In a previous newsletter, at the start of the financial crisis, we outlined the possible consequences and risks concerning the accrued pension reserves of a supplementary pension plan. Depending on the chosen investment method (i.e. ‘Branche 21’ with interest guarantee or ‘Branche 23’ without any capital guarantee) and any financing surplus on top of the minimum statutory commitments, the effects of the financial crisis may not be quite as bad as expected. Even so, this financial crisis has developed today into a broader economic recession and most companies are zealously searching for possible ways to cut costs.
Nobody knows how long the situation will prevail but it is hoped that the economy will recover from 2010. Indeed, if economic activity resumes within a relatively short period, major restructuring at company level would probably not be advisable. After all, the extensive costs that would be associated with restructuring would be quickly followed by new additional costs (selection, recruitment, training, etc) as soon as the market improves again. Most governments are also trying to keep the economic engine running and to avoid mass redundancies with all types of support measures. In this context, many companies are looking to make the necessary cost savings through temporary or other reductions in working hours and pay cuts. In addition to doing away with variable salary components such as bonuses, increasing consideration is being given to reducing supplementary pension plan premiums.
The necessary prudence is called for in this regard and the following concerns should be taken into account:
- Temporarily suspending or reducing the accrual of pension benefits can be defended if this can be made up again later, when the economy is back on its feet, in a tax-friendly manner through catch-up payments. We note that the pension contributions in defined pension plans will never fully cease because of the compulsory, dynamic management (future salary increases will continue to be earned for the previous career until the pension plan is ended).
- Discontinuing risk insurance (death, invalidity and hospitalisation) is harder to understand. It is precisely in times of crisis that additional setbacks are best avoided and insurance for the aforementioned risks should be maintained. Moreover, this cover cannot be made up again later through catch-up payments (if illness, invalidity or death occurs, these risks can no longer be insured). In addition, one runs the risk of having to go through the entire medical examination procedure again in order to reactivate such risk insurance policies.
- Supplementary pension plans form part of the personnel’s employment conditions and all labour law rules must therefore be observed when amending them. As such, the unilateral reduction of supplementary pension benefits by the employer does not seem to be an option and at least prior consultation is appropriate. It would be best to enter into agreements in this regard with the parties involved, observing the applicable legislation and the hierarchy of legal sources (for instance, generally binding provisions of a collective bargaining agreement at sector level cannot be amended at company level).
- Compared to the salary component, the overall cost price of supplementary pension contributions for the employer is lower (4.40% insurance tax plus 8.86% national social security contribution on pension premiums versus 35% employer's national social security contribution on gross salary). Accordingly, large savings are possible if the gross salary is reduced (e.g. part-time work). The 'reverse' question may come up for discussion in part-time working scenarios to at least retain the pension benefits for full-time work.
- In addition to the premium savings by substantively reducing the pension plan, other cost price reductions are often possible by optimising the derived costs of the pension plan (administration, suppliers, insurance conditions, brokers, consultants, etc) (Additional explanations concerning the cost price of a pension plan can be found on the website in our November 2006 newsletter).
- The cost price of a defined benefit pension plan for companies that must report according to international accounting standards (ISA, FAS, etc) is determined on the basis of expected and projected retirement age trends. Some of these projection parameters are determined on a macro-economic basis (anticipated inflation, discounting rate on the basis of high-grade corporate bonds, etc) and therefore cannot be adjusted by the policy of an individual company. On the other hand, other parameters are strongly tied to the company (expected salary trends, resignation rates, retirement age, the effects of restructuring, etc) and strategic decisions of a particular company concerning these factors can actually influence the cost price according to international standards.
Nonetheless, we hope that the economic recovery measures will have their desired effect and that general confidence in the financial and other markets will quickly return. In this way, the reduction of pension premiums can be avoided because there is a great need for supplementary pensions in our ageing society.