Since many of the countries of central and eastern Europe have embarked on their transition from command to market economies, development of employee benefits has moved at varying rates in the different countries. This article looks at trends in employee benefit provision in the main economies there and notes which countries are taking the lead in each area of provision.
Some countries have taken the lead in benefit provision with the government facilitating a wide and deep development in many areas. However, in other countries development has been frustrating.
The main drivers for growth in employee benefit provision have been appropriate regulation, favourable tax treatment, pro-active employers and a reasonably developed financial sector to supply the appropriate vehicles. Generally, employee benefit development reflects a favourable business environment. This explains the identity of three countries who have made much of the running: Hungary, Poland and Czech Republic.

Hungary: This country is well known for its move towards a three-pillar system of pension provision. Although other countries have also followed this route, Hungary was the first to introduce a vehicle for voluntary pension savings. This third pillar of retirement provision, Voluntary Mutual Benefits Funds (VMBFs), is now some eight years old. Hungary’s first pillar is the reformed state pension. The new second pillar, which involves compulsory contributions to a system of funded retirement pension accounts known as MPFs, was introduced in 1998.
The three pillar system in effect commenced in January 1998, with a gradual increase in those having to participate in pillar two. At the same time the accrual rate under the pay as you go system reduces.
Many employers see the VMBFs as a good tax effective ways of providing employee benefits. Smaller and medium sized companies tend to use multi-employer funds whereas the larger companies may set up their own plans. The typical contribution rate by employers varies from 2–6% with the employees paying around half of this on average. One of the constraints of VMBFs is that there is only a limited differentiation allowed between certain groups of employees which makes targeting more difficult. However, there are over 300 third pillar funds in operation with many employer funds amongst these. In this respect, voluntary company focused pension provision is well developed and certainly far ahead of Poland.
The insurance market in Hungary is broad with many international providers present. There are some tax advantages in providing death and disability cover and general market practice sees most employers signing policies on behalf of their employees. This is generally done on a group basis, mainly for cost saving reasons. Supplementary sickness benefits are also provided but premiums are treated as taxable income for the employee and subject to both employer and employee social security charges. It is common practice for employers to meet the employee’s additional tax bill. A typical insurance package is two to three times annual base salary for total and permanent disability.
A number of multinationals have already set up vehicles to provide supplementary medical benefits. Again the market is reasonably broad and there is a large number of private medical clinics which means policies are well developed. As there is a choice of level of provision, certain key employees can be targeted.
Finally, share plans and stock options are possible and there are a number of different routes under which they can be provided. The most common way is simply to adapt the company’s standard global stock option plan to the local environment.

Poland: Radical pension reform is well known here, moving in 1999 from state provision to encouraging both voluntary non-state provision and compelling mandatory coverage. Although the new system is nearly two years old, there are still a number of teething problems with both pillar two and pillar three. Pillar two is an individually focused arrangement where employees must pay 7.3% of their salary to a pension fund of their choice. This money is then rolled up with the investment returns achieved, and further contributions, to a pool of pension savings at retirement. Voluntary third pillar plans were meant to be set up in parallel with pillar two provision but due to a number of changes in the proposed regulatory environment and some confusion about the tax treatment and ability of employers to pay contributions, development has been very slow. At present, the law allows both employee and employer to contribute. In addition, employer contributions are treated as a cost of doing business. Although there is a lot of interest from companies, the confusion has meant that very few companies are currently operating such a plan. Indeed as at 1 February 2001, there are only 29 registered schemes. However, many employers wish to set up such plans for their employees and once the regulatory and tax environment is clarified , further development is likely.
Group life assurance plans are widely available and used by employers in Poland. Based on William Mercer’s own surveys, around 50% of companies provide this kind of benefit with coverage typically between 12 and 18 months’ base salary. Maximum coverage tends to be 48 months salary. The insurance market is becoming widely developed with a number of international players complementing the Polish domestic players. The potential size of the market has attracted many of them.
Sickness and disability benefit provision is also popular driven by the legal requirement that employers must pay the first 35 days of absence. Disability lump sum provision as part of accident insurance is also popular with around 60% of companies providing this benefit. In this respect, Poland is leading the way in central and eastern Europe. At present, cover for disability is relatively low but it is likely to grow as although the state provides certain benefits, for high earners this is deemed insufficient.
One area where Poland is not really developed is the provision of medical insurance. Where it does exist employers write contracts directly with medical service providers to provide a range of basic services.

The Czech Republic: Despite its strategic position the development of employee benefits in the Czech Republic has been quite uneven. Although voluntary funds have been in place since 1994, until recently there were few tax incentives and this was reflected in the level of contributions paid into the funds ( rather than lack of take up per se – indeed many companies did make contributions). However, a new law now provides more generous tax treatment and increased contributions are likely. Open funds are generally sponsored by banks and insurers and employers can contribute. These are multi-company plans as employers sponsored arrangements are not really practical within the current regulatory framework. However since last year, employees can write contracts with pension fund providers to make contributions on behalf of their workers.
One area where the Czech Republic is leading the way, is the attempt to make voluntary provision the focus of employers. It has seen the success of employer sponsored and operated funds in other countries and has studied a number of ways in which this route can be followed. However, others favour more of a Polish approach and a consensus is yet to be reached.
What this means for employers is that supplementary provision is likely to grow but the future shape is unknown. The country is moving in the right direction and there are a number of vehicles already in place on which future provision can be built.
Death benefits can also be provided within the framework of pension funds. Other death benefits are sometimes provided from insured plans but these are generally limited to managers and executives. A typical amount insured is around twice annual base salary.
The state already provides a certain level of sickness and disability provision and some companies make up the difference between state benefits and full salary. Although many multinationals provide this, local companies aren’t so forthcoming. As in Poland, little additional medical insurance exists but some employers do arrange direct medical insurance with a private medical practice.
Development has been encouraging in many central and eastern European economies, most particularly the three highlighted above. However, efforts have generally been focused in the pension sphere; the provision of other employee benefits needs to be more fully developed.
Simon Brimblecombe is a consultant with William M Mercer in London