Europe’s fragmented pension rules in focus as companies look for flexibility

The Covid-19 pandemic has highlighted the heterogeneous nature of Europe’s pension systems, as multinationals look for flexibility on pension funding as a way to manage cash flow.

Analysis by Aon on the funding flexibilities offered by countries across the globe, including several in Europe, highlights the tough decisions companies face on how they finance pension benefits in a world where cash flow is tight.

Commenting, Aon Retirement Solutions senior partner, Paul Bonser, said: “For most multinational companies, pensions represent the biggest component of their employee benefits expenditure. With a global recession looming – along with the sudden impact of the current crisis that companies are facing – some chief financial officers (CFO) are finding themselves forced to look at measures which they would not normally countenance.

“Aon has surveyed its employee benefits consultants worldwide to get a view across the measures that multi-national companies are starting to contemplate – or in some cases have already put in place – as well as the flexibility that is available to them.”

While there is “significant flexibility” in many countries to adjust contributions to defined contributions (DC) schemes and the funding of defined benefit (DB) schemes, there are discrepancies over just how much flexibility is offered. In addition, some countries have chosen to amend rules as a result of the pandemic, whilst others have not.

For example, employers that wish to suspend or defer their contributions to DB schemes have significant flexibility in France, whereas in Norway and Denmark there is little or no flexibility. In other countries, such as the UK, Belgium, the Netherlands, Germany and Switzerland, new flexibilities have been introduced as a result of Covid-19.

Employers in Spain, Finland, Germany and Austria have significant flexibility to access/use surplus DB assets. On the other hand, employers in France, Switzerland, Belgium, the Netherlands, Luxembourg, Greece and Turkey have little to no flexibility.

For those looking to reduce accrued benefits of indexation, only employers in Norway, France, Portugal, and the Netherlands have significant flexibility to, whereas those in Italy, Germany, Denmark, Belgium and Luxembourg have little to no flexibility.

These differences are also apparent when it comes to DC schemes. For example, since the outbreak of the pandemic, employers in Poland and Belgium have seen new flexibilities introduced for employers looking to reduce, delay or suspend contributions. In Ireland and the Netherlands, there is little to no flexibility to do this, whereas there has always been significant flexibility in France, Norway, Sweden, Finland, Turkey and Russia.

As well as these domestic rules, Aon highlighted that differences by country can also be influenced by other factors such as collective bargaining agreements.

“It’s very clear that maintaining cash flow is dominating the thinking of CFOs and that they are therefore looking at their global retirement plans and the flexibilities these could present,” Bonser stated.

“It’s the companies with good governance structures in place and clear data on their global DB and DC plans that are well placed to take quick and decisive action. This could offer them additional cash flow and cost savings at a crucial time. Whether a company actually decides to use the retirement plan savings lever is another matter – but the option can be there.”

Whilst Aon acknowledges that reducing the contributions paid into global retirement schemes would have longer-term consequences, it believes that in the short term, doing so could help protect companies and their employees.

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