Reform of social security systems has been taking place, and is continuing, in most countries across Central & Eastern Europe (C&EE). Struggling economies have found it hard to pay for pensions at the same time as providing for the vast increase in the ranks of unemployed people.
The general trend has been to draw up a new basic pension promise from social security, coupled with some form of incentive to the individual to make his or her own provision for retirement. The countries where a special role is assigned to employer-sponsored plans are few. Although employers are otherwise free to contribute to their employees’ personal savings funds, any such payments suffer from two potential drawbacks: normally there is no tax deductibility; and all monies paid in are immediately vested 100% in the employee.
In consequence, very few private sector employers claim to have any form of retirement income promise to any category of employee (see figure 1). Of those few that have a promise, a substantial proportion have been operating, for some years already, a region-wide plan that is not funded otherwise than via a book reserve, and normally not tax effective.
In many cases, a mandatory second pillar system has also been set up, whereby contributions are directed to individual lifetime accounts, rather than into the common pool available to the pay-as-you-go first pillar of social security pensions. In this context, the third pillar is seen as a mechanism for the individual to make savings against their needs at retirement, while leaving it open to the employer to make additional contributions (see figure 2). Few do so.
There are growing signs of change in this rather static pattern, however. Some employers are finding that they can achieve a competitive advantage by increasing the attention they pay to their spend on benefits. In some cases this is via a form of flexible package, whereby employees can select the elements over which the company’s spend will be spread. The lessons learned from such an exercise can be surprising. Despite the relatively young workforce that is typically found in green-field operations, the item in a flex package that attracts the largest flow of funding is often a retirement pension. Contrast that with the item that often generates the greatest number of employees selecting it, which can be something like a higher value for luncheon vouchers.
The way in which the employer communicates with employees about the value of its contribution to benefits is another potential area of competitive advantage. This clearly applies in any flex package, but is also important for an employer who has just the middle of the road benefits, say limited to cover for death, disability (see figure 3) and perhaps medical expenses.
What is also clear is that there is no strong market pressure on employers in most countries of C&EE to introduce a retirement plan. By way of contrast, market pressure plainly directs your attention to medical benefits in a growing number of countries.
Poland can serve here as an illustration. When the law changed to require employers to provide all employees with a medical examination upon recruitment and periodically thereafter, the opportunity was seized by a number of providers to offer additional out-patient services to the specified group of people. By extending the scope of tax-deductible (and no benefit-kind) mandatory medical to a real employee benefit, suddenly it became such a widespread feature that an employer was virtually required to offer such a plan in order to recruit and retain staff.
We await with interest the response of the medical providers in the Czech Republic to labour code reforms that will mandate medical examinations of employees. The Polish example may be one that is followed here too (see figure 4).
To date, insurance companies have not had much of a look in at medical plans, where a large proportion of the market is satisfied by direct contractual links between employers and the polyclinics that provide the services.
Insurance companies are also lobbying strongly in some cases to gain a level playing field – for example on which to compete against the independent pension funds.
The impact of further tax and legal reforms can be complex. Take the example of the Czech Republic, where it is possible since January 2001 for the employer to make tax-deductible contributions at a modest level to employees’ pension arrangements. Many businesses that have only been providing death and disability cover (as a taxable benefit-in-kind) now find their employees asking for a switch to lower risk cover (that would become tax-effective) combined with a shift towards endowment insurance that would also now qualify for tax-effective treatment. In addressing this sort of pressure, compensation and benefits managers are asking themselves how far they can depart, at a time of increased cost-cutting pressure, from corporate standards on benefit levels. The balance may well be shifting between policy-driven minimum benefits and local business needs.
John Swabey leads the HCG consulting team for Central and Eastern Europe at Watson Wyatt Worldwide in Brussels

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