VA Tech pulls the DC switch
Austrian technology and service group, VA Tech, has just celebrated 10 years of business following strong growth and acquisitions worldwide that have made it a leading name in the fields of metallurgy and power generation.
But while the majority (84%) of its 17,000 plus employees work in Europe, as Lorenz Held, Vienna-based human resources director for the group notes, the group has had to look globally at the risks to the company of its pension schemes following on from the recent years of market turbulence.
“These risks for the company have begun to get bigger and bigger and we have seen this in many in different countries including Germany, the UK, Austria and the US.
“These risks weren’t seen when the markets were rising, but this has changed dramatically in the last few years. I think that all companies have had to look at this risk when the markets were not performing because there was a strong impact on the balance sheet that was in turn affecting company results.”
Held notes, however, that the company has been particularly focused on ending defined benefit (DB) arrangements for executives.
“At VA Tech we tend to look at pensions on a worldwide basis, but the top executives is where we really have to have an eye because these arrangements can cost a lot of money and there is not much chance to influence this.”
Held says that at the executive level pension provision is very centralised, meaning that the shift from DB to defined contribution (DC) plans counts for all new senior staff globally.
“We took the decision within the group that no DB plan should be offered to new executives. If we offer a pension plan in the future it will be DC.”
The company is also closing access to DB plans for the rest of its workforce: “If a company wants to start any kind of new defined benefit plan then there has to be a board meeting to discuss this and it could only be done if it was a question of local legal obligations or particular commercial competition concerns where all our competitors are offering DB.
“We really have cut back in recent years, particularly concerning this shift to DC because we felt that the risk involved with DB was too high and we wanted to avoid that.
He adds: “It was also difficult to introduce DB plans to some employees outside of Austria and additionally the CEO and CIO of the company often had to explain to people like analysts the effect of large DB commitments on the company balance sheet.”
The rationale for the company to move to DC is simple, he explains: “With DC plans there is no risk for the future and no uncertainty.”
Held says the switch to DC has not resulted in lower contribution rates by the company to employee pensions.
“Again this is set very centrally with decisions at the board level. “The company pays in a flat 10% of salary but this can be increased with possible added bonuses. There is a strong performance related element because we believe that if someone is successful they should get a good bonus for their pension etc.”
And while he acknowledges that the DC move will mean cost savings for the company, Held believes it could also be advantageous for employees: “If the markets rise then it also means that individuals have no ceiling on what their pension plan can be worth.
“They can get a higher pension because it is unlimited and related to the contributions put in. Of course, there is no disadvantage for the company either. The contributions remained at the same level for the company, it’s just that the risk is now on the shoulder of the employees.”
The introduction of DC plans, he notes, also mirrors attempts to introduce more flexibility into the pensions offering, particularly regarding early retirement.
Former employees of VA Tech over 50 years of age are able to take their retirement payments early – albeit at a discount. “This is a kind of freedom for executives and they like this a lot, although they are not allowed to do this while they are working with the company.”
While some of the overall pension strategy is centralised, investment is very much a local concern for the trustees of individual schemes, says Held, with one or two major caveats: “There are certain regulations that the pension schemes have to look at. For example, they are not allowed to invest too much in biotech shares because we saw what happened with them in the market crash.
“There are certain very strict legal rules that are applied.”
The company does have representatives from the HQ in Austria who will sit on the various trust boards in different countries and look at issues, including investment, but as Held notes: “We don’t have a clear strategy for controlling investments centrally. This is too far away from us to control and we operate on a decentralised basis for this.”
However, in terms of pension fund performance, Held says he is part of the group who look at such issues: “If we are not satisfied then we would have to take action.”
Similarly, the company does not have a template for the kind of DC plans it introduces. In Austria the plan is run via multi-employer pension fund manager, APK. In the UK, where the company amalgamated two group pension schemes, and in France there are different numbers of funds available to members and employees can decide how much of salary they wish to pay in.
Held notes that the company tends to use investment consultants sparingly: “If we need them we use them. For example, we used a consultant in the UK when we looked at how to bring together the two pension schemes. We try to do this on an occasional basis though and keep payments as low as possible.”
On the question of mobile employees, Held says that policy is quite simple, with the company aiming to maintain home country cover: “If an employee leaves the country for a number of years then we try to keep them in the home country scheme.
“I’m not aware that we use any specific offshore vehicle or anything like that. We do have some people working on development projects that could be out of the home country for 18-24 months, but in reality there aren’t so many ‘nomads’, so to speak, who are constantly drifting around the globe for the company.”
Explaining what he believes is the company philosophy for its global pension provision, Held says that at the executive level VA Tech wants to be an attractive employer and as competitive as anyone out there in the market.
“We’d like to have the same structure for everybody. It should be performance oriented, but of course we would like to keep our pensions as cost-effective as possible as it costs money and the 10% level of contributions is not nothing!
“We do though want to encourage employees to save as much as possible for their retirement because when we look at government levels we don’t believe they are sustainable in the future and won’t pay the kind of money people are expecting.”