J&J rethinks benefits strategy as Europe shouts 'all change'
The benefits department of US pharmaceuticals multi-national Johnson & Johnson (J&J) has been paying increasing attention to Europe because of significant changes in the patterns of pension provision.
Jane Bulger, director of international benefits based at the company headquarters in New Jersey says that of the 30 projects that have come to her for evaluation in the last year, 15 to 20 have been from Europe.
Europe is one of our more active regions, because a lot of the social systems are pull-ing back and companies are trying to adapt. There is also a lot of investigation and consideration of defined contribution (DC) in what has been historically a defined benefit area," she says.
In line with this thinking, the company recently set up a cash plan for under-35s in the UK and is considering changing to DC in the Netherlands and Belgium.
She gives an example of a country with a1.5% accrual rate that wants to move to a 1.57 rate, a 5% increase. She might suggest leaving the pension plan as it is with the increased accrual rate provided by a cash capital accumulation which the em-ployee can then match.
Bulger believes that J&J's practices are in line with most US multi-nationals. US practices are not imposed on subsidiaries though there is strong central scrutiny.
Describing the benefits philosophy, Bulger says: "Benefits are designed as part of our business strategy to assist in attracting and retaining the best employees on Earth. In terms of what the employee receives, this should be in line with the length of service."
She continues: "Thus, we do not specifically state that in retirement he will have an X% benefit. We state that it will be competitive - with some em-ployee cost sharing."
Paul Culleton, vice president, human resources Eur-ope, adds: "I think on a philosophical basis, J&J want to have an overall benefit package that is highly competitive. If you analyse it with regard to salary alone, it may not be the most competitive.
"But the philosophy works on a long-term gain sharing philosophy. It is not really instant gratification: it builds up over time."
J&J's benefits policy re-quires that any proposal to change benefits or establish a programme must be submitted by the international subsidiary for review by the international benefits department in corporate headquarters.
"Some international locations will retain a local consultant and send in a half inch thick proposal report, others may send in a fax saying 'we really need to review our an-nulment age or our definition of pensionable earnings or we want to begin to include a bonus'."
The second scenario in-volves consultations with consultants in New Jersey and in the location to assess cost, the impact on competitiveness and its effect on the individual employees. For bigger countries FAS 87 also needs to be assessed.
The heavier reports, Bulger notes, require almost as much research. "No matter what the report says, I have to be able to say I believe it, so that my management accepts it," she explains.
The proposal then goes be-fore the benefits sub-committee comprising the worldwide director of benefits, the director of benefits planning and a representative of hu-man resources, before final scrutiny by the pension committee, a sub committee of the board of directors "which is definitely not a rubber stamp approval body".
In the case of a takeover, Bulger plays a standard role which involves an assessment of any benefit packages, benefit promises, employment contracts and funding vehicles to see whether the promises have been met with money.
She adds: "An additional advantage of this diligence is that by studying benefits you learn a lot about the culture of the company so it gives you more insight into harmonising or merging the company into the group."
There may have been im-portant changes in Europe, but there is some scepticism that harmonisation efforts such as the Green Paper will succeed. Culleton says: "This an attempt to get an identifiably common approach to benefit provision in Europe but it is difficult to envisage a realistic timescale because of the independence that the EU states want and the different social provision they al-ready have."
Bulger adds: "The philosophy that gives more independence to individuals to define how they wish to spend their cash seems to be on a collision course with countries that advocate a stronger state role."
She adds that philosophically J&J agrees with the moves towards further funding of all European retirement liabilities pointing to arrangements in the UK, Switzerland and Ireland, adding that the unfunded aspect of the German scheme causes some concern: "We don't want to leave an unfunded promise for a future manager to have to deal with."
However, whatever governments do, Eastern Europe will remain an important area. Culleton says: "In Eastern Europe J&J has growth rates of over 100% per annum in business.
"We have been able to at-tract some very well qualified people but we need to keep an eye on our benefit packages to see that they remain competitive when we plan for the next four or five years."
When asked about how much the company is influenced by US ideas when implementing plans in Europe, Bulger says: "We ask what is done locally, why it is done and because of knowledge that we might have from home we can suggest." She adds that some European subsidiaries have adopted savings plans in this way.
"Benefits concepts are the same around the world. However, you cannot take what you do in the US and make Europe do it too or continually say: 'That's not the way you do it in the States'."
She also uncertain about the amount of influence that US multi-nationals have on local practice "When we look at competitive practices for something in the UK or France we can almost always split the data into what local UK or French companies are doing and what US multi-nationals are doing'." She adds that local managers prefer to match themselves with local practices with which they must compete.
Culleton adds that with a lot of the business now off-patent, some competitors - notably aggressive start-up companies - may present different challenges. "They will not necessarily have to pay a lot of regard to rules and regulations elsewhere so they can be a lot more creative in the sort of package they offer. That does present a competitive challenge."
He continues: "I am convinced that philosophically we have to have a long term approach in which people are valued so that when the time comes for people to think about an alternative they have an incentive to stay."
He also acknowledges that 'new entrepreneurs' present a different challenge as they tend to think much more short term although he says that one way forward may be to use the same framework but with shorter vesting periods.
Turning to another exclusive group, that of internationally mobile employees, an international plan for the 250 most mobile is under consideration.
The main obstacles have been the tax and currency complications but Bulger adds: "There are a lot of people that we have in this mode, and the liabilitiesare building. We have the stated desire to pre-fund, so the whole programme is being assessed."
Culleton adds that the company is looking for the best way to bring new talent from Eastern Europe further West. "The costs that surround ex-patriate postings can be prohibitive. We have to find a way to move those people around Europe without limiting or damaging their ability to gain real value from the experience."
He continues: "Everyone talks a good story. J&J does well at putting these packages together and moving people around, but as we do more and more of it there is an issue of cost. The desire, however, is to do more".
Bulger is frustrated that the EU does not make this easier to do. "Multiple pension plan memberships make the re-tirement income fragmented and it is very difficult to make a fragmented pensions history whole. It is administratively very messy." IPE"