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Influence of Financial Determinants on

the Reporting Quality of Dutch Pension

Funds

Combined Master’s Thesis for MSc Accountancy and MSc Controlling

Name Lisette Bonte

Student no. S3817067

MSc track Accountancy & Controlling

Supervisor Wilfred Kevelam

Date January 17th, 2021

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Abstract

The purpose of this study is to investigate whether financial determinants have an effect on the reporting quality of Dutch pension funds and if the reporting quality has increased in the period 2015 to 2019. The reporting quality of pension funds is a relatively new research area and this study adds new insights to existing literature about reporting quality.

The sample consists of 80 pension funds of which the annual reports of 2015, 2017 and 2019 were studied in order to perform a trend analysis. The reporting quality is assessed by using a disclosure index based on the Dutch regulation on reporting specifically for pension funds (RJ 610). A multiple linear regression analysis is used to examine the study hypotheses and achieve the study’s purpose.

The findings indicate that the average reporting quality of Dutch pension funds has indeed increased between 2015 and 2019. Results show that involvement in ESG practices has a positive impact on reporting quality. There was no significant support found for the associations between (1) size and reporting quality, (2) Big4 auditor and reporting quality and (3) financial performance and reporting quality. There was also no statistical support found for the interaction effect of involvement in ESG practices on the association between financial performance and reporting quality.

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1. Introduction

The funding ratios of pension funds are very sensitive and fluctuate every month, which has only been magnified by the current COVID-19 crisis. Poor returns on investments of pensions result in unfavorable funding ratios. During the second half of last year, the funding ratio of Dutch pension funds kept decreasing to a minimum of 95% in August 2019, started to increase again in the last quarter of 2019 and because of the pandemic decreased to an

average of 89% in March 2020 (dnb.nl, 2020). These numbers are relative low in comparison to the legally required funding ratio of 104%. The funding ratio is used to determine the financial position of a pension fund, and prior research has established that financial performance is associated with financial reporting quality (e.g. Martinez-Ferrero, 2014; Matemane and Wentzel, 2019; Mans-Kemp and Van der Lugt, 2020). Based on the numbers described above, pension funds are underperforming. This underperformance could have an effect on their reporting quality. Assuming that the amount of disclosure is related to reporting quality, research shows that managers tend to disclose more information if news about firm performance is good and withhold disclosure on firm performance if the news is bad (e.g., Dye and Sridhar, 1995; Gigler and Hemmer, 2001; Leventis and Weetman, 2004; Vivas et al., 2020). However, there might also be other factors influencing financial reporting quality, for example, corporate governance factors or investor behavior.

The financial reporting quality of companies has been studied extensively in prior literature (e.g. Park, 2018; Hope et al., 2013; Rahman et al., 2010; Cao et al., 2012; Garrett et al., 2014). However, these studies all have in common that they use public and/or private firms as their sample. A pension fund is very different from a public or private firm. Looking at the typology of a pension fund, it can be classified as a financial institution. It differs from the firms studied in previous literature, because it has no predominant flow of own goods. There is no to little prior research done on the financial reporting quality of financial

institutions, in particular pension funds. This study aims to close this gap in existing literature by investigating the reporting quality of Dutch pension funds during the period 2015-2019 and perform a trend analysis.

As briefly mentioned before, this study is unique in the sense that the reporting quality of pension funds is a relatively new research area. Dutch pension funds are chosen as a

sample for this study, because new regulations were introduced in the Netherlands in 2013 and 2014 for pension funds, namely Wet Versterking Bestuur (Act Strengthening

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effective as of January 1st, 2015. Although these regulations were not specifically introduced to improve the reporting quality of Dutch pension funds, these new regulations could help to improve the reporting on these subjects. The purpose of this study is to investigate whether the reporting quality of Dutch pension funds has increased after the introduction of these new regulations. This is done by investigating the annual reports of Dutch pension funds for the financial years of 2015 through 2019 and explore if the reporting quality has increased during this period. The reporting quality will be assessed using a disclosure index based on the Dutch regulation on reporting for pension funds (RJ 610). With this, a trend analysis will be

performed for the studied years to see if the reporting quality has improved.

Over the years, the information in the annual report of firms has become quite extensive in the sense that also non-financial information has been included in these reports. As briefly mentioned before, there could be many factors influencing the reporting quality of corporations. Factors like the audit profession and corporate governance are well-studied areas in relation to reporting quality (e.g., Litt et al., 2014; Habib and Jiang, 2015; Kusnadi et al., 2016; Pucheta-Martínez et al., 2016; Bratten et al., 2019). Each of these factors has their own effect on reporting quality. Therefore, it is interesting to look at particular determinants that are associated with reporting quality. To demarcate the research on reporting quality of Dutch pension funds, this study will focus on the association between financial determinants and reporting quality. In particular, this paper looks at whether size, a Big 4 auditor, ESG practices and financial performance are associated with the reporting quality of pension funds. This is reflected by the following research question:

Which financial determinants have had an effect on the reporting quality of Dutch pension funds during the time period 2015-2019?

The contribution of this study is threefold. First, it adds to existing literature about reporting quality by investigating the reporting quality of Dutch pension funds. Pension funds differ from public/private firms in their typology and their operations. Therefore, results found in previous studies might not hold for pension funds. Therefore, it is interesting to study whether the results in this study are similar or different to those found in previous studies on reporting quality, thereby creating a new research area. Second, the study assesses whether the new regulations introduced by the Dutch government in order to strengthen governance have had a side effect on the reporting quality. Aspects of the new regulations were also introduced in the regulation on reporting for pension funds. These aspects are also part of the disclosure index

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used in this study. Therefore, this study can assess whether the new regulations have helped in increasing the reporting quality of Dutch pension funds. Third, the study investigates which financial determinants have an effect on the reporting quality of Dutch pension funds. As mentioned before, there are multiple factors associated with reporting quality. By demarcating this study into financial determinants, this paper describes only the effect of several financial determinants on the reporting quality of Dutch pension funds, ensuring other determinants, such as governance, do not influence the results found in this study.

The rest of this paper is structured as follows: section 2 describes the theory and hypothesis development, section 3 describes the methodology used in this study, section 4 provides the results of this study and section 5 includes the discussion and conclusions drawn from this study.

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2. Theory and Hypothesis Development

Why do firms disclose information? One theory that provides a view on this question is the agency theory. The agency theory proposes that there is a principal-agent relationship between two parties and the agent acts on behalf of the principle (Jensen and Meckling, 1976). The most common form of this relationship is between the shareholders (as the principal) and the management (as the agent) of an organization. Information asymmetry exists between these two parties, because management has insider knowledge about the performance of the company. Disclosing this knowledge to the shareholders helps decreasing this information asymmetry (Subramaniam, 2006; Buskirk, 2012; Kubota and Takehara, 2016). Stakeholder theory is another theory that provides a view on the question asked above. This theory elaborates on agency theory by taking into account that a wider group exists that holds management accountable for the company’s financial and non-financial performance, for example, employees, governments and customers (Guthrie et al., 2006; Guenther et al., 2016; Herremans et al., 2016). In addition, legitimacy theory also provides a view on this question, but rather from the viewpoint of the company itself. Namely, this theory suggests that the company discloses information voluntarily in order to be perceived as legitimate (Deegan, 2006; Nègre et al., 2017; Patten, 2019). There are other theories that engage in this subject (e.g. signaling theory, stewardship theory), but these three theories are perceived to be the most important regarding firm disclosure. The study of An & Davey (2011) provides a summary of why firms disclose information, namely (1) to reduce information asymmetry; (2) to discharge accountability; and (3) to signal legitimacy. These reasons can also be reasonably expected to hold for pension funds. Information asymmetry also exists between the pension fund and its participants (e.g. the way in which the pension fund is investing their pensions). Besides the participants, the pension fund also has other stakeholders that hold the pension fund accountable (e.g. society’s need for responsible investing, supervisors). This also relates to the legitimacy that pension funds feel to disclose information on their investment policy, premium policy, investment returns, risk attitude, etc. However, the quality of this disclosure might differ between pension funds.

The Dutch pension system is organized as a three-pillar system. The first pillar contains pensions based on income the retiree has generated in the years (s)he has worked in the Netherlands. The government initiates this pension. The second pillar is initiated by the employer to provide supplementary pension to the employee that has retired by using pension funds. The third pillar comprises of personal savings initiated by the retiree himself/herself to

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fill a potential gap between the income from the first and second pillars (Kemna et al., 2011). For the purpose of this research, the focus of this study lies on the second pillar.

In the Netherlands, the second pillar can be divided into three types of pension funds. The first is the industry-wide pension fund, a pension fund that all companies active in that industry are mandated to participate in. Only when a corporation believes it can offer a better pension plan than the industry-wide pension plan, it is allowed to establish a corporate

pension fund for the employees that work for that corporation. Some professional groups also establish their own pension fund, which is known as an occupational pension fund. This pension fund is for independent professions, such as general practitioners or notaries (Kemna et al., 2011). For this research, pension funds from all three types of pension funds will be included in the sample.

The Netherlands has one of the biggest pension sectors in the world. Based on an analysis performed by Consultancy.nl, the Dutch pension sector has the fifth largest pension sector in the world, with a combined total assets of $1.7 trillion. That is almost twice the size of the annual GDP, which is around $900 billion. ABP, the pension fund for employees within the government and education, and PFZW, the pension fund for professionals in the healthcare and welfare sector, are the largest pension funds in the Netherlands. They are also both among the ten largest pension funds in the world (Consultancy.nl, 2020).

Pension funds differ in size. It can be reasonably expected that an industry-wide pension fund is larger in size than a corporate pension fund, because multiple corporations are adjoined to an industry-wide pension fund if they operate in that industry, however, only one corporation is adjoined to a corporate pension fund. Nevertheless, it should be noted that some corporation pension funds are also large in size (e.g. Rabobank, Shell). Prior research suggests that larger firms tend to disclose more because of greater demand for information (e.g., Lobo and Zhou, 2001; Karim et al., 2013; Kansal et al., 2014). Moreover, Uyar et al. (2013) found a positive association between firm size and disclosure quality, arguing that large firms have better resources to produce a higher level of disclosure. Reflecting these prior research results to pension funds, it can be expected that larger pension funds produce a higher level of disclosure, because of greater demand for information from stakeholders, as well as because they have better resources to produce a higher level of disclosure. This leads to the first hypothesis:

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Audit quality can be defined as “the market-assessed joint probability that a given auditor will both discover a breach in the client’s accounting system, and report the breach” (DeAngelo, 1981, p. 186). An important concept within audit quality is ‘quasi-rents’. DeAngelo (1981) argues that audit firms with clients in similar industries can develop their knowledge more and gain so-called ‘quasi-rents’, which is the investment an auditor can make in an industry or a client that must be recouped. And the larger the audit firm, how easier it is to gain these ‘quasi-rents’ and recoup them, thereby providing higher audit quality. Pension funds are a specific sector for auditors. There are significant differences between an enterprise and a pension fund, for example, their operations and because of that they report different things in their annual reports. Pension funds lay emphasis on reporting about, for example, their policies, how they invest the pensions and their risk attitude. An enterprise lays emphasis on reporting about its operations and its profits. Therefore, an opportunity arises for auditors to gain ‘quasi-rents’ in the pension fund sector by auditing a significant part of this sector, thereby also increasing the audit quality, because the auditor can create a large knowledge pool about the operations of a pension fund because they audit a significant part of the pension fund sector. DeAngelo (1981) also mentioned that larger audit firms have a higher chance of reputational damage, so they also benefit intrinsically from ensuring higher audit quality. There is evidence that large audit firms have been involved accounting scandals in this century (e.g., Enron, WorldCom, Lehman Brothers, Wells Fargo), which encourages audit firms to provide high audit quality and protect their reputation. Also, Boone et al. (2010) mention that large audit firms are constantly working on building their brand name, so these firms have an incentive to protect their reputation by providing more credible financial reports. Similarly, Bigus (2015) also mentions the importance of reputation for Big 4 audit firms by fearing what might happen if they provide low audit quality. Francis and Yu (2009) also find that the office size of Big 4 audit firms is associated with a higher level of audit quality. Moreover, Choi et al. (2017) find evidence that Big 4 auditors provide higher audit quality than non-Big 4 auditors. These prior research results are also in line with the findings of DeFond and Zhang (2014), who define higher audit quality as “greater assurance of high financial reporting quality, because high audit quality increases the credibility of the financial reports” (p. 281). Larger audit firms are mostly comprised of Big 4 auditors. Based on the findings described above, it can be expected that reports audited by a Big 4 auditor are of a higher quality than reports audited by a non-Big 4 auditor. Therefore, the financial reports of Dutch pension funds audited by a Big 4 auditor should be a of a higher quality than reports audited by a non-Big 4 auditor. This leads to the second hypothesis:

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H2: Presence of a Big 4 auditor is positively associated with reporting quality.

This last decade has also been characterized with increased awareness for the environment. Corporate Social Responsibility (CSR) becomes more important as the years go by. In the Netherlands, pension funds have started reporting on how they invest the pensions in a

socially responsible way. A lot of pension funds are emphasizing the reduction of their carbon dioxide footprint by investing less in, for example, the coal industry. This is the result of a part of the Dutch pension sector signing the climate agreement of the Dutch government, which is based on the Paris Agreement of 2016. They also report that they do not invest in firms that are in violation of the Dutch law or international regulation. They also do not invest in government bonds of countries subject to a UN Security Council arms embargo.

Because of the increasing awareness of CSR practices in society, corporations feel the need to report on their CSR activities to satisfy those needs of society and relieve the pressure they experience because of those needs. This is consistent with the findings from Weber (2014), who states that accountability is the main driver for issuing a ESG report. His results also suggest that reporting on ESG practices helps improving the performance of ESG practices. Similarly, Lopez-de-Silanes et al. (2020) find that the more that is disclosed about ESG practices, the higher their ESG scores. Romero et al. (2018) find that companies issuing a stand-alone report on ESG practices provide information of a higher quality than companies including ESG information within their annual report. Moreover, Kim and Lee (2019) found support for the statement that more socially responsible firms have better reporting quality. Also, Al-Shaer (2020) found that sustainability reporting firms are less likely to engage in earnings management, thereby providing more transparent and reliable information. Because reporting on ESG practices is included in annual reports, it becomes part of the assessment of the reporting quality. Based on the literature on this subject described above, the effort that is put in to engaging in ESG practices is also associated with reporting quality. Therefore, this study will investigate whether higher involvement in ESG practices leads to higher reporting quality. This leads to the third hypothesis:

H3: Higher involvement in ESG practices is positively associated with reporting quality.

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solvency, the greater the ability to repay short- and long-term debt and the better the financial position. The financial position of pension funds is assessed by determining its funding ratio, which is similar to a firm’s solvency. The target funding ratio depends on a number of factors, among other things, the requirements of the pension fund itself and the minimum funding ratio required by the government. The minimum funding ratio required by the government is 104%. When the funding ratio is below 104%, the pension fund must take measures to improve its financial position. When the funding ratio is between 104% and 110%, a pension fund may not index their pensions. When the funding ratio is above 110%, the pension fund is allowed to (partially) index the pensions (dnb.nl, 2020).

Prior research on the relationship between solvency and reporting quality argues that when the solvency is beneficial, the firm might be more willing to provide information of a higher quality (Amr, 2016). Moreover, previous studies found support for the statement that solvency is positively associated with reporting quality (e.g., Shehu and Farouk,2014; Takhtaei and Mousavi, 2012; Karami and Akhgar, 2014). Also, Echobu (2019) finds this positive relationship between solvency and financial reporting quality at the 5% significance level, arguing that “this finding of the study concurs with the position that firms with

impressive performance indicators such as solvency have added inducement to provide earnings information of higher quality.” (p.40). Reflecting these results onto pension funds, it is thus interesting to examine whether this association between financial performance, in this case the funding ratio, and reporting quality also exists for pension funds. This leads to the fourth hypothesis:

H4: The funding ratio of pension funds is positively associated with reporting quality.

As mentioned before, the awareness for ESG practices is increasing. It has also become an important aspect for investors. Prior research shows that investors value ESG disclosure in making their investment decisions (e.g. Cormier et al., 2011; Durand et al., 2019; Hartzmark and Sussman, 2019; Arnold et al., 2020). Financial performance is also a factor that

influences investment decisions (e.g. Almagtomel and Abbas, 2020; Narayanan et al., 2020). Therefore, it can reasonably be stated that ESG disclosure and financial performance are important aspects for the capital market in assessing a firm’s value.

Prior research also suggests a positive relationship exists between ESG disclosure and financial performance (e.g. Saini and Singhania, 2018; Qian and Xing, 2018; Buallay, 2019).

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Moreover, Almeyda and Darmansyah (2019) studied whether ESG disclosure influences financial performance of listed real estate companies in the G7 countries. They found a significant positive relationship between the two variables. Similarly, Alareeni and Hamdan (2020) studied the impact of ESG disclosure on performance of US S&P 500-listed firms. They found that ESG disclosure is positively associated with firm performance, stating that “results showed that firms with high disclosure levels of ESG, EVN and CSR have higher operational and financial performance (ROA and ROE)” (p. 1422). Given these results, it can reasonably be expected that ESG practices could strengthen the expected relationship stated under H4. This leads to the fifth and final hypothesis:

H5: Involvement in ESG practices moderates the impact of the funding ratio on reporting quality.

A summary of the hypotheses is included in Figure 1.

Figure 1 Conceptual model

Reporting quality ESG practices

Big 4 auditor Financial

performance

Size of pension fund

H1 +

H2 + H3 +

H4 + H5 +

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3. Methodology

3.1. Research Design

In order to answer the research question stated in the introduction, a disclosure index will be used to assess the reporting quality of the pension funds included in the sample. Other methods exist to assess reporting quality, for example performing a content analysis or a linguistic analysis. However, for this study a disclosure index was chosen because data was collected with multiple people and using a disclosure index offers the least subjectivity in the results. The usage of a disclosure index to assess reporting quality is a well-known method and has been used extensively in prior literature (e.g., Coy and Dixon, 2004; Al-Janadi et al., 2012; Tang et al., 2016). Existing literature on the usage of disclosure indices to assess reporting quality have the common assumption that the extent of disclosure is a proxy for the quality of disclosure (Beattie et al., 2004). This is consistent with the author’s view on what is reporting quality. The author is of the opinion that the more that is disclosed also is an

indication of the quality of reporting, because when more information is disclosed,

stakeholders have more information to base their economic decisions on, which is believed to be an important aspect of reporting quality. Therefore, using a disclosure index is a valid method to study the reporting quality of pension funds.

The disclosure index is based on the Dutch legislation on reporting specific for pension funds (RJ 610). The disclosure index is not based on the whole legislation due to the extensiveness of this legislation. Instead, items perceived by the author as important to be disclosed were included in the disclosure index. A questionnaire of 62 items was drawn up, all weighing equally. The questions can only be answered with yes, no, or n/a. For each item, a 1 was put in the column yes when the information in the annual report relating to that item was perceived to be disclosed, in the column no when it was perceived as not disclosed and in the column n/a when the item was not applicable to the pension fund. The items that scored a yes were divided by the total score in the yes and no columns in order to get a percentage which suffices as the score regarding reporting quality. An overview of the items included in the disclosure index is included in Appendix 1.

In order to test the hypotheses, general information from the annual reports was also collected, for instance the total participants of the pension funds, the total assets of the pension funds and the funding ratios of the pension funds.

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3.2. Data Collection

Data was collected based on the most recent publication of De Nederlandsche Bank that included a list of active pension funds in the Netherlands. De Nederlandsche Bank is an organization that supervises the Dutch pension system and sector. Therefore, this source is perceived as reliable to collect data from regarding Dutch pension funds. At the time the selection was chosen, 224 pension funds were active in the Netherlands. From this list, 80 pension funds were taken as a sample to perform the tests. The sample included industry-wide pension funds, corporation pension funds and some occupational pension funds. The sample also included large pension funds as well as smaller pension funds. The sample is consistent with approximately 1/3 of the population and is therefore a representative sample from the population. In order to perform a trend analysis, the annual reports of 2015, 2017, and 2019 from the pension funds in the sample were studied and assessed against the disclosure index. This resulted into 240 observations. Given the time frame available for the study and the extent of annual reports to be studied, the data collection was performed with multiple researchers. An overview of the pension fund included in the sample and their disclosure scores is included in Appendix 2.

3.3. Data Analysis

Data was analyzed using SPSS. Of the 240 observations, 234 annual reports were included in the analysis of the sample. One pension fund in the sample was liquidated in 2019 and another merged with a common pension fund as of January 1st, 2019, therefore they had no annual report of 2019 similar to the other pension funds in the sample and were removed from the total sample. This resulted in a total sample of 78 pension funds with 234 observations. For testing H3 and H5, a subsample was used which included ESG-ranked pension funds. In the Netherlands, there is an organization that assesses the investment policy of Dutch pension funds regarding socially responsible investing, called the Vereniging van Beleggers voor Duurzame Ontwikkeling, the Association of Investors for Sustainable Development (VBDO). Each year, they examine the performance of the investment policy of the 50 largest pension funds in the Netherlands in terms of socially responsible investing and report their findings. They assess the investment policy of these pension funds against a benchmark, which focuses on four categories: (1) governance, (2) policy, (3) implementation, and (4) accountability (vbdo.nl, 2020). It should be noted that the ranking published in 2015 uses the data from 2014 and the ranking published in 2016 uses the data from 2015, etc. Therefore, the published

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reports of 2016, 2018 and 2020 by the VBDO will be used, because these correspond to the financial years from the annual reports.

Because only the 50 largest Dutch pension funds are examined by the VBDO, it does not necessarily mean that pension funds not included in the ranking of the VBDO have a worse investment policy than number 50 on the list in terms of socially responsible investing. Therefore, the whole sample cannot be used for statistical testing and a subsample was selected from the total sample.

Cross checking the ranking list from the VBDO and the sample selection, 27 pension funds are included in both the list from the VBDO and the sample for the years investigated in this study. This resulted in 81 observations. An overview of the pension funds included in this sample and their score on the ranking of the VBDO over the years is included in Appendix 3.

The dependent variable in this study is the score on the disclosure index. This is the proxy for assessing the reporting quality of the pension funds in the sample. The presumption is that a higher disclosure score indicates a higher quality of reporting.

The independent variables are size, audit firm, and funding ratio. Size is measured using the natural logarithm of total assets. The actual values have a wide range, therefore using the natural logarithm of these values ensures the results will not be affected by outliers. Audit firm is measured using a dummy variable. If the auditor of the annual report is a Big4 audit firm, the variable is equal to 1 and 0 if it is a non-Big4 audit firm. Funding ratio is measured using the policy funding ratio of the pension funds included in the sample. The policy funding ratio is for most pension funds an important funding ratio, because this funding ratio is their guiding principle. It is also determined on the basis of this funding ratio whether the buffers of the pension fund (the required funding ratio) are sufficient. The actual funding ratio represents the actual financial position of the pension fund. However, this reflects a particular point in time of the financial position. Therefore, the policy funding ratio will be used in this study to assess the financial position of the pension fund, because this is an average of the last twelve months and therefore gives a better representation of the financial position of the pension funds. For the subsample, ESG ranking is also included as an

independent variable. In order to test whether higher involvement in ESG practices is associated with higher reporting quality, a distinction was made within the subsample between high ranked pension funds and lower ranked pension funds and dummy variables were created. This is done because not all 50 pension funds included in the ESG ranking are included in the sample used for this study. If the pension fund had a ranking number between 1 and 25, it was given a 1 and if the ranking number was between 26 and 50, it was given a 0.

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In order to strengthen the expected relationships, control variables are used in the regression analysis. For this study the control variables are the (1) total participants in the pension fund, and (2) net result. Based on stakeholder theory, the total participants are important stakeholders for a pension fund (e.g. Clark, 2004; Voronkova and Bohl, 2005; Strumskis and Balkevicius, 2016) . Moreover, prior research has also indicated that when results are bad, management is reserved in disclosing this information, thereby lowering the quality of disclosure (e.g., Leventis and Weetman, 2004; Cohen et al., 2018; Guay and

Verrecchia, 2018). Both variables are measured also using the natural logarithm of their actual values to ensure the results are not affected by outliers.

To measure the impact of the financial determinants on reporting quality, the study estimates a multiple linear regression model for the total sample as follows:

(1) 𝑅𝑄𝑖𝑡 = 𝛽0+ 𝛽1𝑆𝑖𝑧𝑒𝑖𝑡+ 𝛽2𝐵𝑖𝑔4𝑖𝑡+ 𝛽3𝐹𝑃𝑖𝑡+ 𝛽4𝑇𝑃𝑖𝑡+ 𝛽5𝑁𝑅𝑖𝑡+ 𝜀

For the subsample, the following multiple linear regression model will be used to test the main effects only:

(2) 𝑅𝑄𝑖𝑡 = 𝛽0+ 𝛽1𝑆𝑖𝑧𝑒𝑖𝑡+ 𝛽2𝐵𝑖𝑔4𝑖𝑡+ 𝛽3𝐸𝑆𝐺𝑟𝑘𝑖𝑡+ 𝛽4𝐹𝑃𝑖𝑡+ 𝛽5𝑇𝑃𝑖𝑡+ 𝛽6𝑁𝑅𝑖𝑡+ 𝜀

In order to test the moderate effect stated under H5, the following multiple linear regression model will be used for the subsample:

(3) 𝑅𝑄𝑖𝑡 = 𝛽0+ 𝛽1𝑆𝑖𝑧𝑒𝑖𝑡+ 𝛽2𝐵𝑖𝑔4𝑖𝑡+ 𝛽3𝐸𝑆𝐺𝑟𝑘𝑖𝑡+ 𝛽4𝐹𝑃𝑖𝑡+ 𝛽5(𝐸𝑆𝐺𝑟𝑘𝑖𝑡× 𝐹𝑃𝑖𝑡) + 𝛽6𝑇𝑃𝑖𝑡+ 𝛽7𝑁𝑅𝑖𝑡 + 𝜀

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Table 1 Description of the study variables

Variable Definition Description

𝑅𝑄 Reporting quality Measured by score on the disclosure index

𝑆𝑖𝑧𝑒 Pension fund size Measured by the total assets of the pension fund (i), in the period (t)

𝐵𝑖𝑔4 Big 4 audit firm The audit firm of the pension fund (i), in the period (t) 𝐸𝑆𝐺𝑟𝑘 ESG ranking The ESG-rank number of the pension fund (i), in the period

(t) 𝐹𝑃 Financial

performance of the pension fund

Measured by the policy funding ratio of the pension fund (i), in the period (t)

𝑇𝑃 Total participants of the pension fund

A control variable measured by the total participants of the pension fund (i), in the period (t)

𝑁𝑇 Net result of the pension fund

A control variable measured by the net result of the pension fund (i), in the period (t)

𝜀 Standard error term

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4. Results

4.1. Descriptive Statistics

Table 2 shows an overview of the descriptive statistics of the sample that was used for this study. The results show that the biggest group in the sample are corporate pension funds, followed by industry-wide pension funds. This is a representative view of the population, because most of the pension funds in the Netherlands are corporate pension funds, followed by industry-wide pension funds and a few professional group pension funds. It is also visible that the sample is consistent over the financial years.

Also visible in Table 2 is that most pension funds have a distribution agreement. This is indeed the most common form of pension scheme in the Netherlands.

Moreover, the Big 4 audit firms have a big share in auditing Dutch pension funds. Of the 234 observations, 209 were audited by a Big 4 auditor, which corresponds to 89.32% of the total sample.

The size of the pension funds in the sample also has a wide range, as is visible from Table 2. This implicates that our sample includes relatively small pension funds, but also some relatively big pension funds.

Table 2 also shows that the funding ratios of the pension funds in the sample have a wide range. It is visible that the mean of the funding ratios is closer to the minimum value than the maximum value, suggesting that some pension funds have outlier funding ratios.

Finally, it is visible that the disclosure score has increased over the years. Between 2015 and 2017 there is a higher difference visible than between 2017 and 2019. This implicates that the reporting quality has improved significantly between 2015 and 2017 and that only a few improvements had to be made from 2017 to 2019.

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Table 2 Descriptive Statistics Financial Year

Total

General information about the sample 2015 2017 2019

Type of pension fund Corporate pension fund 50 50 50 150 Industry-wide pension fund 23 23 23 69 Occupational pension fund 5 5 5 15 Total 78 78 78 234 Nature of pension scheme Distribution agreement 73 73 73 219 Premium agreement 5 5 5 15 Total 78 78 78 234 Independent variables Total assets year-end (x 1,000 EUR) Mean 7,218,355.84 10,325,921.76 10,166193.30 9,236,823.63 Median 1,139,174.50 1,312,092.50 1,527,660 1,328,611 Minimum 30,665 42,073 59,004 30,665 Maximum 187,011,000 216,329,000 264,451,000 264,451,000 N 78 78 78 234 Std. Deviation 22,658,975.90 31,379,547.60 32,494,639.96 29,087,422.11 Audit firm Deloitte 6 7 10 23 PwC 29 26 24 79 KPMG 13 10 10 33 EY 24 26 24 74 BDO 0 1 1 2 Mazars 5 7 9 21 Other 1 1 0 2 Total 78 78 78 234 Funding ratio Mean 110.2410% 113.0487% 109.3671% 110.8856% Median 108.90% 111.80% 108.75% 109.75% Minimum 95.00% 95.80% 87.00% 87.00% Maximum 141.50% 152.20% 134.30% 152.20% N 78 78 78 234 Std. Deviation 8.49263% 10.66341% 10.05179% 9.86308% Dependent variable Score on disclosure index Mean 72.0106% 77.5751% 79.2906% 76.2921% Median 73.00% 77.00% 81.00% 77.00% Minimum 50.85% 54.24% 52.00% 50.85% Maximum 89.00% 92.00% 91.94% 92.00% N 78 78 78 234 Std. Deviation 8.48676% 7.77860% 8.09779% 8.66984%

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Control variables Total participants Mean 99,409.35 102,374.77 101,848.38 101,210.83 Median 9879 10,040 10,188 10,062 Minimum 360 346 340 340 Maximum 2,583,400 2,708,400 2,583,400 2,708,400 N 78 78 78 234 Std. Deviation 335,325.820 350,895.936 341,949.295 341,311.175 Net result (x 1,000 EUR) Mean -290,885.37 395,083.44 153,767.40 85,988.49 Median -34,622.94 57,712 14,019.50 11,064.50 Minimum -11,937,000 -176,989 -796,700 -11,937,000 Maximum 1,364,202 11,385,000 3,183,000 11,385,000 N 78 78 78 234 Std. Deviation 1,421,070.173 1,375,927.964 538,790.854 1,212,441.640

Regarding the subsample, Figure 2 shows the ESG-ranking over the years of the pension funds included in the subsample. It shows that some pension funds have made significant improvements in their ESG policy, gaining a higher rank number over the years. For example, Bakkersbedrijf BPF has made a significant improvement, moving from the 49th place in 2018 to the 11th place in 2020. Others have a significant decrease in their ranking number. For example, AHOLD has slumped between 2018 and 2020, moving from the 13th place to the 37th place. The same holds for Heineken, slumping from the 19th place in 2018 to the 45th place in 2020.

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4.2. Correlations

Table 3 presents the correlation outputs among the dependent and independent variables as well as among independent variables. The results show that there are a few significant

correlations between the dependent variable and the independent variables. This indicates that support could be found for the hypotheses of the study. The results also show that there are some positive and negative significant correlations among the independent and control variables. This indicates the possibility of multicollinearity, which means that the results of this study could be biased when the degree of correlation is high. Table 3 shows that most of the significant correlations are < 0.3, which is interpreted as a medium degree of correlation. There is also one significant correlation < 0.85, which is interpreted as a high degree of correlation. Therefore, there is a possibility of multicollinearity and the results should be interpreted with caution.

Table 3 Pearson Correlation Matrix

Disclosure score

Total

Assets Audit firm Funding ratio

Total

Participants Net Result Disclosure score Total Assets 0.148** Audit firm 0.082 0.294*** Funding ratio -0.093 0.019 0.107 Total participants 0.201*** 0.831*** 0.163** -0.195*** Net result 0.113* 0.103 -0.045 0.203*** 0.033

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4.3. Results

Table 4 includes the regression results from using equation (1) as mentioned in section 3.3.

Table 4 Regression results total sample

Unstandardized Coefficients Standardized Coefficients

B 𝜀 𝛽 t-statistic Constant 77.937 7.942 9.813*** (0.000) Size -0.455 0.646 -0.089 -0.703 (0.483) Audit firm 2.349 1.912 0.084 1.229 (0.220) Funding ratio -0.071 0.062 -0.081 -1.144 (0.254) Total participants 1.096 0.569 0.242 1.925* (0.055) Net result 0.110 0.054 0.134 2.030** (0.044) R2 0.065 Adjusted R2 0.044 F-statistic 3.167*** (0.009)

Note: Symbols mean significance at: *10%, **5% and ***1%

As shown in Table 4, the results show that there is a negative association between the total assets of the pension fund and reporting quality, however this association is not significant (p > 0.10). This is inconsistent with the expected positive relationship stated under H1. The results indicate that, based on the data of this study, the size of the pension fund has no significant impact on the reporting quality of the pension fund. Therefore, H1 is not supported.

The results also show that there is a positive association between a Big 4 auditor and reporting quality, however this association is also not significant (p > 0.10). The positive association is in line with the expected relationship stated under H2, however these results indicate that, based on the data of this study, there is no significant impact on the reporting quality if the annual report is audited by a Big 4 audit firm. Therefore, H2 is not supported.

The results in Table 4 also show a negative association between the policy funding ratio and reporting quality, however this association is also not significant (p > 0.10). This is also inconsistent with the expected positive relationship stated under H4. This result indicates that the financial performance of the pension fund has no significant impact on the reporting quality of the pension fund. Therefore, H4 is not supported.

In order to test H3, the subsample was used for the regression analysis. Table 5 includes the regression results from using equation (2) as mentioned in section 3.3. Table 6 includes

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the regression results from using equation (3) as mentioned in section 3.3, which includes the moderation effect hypothesized under H5.

The results in Table 5 show that there is a significant positive association between the ESG-ranking and disclosure score, as the p-value is less than 5% (0.030). This is consistent with the expected relationship stated under H3. This result indicates a significant positive impact of higher involvement in ESG practices on reporting quality. This reflects that high ESG-ranked pension funds have better reporting quality. Based on the main effects-only model, H3 is supported.

Table 5 Regression results subsample main effects-only model

Unstandardized Coefficients Standardized Coefficients

B 𝜀 𝛽 t-statistic Constant 120.509 15.478 7.786*** (0.000) Size -3.247 1.006 -0.474 -3.229*** (0.002) Audit firm -3.469 4.175 -0.085 -0.831 (0.409) ESG ranking 3.978 1.799 0.258 2.211** (0.030) Funding ratio -0.056 0.093 -0.072 -0.600 (0.550) Total participants 1.549 0.899 0.275 1.723* (0.089) Net result 0.092 0.067 0.149 1.379(0.172) R2 0.240 Adjusted R2 0.178 F-statistic 3.888*** (0.002)

Note: Symbols mean significance at: *10%, **5% and ***1%

The results in Table 6 show that, when including the interaction effect, there is still a positive association between ESG ranking and reporting quality, but this association is not significant (p > 0.10). Therefore the main effects plus interaction model does not support the stated relationship under H3. Based on both models, H3 is partially supported.

The results in Table 6 also show a negative moderation effect of ESG ranking on the funding ratio. However, this effect is not significant (p > 0.10). This is inconsistent with the expected positive moderation effect stated under H5. This result indicates that involvement in ESG practices has no moderation effect on the relationship between financial performance and reporting quality. Therefore, H5 is not supported.

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Table 6 Regression results subsample main effects plus interaction model

Unstandardized Coefficients Standardized Coefficients

B 𝜀 𝛽 t-statistic Constant 120.482 15.689 7.679*** (0.000) Size -3.250 1.029 -0.475 -3.158*** (0.002) Audit firm -3.478 4.246 -0.085 -0.819 (0.415) ESG ranking 4.328 23.027 0.281 0.188 (0.851) Funding ratio -0.055 0.107 -0.071 -0.512 (0.611) ESGRanking*Funding Ratio -0.003 0.209 -0.022 -0.015 (0.988) Total participants 1.548 0.908 0.275 1.705* (0.092) Net result 0.092 0.067 0.149 1.369(0.175) R2 0.240 Adjusted R2 0.167 F-statistic 3.287*** (0.004)

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5. Conclusion and Discussion

The purpose of this study is to determine whether the reporting quality of Dutch pension funds has increased over the years. New regulations for pension funds were introduced in the Netherlands that could help improve the reporting quality of the pension funds. The annual reports of 2015, 2017 and 2019 of 80 pension funds were analyzed and assessed against a disclosure index, which is based on the Dutch regulation for reporting for pension funds (RJ 610). The score on the disclosure index is used as a proxy for the reporting quality. In

particular, this study investigates which financial determinants have an effect on the reporting quality of Dutch pension funds. Statistical testing was used to answer the study’s research question: Which financial determinants have had an effect on the reporting quality of Dutch pension funds during the time period 2015-2019?

The results show that there is indeed an increase in reporting quality over the years, with a significant increase in reporting quality between 2015 and 2017. There is also an increase in reporting quality between 2017 and 2019, however this increase is smaller than between 2015 and 2017. This indicates that most pension funds have made significant

improvements between 2015 and 2017 in their reporting style in order to comply with the new regulations and that between 2017 and 2019 most pension funds complied with the

regulations and only some small improvements needed to be made in order to comply with the regulations even better.

In order to determine which financial determinants affect the reporting quality of pension funds, this study investigates whether size, Big4 auditor, ESG ranking and financial performance are associated with the reporting quality of Dutch pension funds. The findings indicate that a higher involvement in ESG practices has a positive impact on reporting quality. There was no statistical support found for size having an impact on reporting quality. There was also no statistical support found for pension funds having higher reporting quality if the annual report was audited by a Big4 auditor or if financial performance was high. There was also no statistical support found for the moderate effect of ESG ranking on the financial performance of pension funds.

The results found in this study are similar as well as different from what was found during the literature review. First, the literature review showed that firm size is positively associated with reporting quality due to the greater demand for information by stakeholders and these firms have better resources to produce a higher level of disclosure. The results of

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quality, but it was insignificant. The negative association was unexpected. This result

contradicts what was found in previous literature about the association between firm size and reporting quality. The reason for finding a negative impact could be because pension funds have a different typology than most public and/or private firms. The assets and liabilities of pension funds greatly differ from that of public/private firms, which could explain the negative impact found in this study. Pension funds might not have the resources to provide a higher level of disclosure that private/public firms have. This result could give a warning to regulators and supervisors of pension funds to keep an eye on bigger pension funds and their reporting quality. It is also possible that the combination of variables had an effect on this result, because untabulated results reveal a significant positive association between size and reporting quality if only size was tested as an independent variable in the linear regression model (p < 0.05). Second, there was a positive association found between an audited report by a Big4 auditor and reporting quality, which is consistent with what was found in the literature review. However, this association is also insignificant. The reason for not finding a significant association could be that the group of reports audited by a Big4 auditor (89.32%) is too big compared to the group of reports that was audited by a non-Big4 auditor. Third, consistent with the literature review, the study results provide partial support for the statement that higher involvement in ESG practices is associated with higher reporting quality. This result could motivate pension funds to invest more in their ESG practices. It also could provide society with confidence about the annual reports of ESG-ranked pension funds providing a “fair view”, because they are of a higher quality. Fourth, a negative impact was found

between the financial position of the pension fund and reporting quality, but was insignificant. This contradicts what was found during the literature review. It could be that because Dutch pension funds have not been performing well over the last few years, there was a negative impact and no significant association found with reporting quality. Finally, the results showed a negative association for the moderation effect of involvement in ESG practices on the association between financial performance and reporting quality, but was also insignificant. The negative association was also inconsistent with what was found during the literature review. It is possible that because a negative association was found for financial performance, the moderation effect was also found to have a negative association.

There are some important limitations to this study. First, the sample consisted of 80 pension funds. This is consistent with approximately 1/3 of the total population. This is a representative sample, however 2/3 of the population was not studied. The results found in this study are based on the 80 pension funds that were studied. It is possible that the results

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might differ if a different sample from the population is taken or if the whole population is studied. Second, this study used a disclosure index to measure reporting quality. There are other methods available to measure reporting quality. For example, reporting quality can also be determined by studying the market reaction after an annual report is published or by performing a content analysis, which could lead to different results. Moreover, the disclosure index was not based on the regulation of RJ 610 as a whole. Only the parts that were

perceived by the author as important aspects regarding reporting quality were included in the disclosure index. Basing the disclosure index on other items or on the whole regulation might alter the results found in this study. Third, the data collection was performed with multiple people. This leads to subjectivity in the data collection. What one person perceives as disclosure on, for example, investment policy, could be perceived by another person as no disclosure on the investment policy. This leads to differences in the interpretation of what is to be perceived as disclosure.

There is also opportunity for future research to extent the literature on the reporting quality of pension funds. For example, future research could investigate whether the results found in this study hold if a different sample is taken from the population or if the whole population of Dutch pension funds is studied. Moreover, future research could also investigate the reporting quality of pension funds in a different country to see if there are similarities or differences in the results found in this study. Also, future research could investigate if other (financial) determinants have an effect on the reporting quality of pension funds in the Netherlands or in a different country.

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Appendices

Appendix 1: Disclosure index

Nr. Toelichtingsvereiste Diversiteit

1 Wordt de samenstelling (leeftijd) van het bestuur toegelicht? 2 Wordt de samenstelling (geslacht) van het bestuur toegelicht?

3 Wordt de samenstelling (leeftijd) van de RvT of Visitatiecommissie toegelicht? 4 Wordt de samenstelling (geslacht) van de RvT of Visitatiecommissie toegelicht? 5 Wordt de samenstelling (leeftijd) van het Verantwoordingsorgaan toegelicht? 6 Wordt de samenstelling (geslacht) van het Verantwoordingsorgaan toegelicht?

7 Wordt toegelicht welke inspanningen het bestuur heeft verricht om diversiteit in de organen van het pensioenfonds te bevorderen ( artikel 107 PW)?

Pensioenen

8 Wordt de (statutaire) doelstelling van het fonds benoemd?

9 Wordt toegelicht welk type pensioenregeling wordt uitgevoerd (premie-overeenkomst, uitkeringsovereenkomst, etc).

10 Wordt de uitvoeringsovereenkomst toegelicht?

11 Worden de belangrijkste kenmerken van de pensioenregeling toegelicht (pensioengerechtigde leeftijd, opbouwpercentage, hoogte franchise, etc)

12 Wordt het aantal deelnemers per categorie (actieven, slapers en gepensioneerden) benoemd? 13 Worden de totale kosten voor Pensioenbeheer in absolute bedragen vermeld?

14 Worden de kosten voor Pensioenbeheer vermeld in euro's per actieve deelnemer en pensioengerechtigde?

15 Bevat het bestuursverslag een actuariele analyse?

16 Worden de uitkomsten van de solvabiliteitstoets vermeld (s-jes)?

Beleggingen en kostentransparantie

17 Wordt een toelichting gegeven op de belangrijkste uitgangspunten van het beleggingsbeleid (bijvoorbeeld actief versus passief)?

18 Wordt een toelichting gegeven op de onderliggende argumenten mc.q. afwegingen die het fonds heeft gemaakt (bijvoorbeeld afweging rendement/kosten)?

19 Wordt toegelicht op welke wijze in het beleggingsbeleid rekening wordt gehouden met milieu en klimaat, mensenrechten en sociale verhoudingen?

20 Worden interne en externe ontwikkelingen ten aanzien van beleggingen en rendementen benoemd (bijvoorbeeld ontwikkelingen op de aandelenmarkten, etc)?

21 Wordt het rendement per beleggingscategorie weergegeven?

22 Worden de bovengenoemde rendementen voor en na aftrek van kosten van vermogensbeheer en/of transactiekosten weergegeven?

23 Wordt het rendement per beleggingscategorie afgezet tegenover het benchmarkrendement per beleggingscategorie?

24 Worden verschillen tussen het werkelijke rendement per beleggingscategorie en het benchmarkrendement verklaard?

25 Worden de kosten van vermogensbeheer en de transactiekosten per beleggingscategorie toegelicht? 26 worden de kosten van vermogensbeheer en de transactiekosten opgenomen als totaalbedrag en als

(37)

27 Worden verschillen in de kosten van vermogensbeheer en transactiekosten zoals vermeld in het bestuursverslag versus de bedragen zoals vermeld in de jaarrekening toegelicht?

28 Wordt de samenstelling van de beleggingsportefeuille (aandelen, vastrentende waarden, etc) toegelicht?

29 Wordt de portefeuille vastgoedbeleggingen verder onderverdeeld (bijvoorbeeld naar valuta en/of categorie)?

30 Wordt de aandelenportefeuille verder onderverdeeld (bijvoorbeeld naar valuta en/of categorie)? 31 Wordt de vastrentende portefeuille verder onderverdeeld (bijvoorbeeld naar looptijd, valuta en

creditrating)?

32 Wordt toegelicht of er is belegd in de sponsor/aangesloten werkgevers?

33 Wordt toegelicht of er sprake is van belegging groter dan 5% van de totale beleggingen of groter dan 5% van de beleggingscategorie waartoe de belegging behoort?

34 Wordt de duration van de vastrentende waarden vermeld? 35 Wordt de duration van de pensioenverplichtingen vermeld?

Premies

36 Wordt een toelichting gegeven op het premiebeleid van het fonds (doelstelling)?

37 Wordt een toelichting gegeven op de onderliggende argumenten mc.q. afwegingen die het fonds heeft gemaakt?

38 Worden de premiepercentages en andere premiegrondslagen benoemd? 39 Wordt de hoogte van de totale kostendekkende premie vermeld? 40 Wordt de hoogte van de totale gedempte premie vermeld? 41 Wordt de hoogte van de totale feitelijke premie vermeld?

42 Wordt de samenstelling van de feitelijke premie en de hoogte van de premiecomponenten vermeld?

Financiële positie

43 Wordt de nominale dekkingsgraad benoemd?

44 Wordt de minimaal vereiste dekkingsgraad benoemd? 45 Wordt de vereiste dekkingsgraad benoemd?

46 Wordt de reële dekkingsgraad benoemd? 47 Wordt de premiedekkingsgraad benoemd?

48 Wordt een toelichting gegeven op de haalbaarheidstoets?

49 Wordt toegelicht of een herstelplan als bedoeld in artikel 138 of artikel 139 van de Pensioenwet van toepassing is ( artikel 96 sub d PW)?

50 Zo ja, worden de maatregelen uit het herstelplan toegelicht?

51 Zo ja, worden de gerealiseerde effecten van de maatregelen uit het herstelplan toegelicht.

Toeslagverlening (indexatie)

52 Wordt een toelichting gegeven op het toeslagbeleid van het fonds (doelstelling)?

53 Wordt een toelichting gegeven op de onderliggende argumenten mc.q. afwegingen die het fonds heeft gemaakt?

54 Wordt expliciet vermeld of pensioenen wel of niet worden geindexeerd (toeslag wordt verleend)? 55 Worden (cumulatieve) achterstanden in de indexatie van pensioenen vermeld?

Code Pensioenfondsen

56 Wordt er een korte toelichting of introductie gegeven op de Code Pensioenfondsen (bijvoorbeeld verwijzing naar de wettelijke basis)?

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