EUROPE - The impact of regulatory and funding pressures on employers is forcing a major cultural shift within companies and is changing the make-up of people involved in pensions decisions.
Anecdotal evidence presented by PricewaterhouseCoopers suggests employers across Europe now regard pensions as an important issue they want to actively involved in because the reasons for providing pensions and their ability to do is changing.
Until now, many employers have tended to leave negotiations over pension entitlements to the pensions manager and would only tend to get involved in the funding talks at the end of any discussions, according to Marc Hommel, partner and head of PwC's global pensions practice.
Similarly, the pensions manager would be largely left to their own devices and would tend to be the individual working with the employer's trustees, finance managers and HR, Hommel said.
However, such is the pressure on risk management of corporate assets, as well as shareholder disclosure and board scrutiny employers are now passing some of the focus on pensions to their corporate treasury departments and are asking in advance of any negotiations about pensions, as well as publication of company results, what impact their pension offering could have on the company's future.
Equally as important, employers have begun to question where pensions fit into their remuneration package and whether it is considered to be a worthwhile staff enticement or retention tool, particularly in light of UK regulatory developments as there will be a requirement on all employers in 2012 to provide access to pensions with the arrival of personal accounts.
"Come 2012, UK companies are going to have to auto-enrol everyone, so employers are asking ‘what does this mean for our pensions philosophy?'" said Hommel.
"Different people in different organisations have to be taking this on. But relatively few employers have dealt with this because they have first been battling the past. Very few are looking at why they are spending this money and the deal being offered.
"There are many organisations where it is not clear who makes these decisions. As part of that, they are asking what sort of people do you need in employment, dealing with this strategy. What do you need to do as an organisation to drive that? Is pensions a huge factor with people taking responsibility for themselves?"
He continued: "It is not just about what age or stage in life a person is at, it is about increasingly diverse factors and whether the employers package makes you join or stay with that company as well as the extent to which pensions affect their reputations. They are spending x million pounds a year, so employers are asking ‘what it doing for us?'"
German corporations are now paying significantly more attention to their pension benefits and management, Hommel suggested, but the increased funding of stand-alone arrangements - rather than keeping assets within their book of business - is slow in part because the German insurance market is still considered to be "relatively inflexible" to companies' pension needs.
Firms are shifting their focus onto pensions in a bid to clean up the operating company's liabilities, in part because they are more aware of IFRS developments around pensions.
But they tend not to reveal their developments because any changes involve "significant employer industrial relations".
But we are seeing an increasing number [of employers] who realise how risky their global benefits are," said Hommel.
Companies' increased interest in pensions has been borne over recent months out of the credit crisis and the impact reduced liquidity could have on their cashflow and balance sheets.
The risk to corporate capital and its publicly-announced assets, as well as industrial relations and the potential damage to brand management, means employers are looking for alternative options to managing their pensions risk rather than perhaps locking funding inside a pension fund.
UK employers in particular are looking for new ways to provide funding guarantees which do not require capital to be locked into the pension - especially where it could produce a surplus - but which could also be accessed by the company if needed.
Contingent assets is one of the ways employers are now looking to fund pensions and give trustees the security they need but without parting with cash.
Letters of credit were historically the preferred contingent assets, noted Hommel, but they were already very expensive before the credit crunch and some employers considered escrow accounts but found they tie up capital so it cannot be used elsewhere.
What attention is now turning to is the use of the ‘reserve approach' - a trust which sits between the corporate and the pension scheme, and has trustees and is accessible in certain circumstances and can be taken back by the employer, for example when the pension scheme is in surplus.
"What we should really be saying to the trustees is ‘what happens if you go bust as a company)?'" said Hommel.
"Contingent assets is a growing area as companies are looking to use contingent assets in lieu of raising funding assets. But there are perhaps six instances where sponsors are committing more cash than is necessary. Companies are making agreements and regretting them.
"They wanted to keep good relations and put aside assets to be protecting the pensions, so they did. But with cash flow constraints, borrowing has gone up and sales have gone down. They are regretting that they made commitments that are as generous as they have been.
"Employers have not had the confidence to speak out. The issue in partly organisational behaviour because it has not always been clear who has the mandate to negotiate with the trustees. The employer has not always been in the best possible position and the executive board is often not brought in until the end of negotiations. I think we are going to see organisations being more disciplined, being clear who is mandated to negotiate with the trustees.
PwC is now urging employers to be more assertive with their decision-making as a result and "take control" by presenting the strength of the employer covenant".
"We haven't seen employers being assertive enough. They have deferred responsibility to the trustees and the advisers. But this is about group capital and the optimum use of corporate capital," added Hommel.
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