Pension in Europe by CEO Today

1. HR & Workforce Management
??? CEO TODAY
AEGON Global Pensions
FORTHE EUROPEAN PENSIONS
SURVEY, we interviewed leading
multinational companies, international
pension consultants, representatives
of the European Commission and
national supervisory bodies. By revealing
the wishes and experiences of these
different parties, we wanted to better
understand the state of company
pensions in Europe and to see how
the parties involved view the present
state and future of European pensions.
In addition, we examine what the
European Commission is doing to help
multinational companies, and provide
guidelines on how to assess cross-
border opportunities in Europe.
Pensions in Europe reveals three
dominant trends in how multinational
companies are managing their pensions
today – a drive to improve and centralise
pension governance, a strong shift to
Defined Contribution (DC) pensions,
and the move to de-risk Defined Benefit
(DB) pensions. In addition, cross-border
pension provision was viewed by the
majority of interviewees as potentially
useful, with a minority actively involved
in developing cross-border pensions.
The interviews confirmed that
control and risk are of increasing
importance, and Defined Benefit
pensions are in rapid decline. In addition,
corporate interest in solutions that
provide governance benefits, including
cross- border pension solutions, is
increasing. For almost 10 years, there
has been talk of cross-border company
pensions. Although the idea of cross-
border 2nd pillar pension provision
has inspired many, only 84 cross-
border Institutions for Occupational
Retirement Provision (IORPs) have yet
been created. Many find the prospect
of having to overcome the complexities
of the European environment to be
daunting and even prohibitive.
Pensions in Europe –
how multinational companies are preparing their pensions
in Europe for the future
Four categories
Although the companies interviewed
were all affected by similar issues, it
was clear that they adopt different
approaches to achieve better control
over their pensions. On the basis
of how the companies view their
pensions and the degree to which the
companies and their pensions are
centralised, four distinct categories
were identified – the Pragmatists,
Trailblazers, Visionaries, and
Transformers. By distinguishing these
categories, it is easier to identify
who may benefit from centralised
solutions such as asset pooling and
other cross-border pension solutions.
Pragmatists
These are centrally-led companies with
a strong focus on their core business
and a ‘no-nonsense’ approach to
pensions. Their local businesses have
a considerable degree of autonomy,
and of all companies interviewed, they
placed the least value on pensions as
part of the benefits package. They
were typically the least interested
in cross-border European solutions,
and the most wary of potential
disruption to their businesses from
legislation in the EU. These companies
did state that if a proven, simple
pan-European DC solution were to
be introduced – a 401(k) for Europe
– then they would be interested.
Trailblazers
These companies are centrally-led,
capital-rich and well established. They
have a strong pensions tradition and
large Defined Benefit plans. They
consider pensions important, and
have substantial in-house pensions
expertise. They are first movers in
asset pooling for pensions and in the
adoption of cross-border pensions.
Visionaries
These companies have generally
experienced impressive growth, and the
creation of an international centralised
pensions framework has typically
lagged development of other business
structures. These companies have been
looking at their pensions governance
and indeed at their entire pensions
policy. They are interested in cross-
border pensions but are reluctant to be
first movers.
Transformers
These established companies operate
in highly competitive environments.
They need to adapt to continue
their past success and their pension
structures also need to change. As
these companies are often reshaping
themselves, they are often looking for
shorter term solutions and de-risking
solutions. They typically have a ‘wait and
see’ approach to cross-border pensions.
The European Commission
The idea of cross-border pensions has
stimulated considerable interest, and
our survey revealed that the concept
of cross-border pensions is attractive
to most of the companies interviewed.
However, developments here have
been slow, which is why the European
Commission (EC) is looking again at how
it can facilitate pensions across borders.
Europe has grown impressively over
the last years and pensions are not the
only area where it is difficult to align the
Pension management company archetypes
Decentralised Centralised
Decentralised Decentralised
Decentralised Decentralised
Thought
leaders
No-nonsense
Organisation
Attitude
to
pensions

2. HR Workforce Management
CEO TODAY ???
AEGON Global Pensions
P.O. Box 85
2501CB, Den Haag
The Netherlands
Tel: +31 (0) 70 344 8931
Email:
aegonglobalpensions@aegon.com
Website:
www.aegonglobalpensions.com
Contact information
interests of 27 countries. Progressing
European pensions does not just
involve understanding the interaction
between pieces of legislation, it also
involves understanding the drivers and
restrictions of market participants.
The reason for the limited uptake of
cross-border pension vehicles is partly
historical – pensions have typically
been the responsibility of local HR
departments and most companies
have only recently started to centralise
their pension management – but it
partly reflects the position of pensions
themselves in European law. Pensions
straddle various areas of national and
European laws and regulations.
Although the European Union has
considerable power over elements
within the national systems, European
Member States are responsible for the
structure and management of their own
pensions systems through Social and
Labour law. Despite this, the EU internal
market for financial services, which is
intended to ensure fair competition
across the EU, applies at least in part to
the provision of pensions. In addition,
the European Stability and Growth
Pact is increasingly having an effect on
pensions systems. The EU therefore has
considerable – and increasing – power
over how Member States construct and
fund their pension systems.
Pensions are presently receiving
unprecedented attention in the EU and it
is up to the various stakeholders to make
sure that their hopes and concerns are
heard. For multinational companies, it is
clear they would welcome a simplified
system of cross-border European
pension provision and that the present
system is proving difficult to negotiate.
The EC is looking now to find a way to
remove some of the roadblocks and
is actively engaged in challenging all
barriers to competition as a result of
discriminatory tax treatments.
The way ahead
European pensions are at a crossroads.
Globalisation, increasing governance
requirements, a focus on derisking
and the desire for predictability are
all driving companies to reassess and
redesign their pensions – and the global
financial and economic crisis has acted
as a catalyst. Although the crisis has
made it more difficult to derisk DB
pension plans, it seems also to have
confirmed or even accelerated the shift
to DC pensions.
If we look at how companies are
managing their pensions, we can see that
theTrailblazers are continuing to push
ahead with cross-border integration
of their pension plans while the
Pragmatists are sticking with single-
country plans. Looking at developments
today, we can identify four drivers for
the development and adoption of cross-
border pensions in Europe.
Companies
TheTrailblazers are strong companies,
with long-term perspectives, deep
pensions expertise and considerable
resources.They are also companies
who stand to gain the most from pan-
European pensions.Trailblazers are
already exploring cross-border solutions,
including the use of captives to provide
DB pensions, and the use of Belgian
OFP cross-border IORPs to manage
problematic/legacy DB plans, and are
exploring the development of cross-
border IORPs for DC plans.
European Commission
The EC is presently preparing its
holistic white paper on pensions and
its new IORP directive, having engaged
in a thorough consultation of market
participants.The EU may lead the way by
creating a coordinated legislative system
and a level playing-field for pension
provision, providing fertile ground for
further developments.The idea of a
401(k) for Europe, a simple but effective
pan-European DC savings vehicle that is
accepted across Europe is perhaps the
holy grail of pan-European pensions. It is
possible that a single pension plan could
be created as a 28th regime vehicle, but
this would require unanimity among the
EU member states. Alternatively, it may
be possible for the outlines of such a plan
to be described in the new IORP directive
such that the EU member states could
choose to implement it into their local
social and labour law.
Providers
Specialised providers are starting to
create distinct solutions to enable the
efficient functioning of cross-border
pensions, including multi-country
administration, asset pooling, IT, and
insurance solutions. For example, 60% of
those companies interviewed expressed
a positive view on asset pooling and
the potential benefits that it may offer.
By providing outsourced, cross-border
facilities (‘shared service centres
for pensions’), providers will enable
companies to focus on their businesses.
Consultants
Many of the interviewees saw cross-
border pensions presently as the domain
of theTrailblazers and the international
consultants. There is some truth to this:
consultants are often at the forefront
of pension developments, and they
can highlight opportunities and play
an important role in uniting providers,
sponsors and regulators.
Preparing for change
The Survey highlights that different
companies have divergent aims and
desires for their pensions, but equally
that they are unified by their desire
for simplicity, clarity, sustainability
and good governance. Globalisation,
increasing governance requirements,
a focus on derisking and the desire for
predictability are all driving companies
to reassess and redesign their pensions.
The global financial and economic crisis
has accelerated this process. Although
the crisis has made it more difficult
for some companies to derisk their DB
plans, it seems also to have increased
the urgency of moving to DC pensions.
And, as many of our interviewees
pointed out, the next step is to ensure
that these DC pensions are fit for
purpose. At the same time, it is clear
that the pensions landscape in Europe
is shifting. In such a time, continuing and
deepening the dialogue is crucial for all
stakeholders – legislators, supervisors,
providers and companies.The European
pensions environment is far from static,
and we can expect some significant
developments over the next year. n