Pension Pain for Multinationals

The French city of Toulouse is known both for the distinctively rosy glow of its brick and tile Renaissance and 16th- and 17th-century architecture and for the multinational companies–American names such as StorageTek and Motorola–that have helped turn the community into an aerospace and electronics boomtown for 21st-century Europe. Last spring, however, Toulouse’s picturesque streets were filled not with tourists but with thousands of workers, protesting proposed reforms to the nation’s troubled public pension system. The aggrieved employees directed their ire not just at the French government but also at any private employers that dared think about asking older workers to stay on the job into their 60s to make corporate pensions more affordable. “They exploit us, they fire us!” the marchers chanted, according to an Associated Press account. “It’s up to management to pay our pensions!”

    Over the last few years, such demonstrations have erupted across Europe, with similarly angry crowds shutting down airports and train stations in Milan, and retirees massing at Berlin’s Brandenburg Gate to wave union flags and blow whistles in protest. Beneath the bombast, there’s fear and uncertainty. For generations, workers across Europe have counted on retirement benefits far more lavish than what Americans have generally received, stipends that sometimes matched a large portion of–or even actually exceeded–their working wages. In addition, they’ve become accustomed to retiring by age 60, far earlier than Americans. Governments provided most of the benefits, financing them out of hefty payroll taxes that Europeans have come to expect as part of the social contract.

    For years, neither the public nor the private sector worried much about the cost. But all that is changing. Thanks to low birthrates and intense opposition to immigration, the European population is aging even more rapidly than that of the United States, and the ratio of taxpaying workers to retirees is shrinking. Many countries worry that they will be unable to cover the cost of supporting the elderly. But elected officials also fear the public wrath triggered by austerity measures such as cutting benefits or raising the retirement age.

    Instead, governments across Europe are looking increasingly to private employers, including U.S.-based multinationals, to assume more responsibility for retirement benefits–and pick up more of the cost. Pension and human resources consultants in the United States and Europe warn that for American companies, the demographic time bomb on the other side of the Atlantic may have serious financial consequences, increasing labor costs to the point where it may be difficult to do business at all in some countries. As the multinationals grapple with the pension woes of an aging Europe, they’ll face challenges even more complicated and daunting than those caused by the graying of America. U.S. companies already are hindered by a mishmash of varying retirement regulations across Europe, which necessitate setting up separate funds and offering different benefits from country to country. Additionally, they must overcome significant cultural barriers, such as convincing employees to wait longer before retiring and to save on their own to finance benefits that they traditionally got from the government. The experts, unfortunately, don’t offer any easy solutions, but they say that a carefully planned strategy for change may help minimize the pain.

Multinationals pay attention
    Of the more than two dozen U.S.-based multinationals contacted by Workforce Management, none were willing to discuss the problems they might face from the European public-pension crisis. “We don’t speculate about what we might do in any of our business areas, and benefit plans is clearly one of those areas where speculation is not appropriate,” ExxonMobil spokeswoman Sandra C. Duhe wrote in an e-mail message. Others simply deny that there is a problem at all. “Our people don’t characterize what’s happening in Europe as a crisis,” says Ford Motor Co. spokeswoman Marcey Evans. Most were unwilling to divulge anything more than the most general details of how they navigate the continent’s bewildering maze of tax and pension regulations, which vary significantly from country to country. “For our German workforce, we adopted the same benefits offered by other companies that do business in Germany,” says Oliver Neumann, a spokesman for farm equipment manufacturer Deere & Co., whose Mannheim plant is the largest manufacturer of tractors in that country.

    Pension and human resources consultants working in Europe who are privy to the inner workings of U.S. multinationals there tell a different story. “We’re sort of in the deer-in-the-headlights stage right now,” says Stacy Apter, an international pension consultant for PricewaterhouseCoopers. While the cost of providing for older workers will rise in the United States, she says, U.S. companies already have mature pension plans with some built-up assets. “In America, a 40-year-old may have been saving money since he or she started working. In Europe, you’re not going to see that. Instead, you’re playing catch-up. Not only do you have to fund the pensions for all these 40-year-olds, but you have less time to do it because they retire earlier than in the United States.”

    Apter is reluctant to predict precisely how much costs for companies may rise, but she says the worst-case scenario is that it may become too expensive to do business in some countries. “Something really has to happen with this issue. We can’t afford to ignore it any longer.”

    Consultants and academics say that European governments are unlikely to let their pension systems fail. But neither are they likely to reduce benefits as drastically as funding shortfalls might seem to require, they say. Some countries, such as Italy, have tried to reduce the stress by increasing the retirement age and switching to defined-contribution systems, and have found themselves in a public firestorm. “By doing all this dancing around and delaying changes, when you finally have to announce austerity benefits, people tend to blow up and get into the streets,” says Watson Wyatt vice president Sylvester Schieber, who co-authored a 2004 study on aging workforces by the World Economic Forum, an international group of business and government leaders.

    “The union movement feels they’ve spent the last century negotiating these benefits, and they don’t want to give them up.”

    Instead, the experts say, a more likely outcome is that European governments will require private employers, which already pay as much as a third of workers’ public pension taxes in some countries, to pick up an increasing amount of retirement coverage. There’s already at least one fairly successful model: the United Kingdom, which began reducing reliance on public pensions in the 1980s. Today, 80 percent of British workers have private pension coverage, an even higher proportion than the 61 percent in the United States, according to the World Economic Forum-Watson Wyatt study. One crucial aspect of solving the pension crisis in Europe, almost everyone agrees, is getting workers to save more for their own retirement. At a typical big U.S. company, 401(k) retirement accounts provide a little more than half of employees’ retirement income, according to a 2004 Hewitt Associates study. A 1999 study by the German Institute for Retirement Provisions, in contrast, found that only 10 percent of workers in Germany and the Netherlands were saving their own money for retirement, compared to 42 percent of workers in the United States. In France, less than 1 percent of the nation’s 26 million workers have signed up for retirement-savings accounts, Business Week recently reported.

    European countries are starting to give tax breaks to workers who save for retirement, but they’re slow to grasp all the nuances, says Tim Reay, a principal based in the London branch of the U.S.-based consulting firm Hewitt Associates. “In Spain, for example, employees can have a 401(k)-type retirement account, but they can’t direct their own investments. The feeling is that if Fred and Joe both have the same job, it’s unfair that one of them should have less money in his account at retirement because he wasn’t as smart an investor.”

    Multinationals face other difficult hurdles in increasing their retirement coverage. For years, European employers have been required to base private pension funds in the same country as the workers who’ll be collecting benefits from them, Reay says. “Basically, if you have employees in 12 European countries, you’ve got to have 12 different retirement funds, each with its own meetings for executives to attend, documentation and administrative requirements.” (IBM has about 16 billion euros in 20 different retirement funds scattered across Europe, according to a recent article in the London Sunday Times.)

    The EU is moving over the next few years to allow assets to be consolidated into pan-European corporate funds, which may save multinationals tens of millions of dollars. But differences in tax codes and regulations in various countries will still make the job of administering benefits maddeningly complex. Ruud Kistemaker, a Netherlands-based international benefits manager for Aon Consulting Worldwide, notes that in his country, companies in traditional industries such as construction are compelled to make contributions in behalf of workers to industry-wide pension funds–but companies in new technological fields may not be.

Blame it on Bismarck
    Unfortunately, multinationals probably won’t get real relief from European pension woes until the European Union develops a uniform public pension system, says Olivia Mitchell, a professor and executive director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania’s Wharton School of Business. “It sort of defeats the whole purpose of the EU because you can’t really have a free flow of capital and labor across Europe when you have different tax laws and retirement benefits.” European employees already are sometimes reluctant to accept transfers across borders, consultants say, for fear of disrupting benefits dependent on years of working in a country. A 1999 Mercer Human Resource Consulting firm study of U.S. multinationals operating in Europe showed that 83 percent found cross-border transfers to be a difficult personnel issue.

    The roots of the European pension problem go all the way back to the late 19th century, when German Chancellor Otto von Bismarck had the idea of paying people who were too old to work a stipend for living expenses–not out of benevolence, but to dissipate growing public support for socialist political parties and trade unions. Bismarck’s old-age pension had an ingenious catch: a worker had to reach age 74, well beyond the typical life expectancy at the time, before the government had to ante up. In the generations that followed, European politicians showed considerably more largesse, continually expanding benefits.

    “It reached a point where in Greece, until a decade ago, you actually would come out with 102 percent of your salary in retirement,” says Reay.

    Because they predate the European Union, public pension systems vary tremendously from nation to nation across the continent, according to a survey of European systems compiled by Mercer, a global firm. An Italian middle manager, for example, will get 55 percent of salary after 35 to 37 years of service, paid for by a 37 percent payroll tax–28 percent out of the employee’s pocket, 9 percent from the company. A person with the same job and base salary in Austria gets only 44 percent of his salary, for which both the employee and the employer pay a 17.65 percent levy. In France, retirees get both a government pension and a stipend from an industry-wide retirement fund to which employers are required by law to contribute. In both Spain and Belgium, employers pay 35 percent to support employees’ pensions, but in Spain, the employee contributes just 3 percent of his or her salary, while in Belgium, the personal tax is four times as high.

    Additionally, in the 1970s, governments began to lower the retirement age, in an attempt to create more openings for unemployment-plagued younger workers. Nearly half of all Americans between the ages of 60 and 64 are still working, but only 22 percent of Germans are still on the job and less than 15 percent of French workers are still earning salaries, according to the World Economic Forum-Watson Wyatt study. “If you go into businesses in France, you’ll see hardly anybody working who’s older than 55,” Reay says.

    But cracks began to develop in the retirement utopia in the 1990s. Birthrates declined in European countries. In Italy, for example, women on average have just 1.2 children, compared to 2.0 in the United States. And with European countries reluctant to allow immigration to boost their workforces, the continent’s population has aged even more rapidly than that of the United States. In a 2002 paper, Peter Peterson, chairman of the Blackstone Group, a New York-based investment firm, calculated that by 2030, the percentage of the U.S. population over 65 will match the present proportion of older people in Florida, around 18 percent. Germany, in contrast, will achieve “Floridization” by 2006.

    European public pensions, like Social Security in the United States, are predominantly pay-as-you-go systems financed by continual contributions from younger workers and their employers, which means that increasingly less money will go into the funds and more will be coming out. According to United Nations statistics cited in the World Economic Forum-Watson Wyatt report, the ratio of workers to retirees in Italy will fall from an already low 2:1 to 1:1 over the next several decades, which could push the public pension systems to the brink of insolvency.

    But there are things companies can do to minimize their financial and organizational pain while awaiting European pension reform, Reay says:

●Take a pension inventory. Reay says a company’s first step should be to compile a complete database of all its retirement plans throughout Europe (and elsewhere in the world, for that matter). Many companies still don’t keep a close watch on all their offshore pension obligations, he says, because they may not be considered material under accounting rules.

●Devise a unified, cross-border pension strategy. What does the company hope to gain from its pension program? Is competing for talent the top priority, or is it the need to convince its older, most experienced European workers to remain on the job longer? After that, a company should look at all its European plans and see how well they fit the strategy. In doing that, Reay says, it’s crucial to factor in the nature of the business in Europe. “If you’re in, say, the oil or pharmaceutical industry, where people tend to move around the world a lot and identify with the company more than the country, you really have to look at your global competitors [as the benchmark],” he says. “In the auto industry, in contrast, your workers tend to be from the country where the plant is located, and stay there for their entire working lives.”

● Don’t try to make one size fit all. A company can’t simply duplicate its U.S. pension practices in Europe. For one thing, the necessary changes may not even be legal in some countries. Additionally, Reay says, the perception that a plan is being imposed from on high won’t sit well with European employees.

● Invest in changing European workers’ attitude toward saving. Reay says experience has shown that tax breaks aren’t sufficient motivation for European employees to participate in company-sponsored retirement-savings plans. “Europeans just aren’t that familiar with the concept of having to take care of themselves in retirement,” he says. “They’ve always assumed that the state would look after them.” Instead, he says, companies may have to front-load their employee savings plan with more generous incentives than they would in the United States. A company might create retirement-savings accounts for employees, for example, and contribute the equivalent of 5 percent of their pay, in addition to matching the employees’ contributions.

    If established U.S.-based multinationals don’t find a way to deal with pension woes in Western European countries, they risk getting hit with a double whammy, says Mark Sullivan, head of international consulting at Mercer Human Resource Consulting in London. In addition to having to pick up more of the cost of workers’ retirement, established companies run the risk of being squeezed by competitors that have set up shop in the former communist countries that have joined the European Union. Not only have countries such as Poland already gone through the pain of scaling back their state pension systems, but they have an added, albeit grisly, advantage. “Life expectancies aren’t as high there,” he says, “so they’re providing for shorter retirements.”

Workforce Management, September 2004, p. 43-48 — Subscribe Now!