| A ‘best of breed’ opportunity to realign occupational pensions to corporate strategy. |
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A business-friendly environment for occupational pensions becomes even more important now when the scope of mandatory and State pension benefits at retirement is shrinking in most countries and pension emerges as the main area of concern for the majority of the Europeans. A gloomy picture that is reflected in the recent estimates elaborated by the Organisation for Economic Cooperation and Development about the average replacement rate of pension benefit at retirement, and in the results of the EU public opinion poll on the European social reality.
The news gets better when turning to new EU legislation that introduces for the first time a pan-European legal vehicle for occupational pension, and to the recent rulings of the European Court of Justice that impose a level playing field on tax incentives for both domestic and foreign based pension funds.
“This is really a ‘Copernican’ revolution for several national legislators and tax authorities that until now have resisted the application of the single market principles to occupational pension” Commented Leonardo. “For the first time, it is possible to have a pan-European pension fund, with one single fund covering plans in multiple countries. It gives businesses freedom of choice -across 30 different countries- on three crucial factors that are instrumental to guarantee administrative simplification, cost-effectiveness, transparency and efficiency in investment”. First, businesses can choose where to set up their pension fund, irrespective of the location of their employees or of their corporate headquarters. Second, they can choose their service providers on a “best in class” basis rather than on nationality. Third, they can design and apply the best investment policy, free of national constraints.
Now that the doors have been opened, the challenge is to translate into practice these opportunities and re-engineer a pension policy and platform that meet corporate needs and strategy.
Andrew Warwick-Thompson, Defined Contribution Services Leader at Hewitt, described how this could be done by reference to a series of case studies.
“In practice, this means that you can go ‘shopping’ in any European country for each element of the plan on a 'best of breed' basis. For example, you could opt for a UK-based administration system, an asset pool in Luxembourg, a risk pool in Italy and the IORP itself could be registered in Ireland. In this case, the governance framework would be regulated by the Irish Pensions Board which would be responsible for ensuring compliance with the local social and labour law requirements in each EEA country in which the pension plan admits members.”
There is much to be gained. A single, integrated European approach to pension plan design offers the potential for reduced operational risks and costs, simplified governance and operational oversight with fewer providers and interfaces to manage.
Direct cost savings can be made too, thanks to more controlled and efficient asset solutions, improved economies of scale for benefits administration and substantially reduced internal management time.
“Pan-European pension plans offer multinational companies a consistent framework for implementing pension change across Europe, re-aligning pension policy to business strategy.” Andrew explained.
For example, a multinational company could combine two or more existing local pension schemes of subsidiaries. US or Asian multinationals could consolidate all their existing European pension arrangements into a single pan-European pension plan. Regional country hubs could be established, for example for new pension programmes in Eastern Europe. Pension plans for internationally mobile European executives, traditionally established in off-shore havens such as the Channel Islands, can now be brought back onshore, bringing significant tax advantages. For M&As, it could facilitate pension consolidation, providing a framework for simplifying deal structuring.
Yet, despite all the potential advantages, few companies have ventured down the pan-European route so far. However, Hewitt research indicates that 41%* of European companies believe that there are potential benefits to be had from operating cross-border pension plans in Europe – and we expect to see an accelerated trend towards pan-European plans as a means to achieving business efficiency in the near term.
* Source: EChr - Hewitt, 3rd European HR Barometer 2008
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