As a whole, Europe compares unfavourably with the US and Far East in terms of employee benefit costs imposed by law. The solution is theoretically simple but one of the most difficult to achieve politically. Governments have, have least, become more aware of the problem and in recent years have tried to put a ceiling on employer costs. Employers, however, are often helpless to accelerate change at that level. That is why they must maximise cost savings in the benefit plans they sponsor themselves on a voluntary basis.
As Europe takes a momentous leap forward to economic and monetary union, employers in many of the member states are often faced by two opposing pressures. The fall of trade barriers and the shrinking of the world" through faster travel and communication requires that companies are not only competitive within the borders of their own nation or continent, but literally in a worldwide context. On the other hand, they are often at the mercy of governments that are simply strapped for funds - funds to service social security programmes which, for many post-war decades, were cherished with pride.
Governments have very limited options. In fact, they have only two or a mixture of both - either to cut back the benefits or increase the contributions from employers and employees.
The 1997 survey of labour costs in Europe, carried out by Sedgwick Noble Lowndes, demonstrates that, on average, European employers have to pay more into Social Security and mandatory systems than their counterparts in either the US or the Far East. That survey does not take account of factors such as the heavy requirements of labour laws.
The news of a multinational corporation locating a new operation in central or eastern Europe or Latin America still raises strong emotions in countries of the old continent. Although no such decision is ever solely based on social security contributions or pay levels, it would be unbelievable if these did not figure highly in the overall equation. This is especially so for labour- intensive industries, which is where the main unemployment problem lies. Faced by global competition, finding the workforce with the lowest labour cost without sacrificing productivity or quality must figure highly in any business plan. The differences in comparative pay and benefit costs is too wide to ignore even within the confines of the European Union .
So what can European employers do, apart from attempting to convince their governments that the vicious circle needs to be broken? After ale not all companies can simply up and move somewhere else.
There are only two practical areas in the field of benefits where they can control their costs.
1. The voluntary benefit plans they provide for their employees must
be managed in such a way that they
do not provide excessive benefits and are delivered at the lowest cost possible; and
2. Although some non-core benefits may have to be made available, these should be at a competitive price, and the employees should either
pay for the whole or the majority of their cost.
For employers running a defined benefit retirement plan, the efficient investment of assets and contributions should be one of the priorities. The often artificial investment limits imposed in certain member states of the EU are not helpful, however, and liberalisation of the investment of pension funds still has a long way to go. The old principle - recently embraced by the Green Paper from the European Commission - that the better the investment returns the lower the cost of defined benefit plans is at the core of efforts to provide the best funded pensions at the keenest cost. Wherever it can be done, and as soon as it can be done, the pan-European approach to fund investment should be at the top of the agenda of corporations with businesses in more than one member state.
Some employers may decide - as some have already done - that the best way to have full control over the cost of their occupational pension plan is simply to switch to a defined contribution basis. Already, the move is gaining momentum, especially in countries where the growing popularity of private sector plans depends on the corresponding cutbacks in social security. In the short term the management of benefit risks is vital. The cost of benefits in isolation may not figure on company balance sheets but in the context of the overall benefits budget, any saving is welcome.
David Formosa is research manager, global division at Sedgwick Noble Lowndes in the UK"