In their latest survey on Pan-European Pensions, Mercer say there are many benefits yet to be taken advantage of.

London -- Multinationals are attracted to the benefits of Pan-European pension (PEP) arrangements but the complexity of EU legislation, taxation issues and the perceived lack of products on the market are hampering progress toward their development, according to an industry review of attitudes and challenges carried out by Mercer, a human resources consulting company.

Mercer officials say that opportunities to move toward PEPs will become increasingly attractive as companies extend good corporate governance, limit their risk exposure through moves to DC or hybrid structures and promote economies of scale.

“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,” said Barry Mack, head of Mercer’s Pan-European pensions taskforce. “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.”
 
“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,” he added.

Survey respondents, which included employees of more than 80 multinational organisations in the US and Europe and 25 pension providers operating in the EU, felt that PEPs are especially attractive for less mature pension markets and smaller locations. Arrangements in 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 effective management.

In smaller locations, such arrangements can often operate on a ‘stand-alone’ basis and be managed on 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 few 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 similar level of scrutiny as defined benefit (DB) plans. It was recognised that a PEP may facilitate this and any movement toward 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,” said 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 from 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 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 on 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 Mack.

Regarding the process for establishing Pan-European pension arrangements, Mack says there are greater advantages in doing so now. “Multinationals who prepare for PEP arrangements now can reap wider benefits in doing so,” he said. “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.”

Mercer/Expatica