Pensions are a hot topic in corporate Germany, where skills shortages and an ageing workforce have led to a war for talent, as well as a renaissance in occupational retirement provision in the fight for workforce skills. 

Editor's Letter - July 2024

In its 2024 study on occupational pensions, PwC Deutschland found that 41% of surveyed companies have introduced a workplace pensions offering in the past 10 years. No fewer than 95% employers in the survey agreed on the importance of a competitive and market appropriate pension provision. This is after years of stagnating occupational pensions.

Historically, well financially cushioned blue-chip companies in the traditional economic sectors have also offered gold-plated pensions, and some have introduced generous defined contribution offerings in recent years in a bid to retain their competitive edge in employee benefits. 

In the coming decades, employers across the board will have to adapt as the structure of the economy and employment changes as a result of a rapidly ageing population. The imperatives of the green transition add a new dimension.

Europe’s Green Deal and other climate friendly initiatives already face a variety of headwinds – including a widely cited annual investment gap of €620bn to 2030.

Energy transition will, of course, displace employment from brown sectors to green. But some predict an overall net increase in employment with new jobs in areas like retrofitting buildings for energy efficiency, as well as in renewable energy and EV manufacturing.

As the economy changes, smaller companies – start-ups and established SMEs – will come to the fore as innovators of new technology and as drivers of the transition.

In some ways they are at a disadvantage – as are players in energy transition more generally. Renewable energy projects, for instance, are highly capital intensive and are more debt dependent, which adds to the cost of capital in a world where interest rates are likely to be structurally higher than in the zero-rate world of the QE years.

Traditional energy players have been largely protected from rising debt-servicing costs due to their stronger balance sheets.

While throwing up investment opportunities for pension funds and other major institutional investors, the energy transition also presents a more acute labour and employment challenge as employers compete for scarce skilled labour resource. 

The Green Deal and wider energy-transition objectives stretch the continent’s skills and employment ecosystem further at a time of already tightening labour markets. Eurostat estimates that the EU’s working-age population is set to decrease from 286 million in 2022 to 228 million by the end of the century – a reduction of 57.4 million. 

The EU’s employment vacancy rate may have eased somewhat since the 3% peak of early 2022 but it is higher overall than at any time in the pre-pandemic period and the labour market looks resilient. 

Across Europe, attracting skilled labour to transition sectors is likely to be a challenge. Against the backdrop of ageing demographics, investment in skills and the flow of migrant labour are and will continue to be crucial variables.

European employers across a range of sectors might even start to rethink their total remuneration and employment benefit packages. In the US, some employers are returning to DB pensions, most notably IBM, in a bit to attract talent. 

The implication is that attraction and retention of long-term talent may require more generous and perhaps more creative approaches to total remuneration. Smaller but more innovative employers may increasingly need to compete on pay and benefit packages and it will be vital for those in nascent green technologies to become more competitive as they fight for talent.

They should, of course, avoid being lumbered with big future pension deficits, but there needn’t be a wholesale return to the old days of traditional DB. While pension deficits have largely been eradicated across Europe and the US, the sticky collective memory years of pension deficits means employers are unlikely to rush back to DB.

Other models – hybrids between pure DB and DC – are likely to look more attractive. Royal Mail, the UK’s privatised postal service operator, is set to embrace collective defined contribution pensions – a type of pensions scheme that balances risk more fairly between employer and employee than previous models. This and other calibrations of pension offerings are likely to come under greater scrutiny.

Meeting Europe’s Green Deal objectives, including a 55% reduction in greenhouse gas emissions by 2030 and climate neutrality by 2050, will be a vital contribution to the world’s energy transition. Well remunerated workers in a range of new and growing green industries will be vital to meeting these targets. 

Liam Kennedy, Editor