Liam Kennedy speaks to Bernhard Wiesner, head of corporate pensions at German multinational Bosch, about the challenges faced by creating a single Europe-wide pension scheme
The headquarters of Bosch, in the Stuttgart suburb of Schillerhöhe, is also the hub for a long-term project to bring together the European pension funds of the automobile, industrial and electrical technology multinational.
Gerhard Kümmel, CFO at Bosch, laid out his firm's ultimate vision for a Bosch European pension fund at the Schmalenbach conference of German business leaders in the autumn of 2006. Instead of opting for an asset pooling model, with consideration of possible future benefits and administration pooling for its various European funds, according to the EU Institutions for Occupational Retirement Provision, Bosch is now opting for a step-by-step approach.
While other multinationals, like IBM and Unilever, have opted for the asset pooling model with the support of custodian banks, Bosch feels that this model does not capture sufficient administration savings to warrant as a first step.
"A lot is possible within this step-by-step approach," says Bernhard Wiesner, head of corporate pensions at Bosch. "We believe that just pooling asset management is not enough and we need to bring everything together within one administration platform first and one legal entity. But this is not easy on a multi lingual basis.
"We are currently in the process of assessing all the countries in Europe in which we are active in order to introduce or change to EU-compatible models," continues Wiesner. "Our approach is to cluster various regions and to consider amalgamation options. So, step by step, we will move towards the next level, which will be an even greater level of amalgamation between regions. This is a complex process but two factors work in our favour: the growing importance of pension benefits and lower costs."
First of all, according to Wiesner, the firm is set this year to amalgamate its eight UK pension funds. These represent pension provision for firms that Bosch has acquired in Britain over the years.
Wiesner also refers to Nestlé's pension pooling approach, which will see a single fund established in Belgium, which will also be able to incorporate Dutch entitlements. He notes that Bosch has 25 subsidiaries in the Benelux countries alone. "The labour and tax regulatory frameworks of the respective countries must be incorporated into the entity, but this is not so critical. For example, there are already models today whereby payroll for the entire operations of a European company can be carried out in the Czech Republic, for example. It should also be possible to do this for pension funds, although on a step-by-step basis," he says.
Bosch has already put out a tender to eight international consultants and other service providers to determine whether they are in position to support such a long-term project. "The answers told us that none of the providers were yet able to offer something in all EU countries, but several were able to offer something in more than one European country: "Anyone who is quick off the mark and who brings efficiency has the advantage," comments Wiesner.
Robert Bosch, the founder of the firm, was an early proponent of occupational pensions with the introduction of the Bosch-Hilfe support fund in 1929. Like other post war German companies, Bosch provided for pensions on its balance sheet through book reserves until this decade. In 2002, however, it was the third German company - and the first with no state shareholding after Deutsche Bahn and Deutsche Telekom - to adopt the Pensionsfonds vehicle.
The Pensionsfonds, which is offered to employees in the so-called Bosch-Vorsorge-Plan (Bosch Provision Plan), is open to voluntary contributions in the framework of the Riester reforms of 2001-02 - so-called salary sacrifice. This allows a contribution of 4% of salary, free from tax and social payments, up to the upper earning limit of between €54,000 and €63,000 per year. These contributions accrue in a defined contribution account, with the statutory 0% sum-of-contributions minimum guarantee.
The start of 2006 saw the introduction of a new framework for pensions at Bosch, whereby all contributions for the employer financed direct promise (formerly funded via book reserves) now flow into the Pensionsfonds, in addition to the salary sacrifice contributions under the auspices of the Riester reforms. The former accrued benefits will remain on Bosch's balance sheet, although a one-off contribution of €350m relating to the direct promise pensions of 40,000 pensioners has been made to the Pensionsfonds in respect to a subsidiary that Bosch has now disposed of.
"We may some time in the future make further decisions about the previous direct promise pensions," says Wiesner. "Since we have shifted our strategic course in the direction of the Pensionsfonds, in the long term we may move our active employees, and in the much longer term our pensioners, into the Pensionsfonds." Continuing this course would see the assets grow considerably, although the current economic climate does not generally favour pension funding.
But in the mean time, assets for the Pensionsfonds have now grown to around €800m, and Wiesner reckons participation for voluntary contributions to be around 40% of the total workforce. Investments are made on a life cycle basis, with current asset allocation split equally between equities and fixed income. From age 55, according to the lifestyle process, assets are gradually switched into fixed income. Wiesner also says that the fund is likely to diversify into alternatives, such as infrastructure and property, as assets grow.
Allianz Pension Consulting has been appointed by the Bosch Pensionsfonds, and Zurich-based Ecofin is in place as a neutral adviser. "We would decide on a case by case basis whether further advisers may be necessary," adds Wiesner. "This might be possible for new investment segments or the like."
"The asset management is conducted via different managers and we will continue to appoint more as the pension fund grows," explains Wiesner. "It is also conceivable that we terminate a mandate that does not fulfil our expectations. But the emphasis is on passive management, although we do also use active management, as we have an interest in reducing costs. Lower costs affect the returns for the employees, although administration costs are borne by the employer." Or as Wiesner puts it: "Step by step towards efficiency with low costs."
A novel form of salary sacrifice is also pushing up the assets of the Bosch Pensionsfonds. In 2006 the social partners of the German metal and electronics sector negotiated for the so-called vermögenswirksame Leistung, a German tax-exempt long term saving concession of €26 per month, to be incorporated into a pension contribution: "We have negotiated with our company works council that this sum will be paid into the Pensionsfonds in respect to all employees, regardless of their income," explains Wiesner.
Bosch has also undertaken something almost without parallel in Germany, according to Wiesner: "In 2006-7 we negotiated with our company works council that part of the annual Bosch performance related bonus would be contributed by Bosch into the Pensionsfonds and not be paid out in cash, which is effectively a kind of collective salary sacrifice. And there is a high probability that we will continue this practice."
Bosch also tries to be at the forefront of communication in the field of pensions. All employees have access to their pension fund account, both to view the sum total of their contributions and the performance of investments. Simulations can also be made, according to retirement or withdrawal age. "Participants can create a complete picture of their total pension provision with this software. They have total transparency, including over the fee portion borne by the employee," comments Wiesner.
Bosch has noted with interest the emergence of German pension funds domiciled in Liechtenstein, especially in relation to its own international ambitions for its European pension funds. In particular, the funding requirements in Liechtenstein domiciled vehicles are more flexible than those in Germany. Germany, for instance, permits underfunding of up to 10% for entitlements of German employees within a Pensionsfonds, but not for those from other countries, rendering the vehicle less advantageous for cross-border activities than those domiciled in other countries, including Belgium - a country that went on the offensive last year with its new OFP pension vehicle.
The German Pensionsfonds can now absorb any form of funded pension entitlement in Europe, according to the eighth revision of the German insurance law. And, as Wiesner points out, foreign payout rules apply, even if they are more liberal than those in force in Germany. For example, on retirement, German rules limit capital payout to 30% of the total accumulated assets and the rest must be annuitised. Other countries allow a 100% capital payout, and this would be respected within a German Pensionsfonds.
But Wiesner is more critical of other regulations: "For example, in Germany with the recent revision to the law governing insurance, underfunding rules for pensions have been liberalised, but this only applies for German employees within the vehicle," he comments. "If we were to include Spanish, Dutch or British employees in our pension fund this rule would not apply for them and we would have to be 100% funded all the time because Germany is interpreting EU pension funds directive too strictly. Flexibility is in principle to be welcomed, and we cannot understand why these rules should be different for cross-border activity. Liechtenstein and also Belgium have a dynamic view of these aspects, which you also see within the framework of the EU pension funds directive. We want the regulations in Germany to develop so the emergence of competitors operating via Liechtenstein is not wrong and can only influence us positively."
Wiesner believes that it should be clarified within the EU pension fund directive that the legislation is designed to facilitate crossborder funding and not to set up barriers, such as full funding at all times or ringfencing. "It does not make sense to treat our Dutch, German or Spanish employees working together for the common success of Bosch differently in the case of crossborder pension funding."
All German single company Pensionsfonds vehicles take the form of a limited liability company - or Aktiengesellschaft (AG). But Wiesner notes that it is possible under current law for any AG to convert itself to an SE - or Societas Europaea - the pan-European corporate entity introduced by the EU. The Pensionsfonds would be able then to relocate itself in any other EU jurisdiction and thereby effectively to redomicile itself.
As for the prospect of Solvency II, Wiesner recognises that the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) appears to be softening its previous stance that the regime should apply to occupational pension funds as well as insurance companies. "Company pension funds are - quoting the European Federation for Retirement Provision (EFRP) - not-for-profit-organisations close to the workplace and have no shareholder interests, so Solvency II would be against the interests of both employees as consumers and of companies because it would increase complexity and costs."
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