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Pay or perquisite?

Two views of pensions have developed in Europe. One is that a pension, whether provided by government or private sector, is effectively deferred pay.
In this view, members of defined benefit (DB) pension schemes exchange pay today for future pensions. In other words, people will accept wages at lower than the market rate because they can expect their pension to make up the difference.
The other view is that a pension is not deferred pay at all but an additional incentive for employees. The purpose of a pension is not simply to reward past service, but to encourage continuity of future service – and to soften the impact of retirement.
The question of whether or not a pension should be considered deferred pay has become more urgent as DB schemes - particularly in the UK – have come under pressure, with some employers winding up their schemes because they can no longer afford to meet their liabilities.
If an occupational pension is truly deferred pay, then any attempt to reduce or walk away from commitment is a breach of the employer’s contractual obligations.
On the other hand if a pension is no more than an additional benefit or perquisite, then it can be withdrawn as easily as it was offered.
So what is an occupational pension – pay or perquisite? It should be a straightforward question. However, as with so many pan-European pension issues, the answers depend to some extent on the characteristics of the different pension systems operating in Europe
For example, in Switzerland, a pension fund is a legal entity independent of the sponsoring company, and the contractual arrangement is with the pension fund not with the company. In a Swiss employment contract the employer merely guarantees that the employee is insured with a specific pension fund.
The actual benefits are defined in the pension fund regulations and may be changed by the board of trustees. So the question of whether it is deferred pay cannot arise.
In Spain, pensions are legally defined as deferred pay and there is a legal obligation for the employer to treat it as such. So the question of whether a pension is deferred pay is immediately resolved.
Yet in countries where occupational pensions more closely resemble the Anglo-Saxon system, it is a live issue.
A large majority - three in four - of the pension fund managers and administrators who responded to our survey agree that pensions in DB occupational pension schemes are, in effect, deferred pay.
One UK pension fund manager points out that, in the UK at least, this was true in the past, but less so now. “I make a distinction between what happened in the past, when DB pension provision was far more common and was a condition of employment, and what happens now, where those with a choice tend to go for low cost options of DC arrangements.”
Most agree that if employees are required to join a pension fund as a condition of employment, the pension promise should be considered part of the remuneration package. In Switzerland, the situation does not arise. The employment contract merely guarantees membership of a specific pension fund.

We tried another tack. Perhaps pensions no longer function as deferred salary, but rather as salary savings? Here opinion is more divided with just over half of respondents agreeing. The view of one manager is typical. “People do not understand pensions as deferred pay and employers see them as an added attraction for employment rather than deferred salary.”
However, one manager of a Swedish pension fund points out that the way that people perceive pensions is irrelevant. “Whether a pension is deferred pay or savings has no impact on the promise. This is a part of the package that can’t be taken away without agreement or change in the contract.”
If pensions within DB pension schemes are deferred pay, then arguably employees within such schemes should expect the same protection of their pension rights as they have for their earned income?
Four in five respondents think this is reasonable. However, a significant number of Dutch respondents disagree, and a Swedish manager says the protection should extend only to “earned pension rights not pension rights that you might earn in the future”.
Similarly, although two out of three respondents agree with the proposition that pension fund assets in a DB scheme belong to the members, there is significant disagreement from both Dutch and UK respondents.
One UK manager argues that employers are entitled to get back some of their contributions. “If for some reason there has been a major over funding and the fund is wound up I do not see why the employer should not get the excess back, or at least a proportion of it. Effectively they would be penalised for being prudent in putting more money in to avoid a shortfall, and this requires an attitude of putting in no more than is legally required.”
So is a pension promise no different from any other contractual obligation in employment? Three in four respondents say that they are not different. However, one manager points out that it should be possible to renegotiate this obligation if the pension fund or the sponsoring company comes under pressure. “In some cases employees may have to realise that it is to their eventual benefit to concede reduced pension rights to improve the financial state of the organisation so it remains a going concern.”
There is a strong feeling that employers should act fairly towards their employees. An overwhelming majority of respondents agree that if scheme members meet their side of the contract by carrying out their jobs, and it is up to employers and pension funds to carry out their side by providing the promised benefits. And only one in five thinks that employers are not obliged to their pension promise
The manager of a Nordic pension fund comments dryly. “This could be permissible if it was possible for the employed to re-live his or her life.”
One solution to the problem of employers who renege on their pension promise is to bind them to the promise with legislation. Four out five respondents agree that employers who offer DB promises should be legally obliged to honour their pension promises
However, one UK fund manager thinks that, in the UK at least, employers who provide DB pension schemes have had a raw deal from their governments: “The playing field for employers is not level. Governments have retrospectively increased the liabilities unilaterally for DB schemes and have also removed the smoothing mechanism previously open to employers with the surplus legislation. They have reduced the income from dividends, and then expected employers to have bottomless pits of resources to make up the damage they have inflicted. To this extent the government is culpable, but is expecting employers to bale them out.

Legislation is too blunt an instrument, some feel. What is needed is more honesty about what can and cannot be promised in a pension scheme. “An employer needs to have flexibility in the competitive world we live in to change their benefit packages, but they need to avoid implying that a promise is forever if there is a possibility of it not being realised. In other words, greater clarity about what can be expected and the relative risks would be preferable to legislative enforcement.”
Finally we wanted to test opinion about an issue first aired in the 1950s – whether or not people have the right to an old age pension. The International Labour Office’s (ILO) Social Security Minimum Standards Convention of 1952 defines the right to social security, including an old age pension, as a basic human right.
This view is not accepted by international bodies responsible for economic and social programmes worldwide – notably the World Bank. Two out of three of our respondents agree with the ILO. One manager comments: “Society now creates conditions where mobility forces families apart – so there needs to be something to take the place of family to look after you in old age or infirmity, and some mechanism to provide decency in living standards for those who do not have relatives who can take this on.”
However, there is considerable scepticism about who will pay for this right. One Dutch pension fund manager says that people have a right to a pension “so long as they save money towards it”.
There is an also a feeling that other matters take precedence over pensions – notably public health. The right to an old age pension is a nice idea, one respondent observes sagely, adding “there are many other things of a higher priority, for example helping increase people’s chances of reaching pensionable age!”

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