The launch this year of a defined contribution (DC) pension scheme in the UK marks the latest step in Hewlett Packard’s programme to retructure its benefits in Europe, where a fifth of the electronics giant’s 102,000 worldwide workforce is based.

Apart from the Netherlands and Switzerland, where defined benefit (DB) schemes are mandatory, the group has put all schemes on a DC basis. But due to the doctrine of acquired rights, we have not been able to convert the existing DB plan to DC. In other words, all the DC plans which have been introduced apply to future employees only, except in the cases of Denmark and Spain,” says Michel Henneaux, Geneva-based head of benefits for Europe.

The process started following approval at a corporate level in 1993 for a strategy of preferring DC plans over DB, unless local practices dictated differently. This was a fundamental rethink of pension design, which since the 1960/70s had largely been on a DB basis. “A key feature then was to provide some standard provisions throughout Europe,” he says. This aimed at up to 80% of final pay after 40 years’ service, including state benefit, but on a non-contributory basis, ex-cept for France, Italy and Sweden where the mandatory nationwide programmes were considered appropriate.

The adoption of a ‘total compensation strategy’ with-in the group during the 1980s led to a package ap-proach to pay and benefits, so the entire remuneration package is looked at rather than each item separately.

The results of surveys in European countries as part of the total compensation strategy confirmed that many benefits, especially retirement were often too competitive, inadequate and not in line with most local practices.

Fitting in with the flexible approach, the group introduced wherever possible core or mandatory contributions plus additional matched em-ployee contributions.

In Denmark, which has a DC culture, the existing DB scheme members were given the option to join the new DC scheme. “Only 53% opted for the switch - they were typically younger and lower paid employees - which was considered low given the prevailing culture,” he says.

“In Spain, incentives have been given designed to en-courage the employees to switch from the existing DB to the new DC plan. The final formula must still be finalised, based on the outcome of forthcoming ordinances, which are expected to clarify the 1995 pensions law.”

He points out that such a strategy has only been possible in Spain and was virtually impossible in the UK, Ireland and Belgium.

The contribution rates und-er the DC plans have been calculated with reference to local market practice and “adequacy ratios”, which show the ratio of total retirement in-come (state and group pensions combined) over final salary. The ratios, he says, vary from between 80% in the case of those at the lower end of the salary spectrum and 50% at the upper end.

Hewlett Packard has also amended its existing DB plans, reducing the pensions target from 80% to whatever is local market practice - to 70% in the Netherlands and 65% in Switzerland. Wo-men’s normal retirement age was raised to 65. Widows’ pensions were replaced by spouses’ pensions, and vesting and portability improvements were made. “The combined effect of these measures usually translated into an overall cost increase. We reduced costs by introducing employee contributions.”

This article is based on a presentation to a Sedgwick Noble Lowndes seminar in London

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