Weaknesses in Britain’s private and state pension systems are putting UK businesses at a severe competitive disadvantage in Europe, according to a report from Aon Consulting.
The research finds that other European models have withstood the shocks of the global downturn much better, putting companies based in these pension regimes at a competitive advantage over their UK counterparts.
Aon’s European Business Leaders Survey finds that the ways in which pension benefits are delivered are diverse, ranging from fully-funded defined benefit (DB) models in Ireland, the Netherlands and the UK, to the fully-insured and predominantly defined contribution (DC) Scandinavian systems.
Paul McGlone, director of propositions, UK, said: “Employee benefit provision can have a significant impact on a company’s cost base but the extent will vary considerably according to where the company’s pension liabilities are. So, while volatile securities markets may be a global phenomenon, the way in which this volatility impacts pension scheme sponsors is not. There are winners and losers, with UK business a clear loser.
“The pensions issues highlighted in this report are long-term challenges that require careful consideration by governments, regulators and pension scheme stakeholders. The financial crisis has worsened many of these challenges and focused attention on them, but also offers an opportunity to address them.”
DB versus DC
In terms of competitive disadvantages arising from pension funds affected by the economic turmoil, the Netherlands is the worse hit country in Europe, followed closely by the UK and Ireland. A significant number of companies within these countries sponsor fully-funded DB pension schemes and are under pressure to replenish scheme deficits from earnings or other sources.
The least badly affected countries in the study have been the Scandinavians, especially Denmark and Sweden, who have adopted highly regulated insurance-based and predominantly DC pension arrangements. These systems have benefited from the fact that pensions sit on the balance sheets of insurance companies, which are required to keep capital buffers, with the result that they have withstood the pressures of market volatility and not impact directly on sponsors.
Stark disparities in state pension provisions are also affecting companies’ ability to compete. A generous state pension, as found in many European countries, means there is less a burden on employers to fund pensions. In the UK, the state offers a paltry maximum annual benefit of £4,700 (€5,100) to retirees, compared to a maximum €38,000 in Austria. In France, pensions assets hardly exist because of highly attractive state earnings-related payments.
McGlone added: “Continuing recession will hasten UK companies’ efforts to reduce their DB liabilities. More schemes will close, both to new members and to future accrual for existing members. Indeed already 80% of companies have already closed to new members and 20% have now also closed to accrual for existing members. We expect this proportion to rise above 50% within three years.”