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Impact Investing

IPE special report May 2018

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Euro pinpoints benefit difference

The huge differences in pay and benefit costs in Europe have become more obvious since the launch of the euro.
“Transparency is not just hitting benefit costs, it’s hitting every cost that business and individuals face,” says Alastair Hunter, head of William M Mercer’s international consulting practice in London.
According to Mercer’s ‘International Benefits Guidelines 1999’, the annual average cost of employment in the EU is e37,661. Belgium’s average pay and benefit costs are e41,533 while Portugal’s are just e11,298.
“None of this is particularly new, but the fact that those costs are being more easily compared is bringing the issue to the forefront of some companies’ thinking,” says Hunter.
This situation will encourage employers to look increasingly at pay and benefit strategies on a pan-European basis. At a time when companies have to be competitive in a worldwide context “what employers will be looking for is some sort of reassurance that governments are taking the right steps to control future costs,” says Hunter and adds: “Cost reduction is not something that is possible in the short term. It is the longer term that will be of concern for companies, especially in terms of social security systems.”
Separating pay from labour costs shows a broad difference in total benefit costs, including social security, mandatory and voluntary benefits, that can vary from less than 15% to more than 50% of pay. “Many employers tend to focus on base pay as the key indicator for labour cost comparisons. Our research shows that the hidden costs of state and occupational benefits can be substantial, and should be factored into the European expansion plans,” says Hunter.
In Italy benefit costs represent 54% of pay. This is due to an extremely generous social security system, the many mandatory benefits and the high payroll costs faced by employers. The Italian government is considering increasing the tax-deductible contribution limit for contributions to pension funds that have grown during the last two years.
In France, Belgium, Sweden, Greece, Spain and Portugal labour costs varies from 44% to 33% of pay. Finland, Germany, Austria, Ireland and the Netherlands labour costs oscillate between 29 and 21% of pay.
In the UK benefits are set at a relatively low level, with an annual average of e5,668, representing 19% of pay. Despite the strength of the pound against the euro, UK’s labour costs are still competitive in the EU. “UK social security and benefit costs are only about half the level of those in France and just over two-thirds of those in Germany,” Hunter says.
Luxembourg and Denmark appear at the bottom of the table with 16% and 7% of pay respectively spent in labour costs. In Denmark, where more than 50% of employers have supplementary plans, employers contribute to basic social security through corporate taxes and employees through income taxes. In January, a temporary additional mandatory contribution of 1% of gross salary approved in 1998 to tighten fiscal policy, was made permanent. Total benefit costs represent 7% of the Danish annual average pay that amounts to E36,199.
As all European states seem to be reviewing their benefit systems, some employers are switching to DC plans, especially in countries where the popularity of private sector plans depends on cutbacks in social security.
Differences in contribution to social security systems in the EU can vary from more than 40% of pay in Italy to less than 1% in Denmark. “In terms of how employers are dealing with differences, there is relatively little they can do.” says Hunter.
Mercer’s study also emphasises the fact that the majority of the EU states have higher labour costs than those in the US. “The EU still needs outside investment, especially from US companies, to help reduce its high levels of unemployment,” he says. Although there are many other factors that overseas companies are taking into account before investing in Europe, high benefit costs might discourage US investors.
“To say that employers are going to move to low cost countries is a very broad generalisation, but labour costs is one of the factors they are looking at,” Hunter says. The information revealed by this study may be “used as a factor in future negotiations on pay and conditions”.

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