The practical realities
There was much fanfare and press coverage about the pensions directive, which was finally a legal requirement from 23 September 2005. In comparison, the proposed portability directive has received relatively little in the way of media attention – but the financial consequences of this legislation are far more worrying for European multi-nationals.
The directive is focused on facilitating the mobility of European labour markets. It is believed that if a loss of pension benefits is one result of a job change, then the mobility of workers will be unfairly hindered. As a result, the directive is focused not just on the legal hurdles to job transfers, many of which have been removed by various directives, but on the other retention ties which apply to employees as a result of pension-benefit design, such as:
q The use of high entry age limits to restrict pension benefit accrual for younger, more mobile employees, as in Germany where the age for eligibility is often set at 30 years old;
q The use of long vesting periods, which act as a significant hurdle to the mobility of labour - for example, in France, where some pension promises still require an employee to be with the company at retirement to draw a pension benefit;
q The lack of inflation protection between date of leaving and date of retirement (as in the Netherlands) where there is no indexation, which acts as a significant deterrent to individuals changing jobs.
The commission is aware of the fragile financial state of European pensions and the continued pressure on operating margins. Thus, it wants to ensure any additional legislative requirements do not force or encourage more multi-nationals away from supplementary benefit provision and toward the minimum required by industry and collective agreement.
The directive’s focus is on introducing regulations to address three main groups of obstacles: It proposes restricting the maximum age limit for eligibility to a scheme to 21 years.
Further, where an individual has to participate in a plan for a number of years before an entitlement to benefit, this vesting period cannot be longer than two years. A return of employee contributions should also, as a minimum, be available to the employee upon termination of employment in the event benefits are not fully vested.
In the event that an individual leaves his or her benefits with the former employer, the benefit rights should be adjusted and some form of indexation should be provided.
Individuals should have the right to transfer the value of their benefits to another scheme or employer.
Table 1 shows the current legislative minimum requirements in the areas targeted by the European Commission:
Countries such as the UK and Ireland are unlikely to be significantly impacted by these changes because many of the proposals reflect existing pension regulations. It is those requirements, such as mandatory indexation or benefits pre- and post-retirement, that have been introduced into the proposed legislation to protect the real value of benefits.
Much criticism has been levied at the ‘poor financial state’ of pension funds in the UK and Ireland. However, if we were to remove indexation from the calculation, or if continental European countries introduced it, I do not believe the plans would be in a much more favourable financial position.
Outside the UK and Ireland, reaction to the EC’s proposed directive on pensions portability has been less favourable. The Dutch employers’ organisation VNO-NCW has criticised it, saying it could threaten the Dutch pension system. The VNO-NCW has gone further and asked for changes or lobbied the Dutch government to veto the proposals. The European Federation for Retirement Provision shares the worries of the Dutch employers on the issue of indexation, commenting: “It might lead to a considerable costs increase, both for employers and employees.” Indeed, such sentiment suggests a watering down of the proposals is likely to achieve all country agreement.
In a time of increased focus on labour costs, any additional burden on industry is likely to result in action being taken to reduce exposure to increasing costs. With much of the continental European workforce enjoying benefits driven by collective or industry agreements, it will be fascinating to see to what extent multinationals are able to reduce benefits to, at best, maintain costs against the inevitable pressure from unions or workers’ representatives – as they will be pushing hard for continuation of benefit levels, along with enhancements to reflect good labour practice and legal compliance.
There will undoubtedly be costs in altering existing benefit regulations to meet the directive’s proposals. Many organisations are already struggling with pressure on operating margins in the global market place. If reducing benefits is not politically acceptable, then it is likely that for certain portable industries, it will be another factor in the move
to lower-cost employment centres.
The financial impact of the portability directive will vary from one European country to another, just as the provisions of pension plans vary from one to another and possibly from one company to another within a country.
The EC is concerned about whether further regulation and cost will encourage more companies to move away from supplementary provision. However, the existence of ‘collective bargaining agreements’ may prevent this. Should there be a large shift from supplementary provision, member states may need to move to compulsion on corporate provision to avoid more burden falling on the already fragile state systems.
Mark Sullivan is a worldwide partner at Mercer Human Resource Consulting, firstname.lastname@example.org, www.mercerhr.com