Nowhere does the Henkel corporate slogan ‘focus: future’ have greater relevance than for its pensions programme for employees, where decisions taken now will impact on the future welfare of its workforce.
Having grown over 125 years from a family business into a multinational corporation with over 60,000 employees worldwide and operations in 75 countries, the group prides itself that it has still retained the family ethos, particularly in the domestic German operations, where some 15,000 of its employees are based, with just under half of these at the headquarters site, south of Dusseldorf.
The product range varies from detergents like Persil,cosmetics like Fa, adhesives for households, such as Pritt, and other areas, as in the space industry and medical applications, to speciality chemicals and surface technologies.
“With the concept of total remuneration, pensions and other benefits are given much more recognition in the remuneration package,” says Wolfgang Lorz, the group’s benefits manager. “Pensions are a highly important part of the total.” By using this concept, it is possible to move to a greater degree of flexible benefits. “Perhaps in a few years we could be there,” he says.
Already, Henkel has taken the shrewd step of helping employees identify the value of their pensions benefits, by showing on their annual statement of company-provided supplementary pension benefits an estimate of the cost of providing the equivalent through a privately arranged insurance contract. “Those figures caused some surprise,” he adds. Lorz says it helps make the workforce more aware of the benefits and their real value.
“We have a number of different schemes here in Germany, which vary with the type of employee, depending on whether they are executives or non executives and the area of operations,” he explains. “In principle, all German employees are covered by an occupational pension scheme in addition to their state pension.” This universal approach contrasts with that of other major German employers.
The difference between executive and other employees is due to the different limits of coverage provided under social security, where there is a limit on the state pension payable to those on higher pay.
The company has recently taken the novel step of moving from its long established defined benefit (DB) approach to a cash balance plan. “We took this step last year as being the only real opportunity to effect the change. Originally, we wanted to go for a defined contribution(DC) plan, but we found that DC couldn’t work under the current law here,” says Lorz.
He explains: “Our reasoning behind the move was to have more cost control over the pensions area. Also, we believed it was more efficient and convenient to run things in this way considering our total compensation package. We had been looking at the issues for some years.”
While the new pension fund law was on the horizon then, any possible new vehicle that might emerge would have too many uncertainties, in his views, citing the example of executive contributions and the likelihood that there would be limits on these, restricting the possibility of providing full replacement income. The decision on setting up any pension fund is one where the group’s financial division would also be very much involved, Lorz stresses, as it could mean moving from the current book reserve approach to making provision for pension liabilities that Henkel uses. “We do have a small Pensionskasse, which has been closed since 1975 for tax reasons, and we also have a support fund, but this is closed as well. These only provide benefits for pensioners and deferred pensioners.”
Lorz explains the thinking behind adopting the cash balance plan: “We worked on the basis of a contribution rate for the plan that the company could afford, but on the other hand we have to give the employee a pension promise as a component of pension each year. While this is a mix of both DB and DC, it is relatively near. DC and so far it is the best solution we found.” The group does retain a liability that of longevity could be beyond that anticipated. “We have a contribution rate that is a result of the contribution and the salary and then we have a conversion table where we look at the age someone has attained, which gives a conversion rate for converting this into a pension.”
Lorz says that while the link between the ultimate replacement income and salary level is broken to a degree, the decision was taken that this new arrangement would only apply to new employees from last year. “So all our existing employees remain in the existing DB plan. But in deciding on the contribution rate for the new plan, our intention was to come to the same replacement ratios for the average of employees, with the same level of costs.” The arrangement was introduced with the agreement of the works council. “We had to convince them of the need to introduce this new approach.”
While the company is dedicated to the book reserve approach, it does recognise the pressures that are coming from the US and the view is that in the longer term it will move to external funding of the reserves, something it does not do at all except for e46m of assets in the Pensionskasse.
He welcomes the arrival of the new German pensions legislation and the potential opportunities it brings. “I would have liked it to have been more user friendly, but we have to see how it works out. So we have to live and work with this new law, but first we have to see what the implications are for us.” For example, employees are given the right to operate “salary sacrifice” for a pension, so Henkel has to decide how to implement this and then it has to take a view about using the new ‘pensionsfonds’ or not.
While Lorz and his colleagues in the finance department do most of work in connection with the pension and other benefits, they call in from time to time the actuarial consultants the group uses in connection with the book reserve arrangements.
“The management of the investments of the Pensionskasse and the support fund is really a joint operation between the benefits and finance departments.” These are invested through spezialfonds mainly in fixed income, with some shares through an investment fund.

The group has offered its workforce access to direct insurance, which gives tax advantages through a salary sacrifice basis. “In addition, we provide two mutual funds, one fixed income and the other equity, on advantageous terms. The first fund we launched about 10 years ago,” says Lorz. This was a pioneering step at the time as the fund was based in Luxembourg - not with the idea of tax advantages, but to offer the fund to employees worldwide. “We thought Luxembourg was a better base for this. But we found there were barriers, so if we wanted to offer it in France to our workforce there, then some legal requirements had to be met, which would have cost a lot to do. We did not think this would make sense given the take-up we could expect.” The company may look at this again for Euro-zone countries, though the EC’s supposed passport for distributing mutual funds is still handicapped by costly local restrictions, which are depriving Henkel of an opportunity it would like to avail of.
The funds have certainly been a successful venture as far as the German workforce is concerned, says Lorz, though he has only limited information of what is invested since care to keep details of what individuals have invested confidential. But the company was well ahead of other major German groups who have just much more recently introduced investment funds for their workers.
“Across the world we have a variety of pension arrangements, including funded and insured plans, says Lorz, who is also responsible for overseeing the group approach was to benefits worldwide. Until recently the approach was more or less to allow each operation to implement a local programme. “Last year we started a world-wide pensions policy, with the hope of being able to provide a similar set of benefits world-wide, through similar arrangements.” In particular, a decision was taken to go the DC route where possible as the preferred solution. He believes that such a programme is achievable but on a step-by-step basis. “In some countries, where we have been implementing new plans, we have been able to do these on a DC basis straightaway, such as in Brazil.” Altogether the funded schemes worldwide have assets of around e0.5 billion. And Lorz is watching keenly the unfolding debate in Europe about the possibility of pension fund vehicles with tax advantage. “This could be the future,” he comments.
The group is setting up a committee to have a look at the pensions globally, at the request of the board. “It will be on the basis of the reports this committee will make that the final decisions about the shift to DC and other moves will be made. This will involve a lot of discussion with our counterparts abroad.” The group has pooling arrangements for benefits with three multinational pools. Lorz has yet to be fully convinced of their effectiveness in relation to the amount of work required. “The most difficult and most important decision that has to be made is which policies to include in the arrangements.”
At the moment, he is very committeed to the group’s launch of a worldwide share scheme for all employees. “ Sadly, we will not be able to offer it in all countries because of legal restrictions. Where it is possible, they will get the opportunity to invest once a year and the company will match the investment with bonus shares.” This should be ready to fly in September – another step in achieving the group’s benefits programme, says Lorz.