Multinationals are attracted to the benefits of Pan-European pension arrangements, but the complexity of EU legislation, taxation issues and the perceived lack of products are hampering progress towards their development, according to an industry review carried out by Mercer.
Mercer believes that as companies extend good corporate governance, limit their risk exposure through moves to DC or hybrid structures and look for economies of scale, the opportunities to move towards PEPs will become increasingly attractive, however.
Mercer conducted a number of structured interviews and spoke to over 80 multinational organisations headquartered in the US or Europe and 25 pension providers with EU operations for an overview of the status of and attitudes towards the issues, challenges and barriers to PEP provision.
According to Barry Mack, head of Mercer’s Pan-European pensions task-force,
“PEPs are seen to provide a number of benefits – competitive advantage in attracting staff, support for multinational benefit policies and a vehicle for helping to co-ordinate the move to defined contribution pensions.
“But there are hurdles – not least, the requirement by multinationals that PEPs be implemented on a cost-effective basis. Until that’s possible, and until the main barriers are removed, many multinationals are reluctant to be amongst the first movers in the market.”
He added: “We believe, however, that much of the value is not just in the creation of PEPs but what can be achieved in the steps taken to get there.”
Survey respondents felt that PEPs are especially attractive for less mature pension markets and smaller locations.
Arrangements in large locations such as Germany, the Netherlands and UK, which have a large concentration of employees, assets and liabilities and associated financial risks, warrant special resourcing to ensure they are managed effectively.
In smaller locations, such arrangements can often operate on a ‘stand-alone’ basis and can be managed on much a reduced scale. There was also a strong desire to bring pension administration under one roof and reduce costs.
Expatriates
Doubt remains over the belief that PEPs suit expatriate employees since this group often consists of small numbers of employees in any given location. Respondents felt that a PEP would ‘overcook’ the provision of retirement benefits for expatriates, exposing the organisation unnecessarily to additional regulations including ongoing reporting.
Governance
As many multinationals have already switched to DC plans in most of their locations, many survey respondents felt DC plans should be subject to a similar level of scrutiny as defined benefit (DB) plans. It was recognised that a PEP may facilitate this and any movement towards a PEP vehicle would help improve central control and coordination of DC plans.
Regulation
While there was recognition of the benefits of PEPs, respondents felt that their progress was limited by regulatory issues.
“The Pan-European Pensions Directive has been implemented with considerable inconsistency, with some jurisdictions over-regulating on the requirements and others tending to under-regulate”, commented Mr Mack.
“Until the European Commission reviews the current situation and recommends changes to member state implementation, this paralysis of the PEP market could remain.”
Taxation
Tax was cited as another barrier. While the European Commission has largely addressed the issue of discrimination in tax treatment between a member state’s nationals and those in other member states, the exact treatment of tax is still unclear.
Organisations were also concerned that PEPs would add a further layer of unnecessary complexity in terms of the potential benefits.
“Initially, approval is needed for each EU state in which a PEP plan has members,” said Mr Mack. “Once set up, there are other ongoing regulatory requirements though it’s doubtful these would be any more onerous than for traditional retirement plans operated on a per country basis.”
Providers
Respondents expressed disappointment at the limited variety of providers in the market that could help them implement a PEP.
However, Mercer surveyed 25 providers about their PEP plans and found that six already claim to have Pan-European products offering a package of investment, administration, communications and plan management.
Of those six, half use Belgium’s Organisation for Pensions (OFP) as one of the vehicles. A further five providers expect to have a Pan-European product within the next 12 months with another eight following in the next two to three years.
Over half of the providers (13) intend to offer or use more than one legal vehicle for their services. “Our research highlights a lack of awareness and understanding around provision in this market,” said Mr Mack.
Commenting on the process for establishing Pan-European pension arrangements, Mr Mack said:
“Multinationals who prepare for PEP arrangements now can reap wider benefits in doing so. A number of steps must be taken in the process: auditing existing pension plans, centralising decision-making, implementing policy and improving governance – as well as reviewing providers and plan administration arrangements.
“At each stage, the benefits can be evaluated in terms of cost savings and improved risk management, while the exercise can help determine the potential business value of taking further steps, such as consolidating around a single provider or creating a multinational pooling arrangement. With PEPS, the value is in the journey, not just the destination.”
