIIPs KID assumptions for the moderate scenario for the calculations of the indicators? Should and additional scenario (point in time) being included to evaluate the current performance of the product?

Since I assume to use worst-case assumptions for the costs within MOPs IRR (cf. my comment on Q13) I would take it as appropriate to refer to the moderate scenario. If the results are disclosed, the underlying assumptions of the moderate scenario should be disclosed as well.

Q17: Do stakeholders agree to use percentiles to define benchmarks?


Q18: Do stakeholders agree that percentiles should be defined once the data is available and that such percentiles should be adjusted as relevant?


Q19: In stakeholders’ views are there some minimum/maximum percentiles which should be used?

It seems to be appropriate to use 0-25-75-100 as it is the most common.

Q20: Do stakeholders think that the data collection should be expanded?

The Returns of Investment of selected ETFs should be added while they are often used within MOPs.

Q21: If yes, which data collection principles should be used?

No answer possible.

Q22: Do stakeholders foresee a significant impact in the data collection in terms of resources and time in comparison to the current Cost and Past Performance data collection?

No answer possible.

Q23: How would you assess the impact that the benchmarks methodology would have in your organisation? Please consider both the data collection and the use of the benchmarks when they will be available.

No answer possible.

Q24: Do stakeholders agree with benefits of the proposed approach?

The proposed approach will lead to a better understanding of the products within the manufacturers. Often the people involved in creating new products only look at specific aspects of a product and not to the product in whole. The approach helps to understand better whether a product has a VfM or not.

The NCAs, too, will get a good and easy way to examine the products. This is of great value especially for well-developed markets with a wide variety of products.

And – as recommended – if the results are disclosed to public, the approach will help intermediaries and consumers to find an appropriate way through the jungle of offers.

Q25: Are there additional benefits in stakeholders’ views?

This approach helps to understand the ideas behind VfM.

While many users of financial products often have an uncertain feeling being not fairly treated, this approach will help them to understand if this is really the case or not.

Therefor this approach might be a good way to empower the consumers without regulating the products themselves.

Q26: What could be the costs of implementing Option 2?

No answer possible.