Make way for the 'IW PEPP'
Late last summer members of the Dutch Parliament took the extraordinary step of passing a motion whose likely effect would be to cause the Netherlands to independently veto a proposed European directive for the first time in its history. The unlikely cause of such a sudden outbreak of Dutch Europhobia was the EC’s proposed directive for improving the portability of supplementary pension rights. The Dutch reaction is however merely symptomatic of general opposition to the proposed directive throughout Europe.
Everyone appears to have different reasons for opposing the directive, but most significantly an unholy unofficial alliance between the right and left appears to have developed, with employers worrying about extra costs being imposed upon them under funded pension systems, and national employee representatives resenting perceived interference in matters they regard as their exclusive preserve.
Ironically, nobody objects to the basic aims of the proposed directive.
The erosion of pension benefits caused by job changes is well documented and is often quite severe. Most individuals will change their employer at least once throughout their working lives, and many will change their employer several times. The attempt by the EC to address problems surrounding the preservation, transfer and acquisition of pension rights by mobile employees is widely applauded.Few are asking ‘why?’ Yet everyone, it seems, is extremely concerned about ‘how?’ It was always going to be a Herculean task for the EC to obtain the required agreement of 25 EU member states for the adoption of this directive, and one suspects that one of the main
aims of the commission was simply to put the spotlight on the individual pension problems of the modern-day employee/worker - and in this it would seem that they have succeeded handsomely.
However, there is a way that the ‘good old days’ could return for the mobile employee. While a ‘job for life’ may be a thing of the past, a ‘ pension for life’ could and should be a thing of the future. An obvious solution for many of the pension problems of the mobile employee is the creation of pan-European industry-wide schemes to which each successive employer (as well as the employee) contributes. While one’s employer may change, one’s pension plan does not. This concept is also of great interest to employers wishing to externalise the risks associated with single-company sponsored pension plans. One reason that the EC has not yet embraced this idea, is the existence of categories of workers who cannot be classified as working in any one industry. Secretarial assistants, translators or IT consultants may, for example, be working for a pharmaceutical company one year and a firm of auditors the next. Yet this potential ‘hole’ could be filled by widely defined industry-wide schemes such as for example ‘The IT Workers Industry-Wide European Pension Plan’. In order to facilitate the creation of such pan-European industry-wide plans, the EC could propose a model, or template, which takes into account national variations. Such industry-wide plans could be both created and governed by boards comprised of employer and employee representatives. If a pension plan conforms to the template or model adopted by the EU, then every EU member state would be required to give it equivalent tax treatment to national second pillar plans. Another advantage is that one model could be adapted for defined benefit plans and this could help arrest the current stampede towards defined contribution plans that is threatening individuals’ chances of receiving adequate pension benefit.
Had Eddy in the ‘case study’, for example, joined a European aviation industry defined benefit plan in 1974, his pension prospects would undoubtedly have been superior to his current position (see graphs).
The concept of a model Industry-Wide Pan-European Pension Plan should be of appeal to both employers and employee representatives. The former should welcome systems of retirement provision which externalise pension risk, while the latter should feel comfortable with pension plans in which they play a full part in creating and supervising, and, in which their traditional national prerogatives are not usurped.
Does all this sound too utopian? Perhaps it is, perhaps it is not - but an initiative by the EC along the lines suggested would represent a practical step along the path to solving the pension problems of Europe’s increasingly mobile citizens.
Geoffrey Furlonger is chairman of the International Employee Benefit Association and head of EU Practice Aon Consulting in Brussels
The opinions expressed in this article are personal opinions and do not necessarily represent the views of either the International Employee Benefit Association or Aon Consulting
Case study .…
n terms of obtaining concrete progress in alleviating the pension problems of job changers - which is to say, the majority of the modern working population - it would seem that a fresh approach is required. It is instructive to view a case study of a mobile employee. The individual selected is an engineer working in the airline industry whom we shall call ‘Eddy’. Every mobile employee has a unique pension profile,
therefore Eddy’s story is neither typical nor atypical. This case study is interesting however because at no stage in his career has Eddy ever voluntarily left an employer or been the subject of an individual dismissal. This is relevant because job changers are sometimes prone to accusations of either incompetence or disloyalty, thereby diminishing sympathy for their pension problems.
Eddy began work for Laker Airways in the UK in 1974, aged 21, and immediately joined Laker’s two-thirds final salary defined benefit pension scheme. In 1982, Laker Airways went into bankruptcy. Freddy Laker, the owner of the airline, subsequently sued British Airways and certain American airlines for alleged illegal anti-competitive practices leading to the bankruptcy of his airline: the parties settled out of court, and as a result of this settlement Eddy received a defined-benefit pension equivalent to €13,350 to be paid every year after Eddy reaches age 65. Unable to find work in the UK, in 1982, Eddy and his family moved to South East Asia where he took up a senior position with a national airline and stayed until 1987.
As no pension was offered by his new employer, Eddy began contributing in 1982 to a private pension based in the Isle of Man to which he continued to contribute until 1991.
In 1987, Eddy returned to the UK and worked until 1991 for Air Europe until this airline also went bankrupt. Interestingly, Air Europe offered a voluntary defined benefit pension plan - which offered a pension benefit,
providing the employee remained with the company for 40 years! Needless to say Eddy elected to continue contributing to his private pension, which proved to be a prudent choice given this employer’s subsequent bankruptcy four years later.
In 1991 Eddy received a curious letter from the administrators of his Isle of Man private pension informing him that the pension plan could no longer be maintained in conformity with UK regulations and advising him that he should withdraw the accumulated value of his pension - which expressed as an annuity is projected to be worth €4,500 - a year when he reaches age 65. In 1992, Eddy’s pension luck changed somewhat when he began working for Virgin Atlantic Airlines and he trusted his future to the business skills of entrepreneur Richard Branson. Virgin Atlantic offers a reasonably generous defined contribution pension scheme with the employer contributing 11% of gross salary and the employee contributing an additional 6%. The asset value of Eddy’s Virgin Atlantic Airlines pension currently stands at €150,000. Andy’s current gross salary is €75,000, and it is estimated that if he remains with Virgin Atlantic with salary increases until he retires in 2018, aged 65, his gross Virgin Atlantic Airways pension benefit expressed as an annuity will be worth €32,900 per annum.
It is therefore possible to estimate Eddy’s final total second pillar benefit at age 65 as worth around €50,750. Now, had Eddy been able to stay all his working life at Laker Airways, using the same assumptions as were used to estimate his actual pension, with Laker Airways his final pension benefit would have been worth €84,800. In other words, Eddy is likely to receive a little over one half of the pension he might have expected had he succeeded in having ‘a job for life’ with Laker Airways.
It might be argued that Eddy’s disappointing pension prospects are as much due to the phenomenon of substitution of defined contribution plans for defined benefit plans, as they are due to his involuntary mobility. While this is true, it should be remembered that companies have tended to close defined benefit plans to new entrants, while maintaining them for the “old timers”. Therefore, the march to defined contribution schemes may be viewed as simply another factor causing mobile employees to be disadvantaged in comparison with static employees.