Getronics aims for DB style outcome
Getronics, an international IT company with its headquarters in Amsterdam, is one of a only a handful of companies in the Netherlands that has moved wholly from a defined benefit (DB) to a defined contribution (DC) system for its corporate pension plan.
A new economy business with a young, well educated workforce it could serve as a model of the kind of business most likely to move to DC.
The move followed a string of acquisitions in the 1990s, which brought with them some 10 to 15 different types of pensions scheme. Getronics saw an opportunity to introduce a single plan for the entire workforce and an opportunity to re-think its compensation strategy.
There were several reasons for the move to DC. A survey of the workforce had revealed that it did appreciate the benefits of the existing DB scheme. Fred Ooms, vice president compensation and benefits with Getronics says: “The ratio between the value of the benefit and the cost to the company and the appreciation by the employees was totally out of control.” Also demographic changes such as greater longevity meant that the costs of the DB plan were likely to rise. A DC scheme would enable Getronics to predict and control these costs.
Getronics knew it faced an uphill task, says Ooms. “We knew at that point of time, especially in the Netherlands, DC type plans were not very popular, not only with employees but also with works councils and trade unions. They were seen as a less good plan compared with DB. Our view was that it depends how much money you are prepared to spend in a DC plan. We did not want to earn money by the change, We wanted a DC plan that provided the same type of outcome that employees would get in a DB plan.”
Getronics calculated that, assuming returns of between 6% and 7%, it could achieve a comparable pension with contributions of 12% of pensionable salary for employees up to the age of 40 and 17% thereafter. The employees contribute 5% towards these total contributions.
The company pays the cost of administration and the cost of the risk premiums for dependents and disability insurance, equivalent on average to an additional 3% contribution. “All the ingredients that are normally included in a DB plan are included in our plan, with this main difference that it is DC rather than DB,” says Ooms.
The DC scheme has been rolled out progressively over the past four years. Today 90% of the workforce, 6,600 people, are covered by the DC plan. “The transition was successful because we took the position that the employee will not be worse off,” says Ooms. “At the same time we said the employer will not pay more costs – so it’s the best of both worlds.”
Getronics has introduced its own system of investment choice within the scheme. It invests in two indices – the MSCI Netherlands for equities and Salomon Brothers less than one year for bonds It then offers five investment options ranging from 100% investment in the MSCI index to 100% in the Salomon index.
Contributions are lumped together and invested in both indices. How much is paid into the employees’ accounts depends on the performance of the indices and the investment option chosen.
“It’s a fairly cost effective way by which a company can achieve the same effect than if it has bought individual products from an insurance company,” says Ooms.
There is a default option – a collective portfolio for people who prefer to leave investment choice to the company. This guarantees members a minimum 4% return at retirement age provided they continue to invest in the collective portfolio until retirement.
Initially, 70% chose to invest in the collective portfolio. Ooms says that the fact that as many as 30% opted for their own choice was surprising. “We explained to them that if you opt for something different from the collective portfolio you lose your 4% guarantee. Even if you go back to your collective portfolio you cannot regain the 4%.”
Employees may switch portfolios once a year, although Getronics is considering allowing more frequent switching. They can get information – but not advice – on their investment choice from the helpdesks operated by the scheme’s three insurers, Fortis, Aegon and ING.
Getronics has also developed a piece of software that enables employees to calculate the returns from the various invetment options or decide what sort of pension they want.
Fred Ooms says the results of these initiatives have been encouraging: “There is much more interaction between individuals and the company than there was with the traditional sort of plan. The ratio between the appreciation by the employees and the cost to the company has dramatically improved. People say this is the first time they have seen how a pension plan actually works.”