Aon Consulting European Business Leaders Survey: June 2009

Aon Consulting
European Business Leaders Survey

June 2009
www.aon.com 01
Aon Consulting European Business Leaders Survey
June 2009
Contents 04 Executive summary

05 About this survey
06 European pensions
07 State pensions
08 The DB / DC challenge
09 Demographics favour Ireland
10 Winners and losers
11 Analysis by country
12 Austria
13 Denmark
14 France
15 Germany
17 Ireland
19 The Netherlands
21 Norway
22 Spain
24 Sweden
25 Switzerland
26 UK
28 Conclusion
www.aon.com 03
June 2009
Executive summary In early 2009, Aon Consulting - one of the world’s largest employee
benefit firms - conducted a survey of its business leaders across Europe.
The objective was to establish a picture of how pension benefits
provision was being affected by economic and financial turmoil in each
individual country. The interviewees were chief executives and senior
consultants at Aon Consulting working in eleven countries with total
private pension assets of circa €4 trillion.
The ways in which pension benefits are delivered in different European

countries are diverse, ranging from the fully-funded defined benefit (DB)
models prevalent in Ireland, the Netherlands and the UK to the fully
insured and predominantly defined contribution (DC) arrangements of
Scandinavian countries.
Such differences have a significant impact on the competitiveness

of companies working within each country and globally, as well as
the benefits accruing to pension scheme members. These have been
exacerbated by financial and economic turmoil.
Companies worst affected by the impact of financial and economic

turmoil on their pension liabilities are those sponsoring funded
defined benefit pension schemes in Ireland, the UK and Netherlands.
Companies least affected are those working in countries with generous
state-provided pension benefits, including Austria, France and Spain.
Insured pension models in Denmark, Norway and Sweden have

performed relatively well in recent market conditions, but will face
challenges over the medium term as conservative investment policies
struggle to keep pace with increasing liabilities.
Book reserved systems used in Germany and Austria are well adapted to
capital-constrained economic conditions.
Guarantees on DC benefit operate in some countries, notably

Switzerland, Germany and the Scandinavian countries, but not others,
such as Austria, the UK and Ireland.
Liability calculation methods vary between countries, inhibiting

transparency and introducing disparate levels of volatility in pension
fund liabilities.
Employee benefit provision can have a significant impact on a company’s

cost base, but the extent of this impact will vary considerably according
to where companies’ pension liabilities lie. Thus, while volatile securities
markets may be a global phenomenon, the way in which this impacts
pension scheme sponsors is not. There will be winners and losers in
different European countries, according to local rules and practice.
04 www.aon.com
June 2009
About this survey Interviews with Aon Consulting’s European business leaders were
conducted by telephone during February, March and April 2009. The
research was qualitative, focusing on specific, local issues affecting
pension provision at the time of interview in 11 countries: Austria,
Denmark, France, Germany, Ireland, The Netherlands, Norway, Spain,
Sweden, Switzerland and the United Kingdom. The survey does not
seek to provide a comprehensive analysis of national employee benefits
in each country and should not be used as a basis for decision-making
on employee benefits policy. However, we hope it will provide valuable
market insight in these challenging times.
About Aon Consulting employs a comprehensive network of employee

benefits and risk management professionals, representing thousands of
Aon Consulting clients throughout Europe. Aon Consulting is part of Aon Consulting
Worldwide which is among the top global employee benefits and HR
consulting firms, with 2007 revenues of US$1.352 billion and more than
6,000 professionals in 117 offices worldwide. The readers of Business
Insurance magazine named Aon Consulting the best employee benefit
consulting firm in 2006, 2007 and 2008.
Disclaimer
No part of this publication may be reproduced stored in a retrieval system, or transmitted in any
way or by any means, including photocopying or recording, without the written permission of
the copyright holder, application for which should be addresses to the copyright holder.
Whilst care has been taken in the production of this report and the information contained
within, Aon Consulting does not make any representation as to the accuracy of the report and
accepts no liability for any loss incurred by any person who may rely on it. In any case, the
recipient shall be entirely responsible for their use of the report.
www.aon.com 05
June 2009
European pensions: Financial turmoil and economic recession have had a deep impact on
European pensions, but the precise nature of this has varied according
to the pension systems operating in member states.
competitive holes
Performance under pressure is one of the most important metrics for
are showing in the any store of value. It is clear that some pension regimes - particularly the
insurance-based systems in Scandinavia - have performed better than
patchwork others, such as the fully funded arrangements of the Netherlands, the
UK and Ireland.
As well as affecting the perceived sustainability of each country’s

pension system, differences in performance are affecting the relative
competitiveness of companies within each country, depending on the
extent of their direct pension liabilities and the way in which they must
be met.
In some countries, such as the UK, the Netherlands and Ireland,

companies are under pressure to replenish funded pension scheme
deficits from earnings or other sources. Deficits have opened up as a
result of pressure on two fronts. Falling interest rates (in some cases) are
driving up pension funds’ accounting-driven liabilities while tumbling
equity markets are driving down the value of their assets. Clearly,
replenishing pension fund deficits from profit and loss and cash accounts
hit hard by recession is not an attractive option for companies. But even
here there are significant variances in approach. UK pension scheme
sponsors’ use of corporate bond yields as their liability benchmarks has
proved advantageous. Dutch companies use swap rates, which have
proved to be disadvantageous.
Other countries - most notably Germany - allow for a more counter-

cyclical approach, enabling companies to use pension assets within
the business during times of capital stress. This offers a competitive
advantage in the context of a credit crunch. While accounting standards
have pushed the biggest German companies towards funding their
pension liabilities and thus improving their ratings amongst stock
analysts, smaller enterprises still can and do use the un-funded book
reserved model.
Differences in national pension law within the EU have created other

instances of uneven treatment which could have a competitive impact.
For example, this report notes that Irish legislation currently protects
firmly the interests of retirees, but leaves working pension fund members
more exposed. The impact of this, which is now the subject of draft
legislation likely to change current arrangements, will be particularly
evident with regard to defined benefit pension funds winding up
on grounds of employer insolvency. In some cases, securing the full
interests of retirees may consume the entire pension fund, leaving no
benefits for working members.
Other examples of uneven pension rules include the fact that Swiss and
German companies have to provide guarantees on the minimum level
of benefit accruing to pensioners from their DC schemes, unlike their
competitors just across the border in Austria and DC schemes elsewhere.
06 www.aon.com
June 2009
State pensions: the The biggest and most obvious disparity in European pension provision
is the difference between state systems across different countries. In
the UK, home to the biggest pension funds in Europe, the state offers a
elephant in the room meagre €5000 to those reaching retirement age (excluding a variable
but modest state second pension), compared to a maximum €38,000
in Austria. Although some of these differences are balanced out
through the tax regime, it is difficult not to conclude that generous state
pensions are tantamount, at least in part, to a subsidy of employers’
labour costs.
The varying approaches in different countries to pension benefit

provision means that the European playing field for business is not level.
As pension funds have come under pressure over the past year, these
differences have become more noticeable and could play a bigger role
in corporate decision-making over the next few years.
Source: Eurostat
State pensions 40,000

* Excludes earnings related element
35,000
30,000
€ (Maximum pa)
25,000
20,000
15,000
10,000
5,000
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Source: Eurostat
Pensions assets 90,000
per capita 80,000
70,000
Total private pension assests
divded by the population
60,000
Euros
50,000
40,000
30,000
20,000
10,000
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www.aon.com 07
June 2009
The DB/DC challenge Across Europe, the falling value of stock markets has dented scheme
member confidence in DC pension schemes. At the same time, recession
is increasing the pressure on companies with DB liabilities. Those
companies who have already capped or scrapped their DB schemes now
hold a material advantage over those who haven’t.
Where DC schemes are growing, pension scheme members are taking

on the risk of movements in asset prices, while companies are benefiting
from a reduction in DB pension fund liabilities. The extent of this re-
balancing of risk between sponsoring companies and members varies
between the different countries in the survey with some offering more
protection than others through minimum guarantees and/or capital
protection. State pension provision has a strong influence on how
serious the impact will be to the individual. The UK’s low state pension,
coupled with an absence of guarantees, puts DC pension scheme
members at a disadvantage to every other country in the survey.
The long-term characteristics of pension funds mean that the problems

identified today will not manifest themselves as critical issues in the short
term. But it is self-evident that the capital cushion supporting them has
been reduced and that action will have to be taken.
The success of a pension scheme rests fundamentally on maintaining

the support of its stakeholders, including employees, retirees, corporate
sponsors, regulators and others. In some cases, such as those countries
characterised by non-guaranteed DC schemes, the shock of the recent
collapse in equity prices may prompt calls for some form of guarantee
to be introduced. The main question is who will pay for it, with both
governments and corporations pleading poverty.
An urgent priority amongst DC schemes is to help employees develop

a better sense of what they can do to influence performance. Across
Europe, the majority of scheme members don’t choose their investment
strategies but plump for the “default option”. Communication and
education programmes need to be developed to help employees
become more conscious of their pension assets and how they can be
shaped to an individual’s age and circumstances. Employers could also
do a better job of helping their workforces to understand the value (and
the cost to employers) of retirement provision.
As ever in the pensions universe, these are long-term issues that require
careful thought and consideration by governments, regulators, and all
pension scheme stakeholders. The financial crisis, by virtue of newspaper
headlines and heightened levels of general awareness, offers an
opportunity to address them.
08 www.aon.com
June 2009
Demographics Sustainability of pensions is highly dependent on national

demographics. The younger the workforce, the more equipped
a country will be to continue funding retirement benefits. Of the
favour Ireland countries examined in this report, Ireland is the most favoured from
a demographic perspective, having both the smallest proportion of
population within the older employee range (50-64) and the largest
number of potential future workers (aged 14 and below).
According to a 2008 European Commission study, Ireland and Spain

have the lowest-aged workforces (under 38 years), while Sweden (with
the second highest pension assets per capita) has the highest aged
workforce at almost 42 years. Germany (with low pension assets per
capita) has the second highest average workforce age (over 41) and also
has the lowest proportion of inhabitants aged 14 or under.
Source: Eurostat
Population (Ages 15-64)

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15-24 25-49 50-64
Source: Eurostat
Future workers (% of 25
population under 14 years)

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Un
emographic Trends, Socio-Economic Impacts and Policy Implications in the

D
1
European Union - 2007 published by the European Commission, 2008.
www.aon.com 09
June 2009
Winners and losers We estimate that, in terms of competitive disadvantages arising

from pension funds affected by financial and economic turmoil, the
Netherlands is the worst hit country in Europe, followed by the UK and
Ireland, where there has been greater progress in replacing DB with
DC. Challenges in the Netherlands are exacerbated by the fact that its
pension fund liabilities have soared in accounting terms as a result of its
using interest swap rates as the liability benchmark.
The least badly affected countries in this study have been the
Scandinavians - especially Denmark and Sweden - who have adopted
highly regulated insurance-based and predominantly DC pension
arrangements. Insurance companies are not invulnerable. Their
conservative investment policies will, if unchanged, make it harder to
recoup portfolio losses and premiums are likely to rise as a consequence.
For companies, the impact of this will be more manageable than having
to restore pension fund deficits. The Scandinavian countries will not, as
a result, be affected significantly by the pensions impact of the current
financial and economic turmoil over the medium term.
Companies operating within countries with generous state pension

provision, most notably France, will also enjoy a competitive advantage
over European countries with low state benefits, particularly the UK. This
seems counter-intuitive, with low state intervention usually regarded
by economists as an expression of superior national competitiveness.
The past year of severe dislocation in financial markets has turned the
equation on its head - at least for now.
The book reserved pension model applied in Germany and Austria, once
regarded as unsustainable and making companies hostage to fortune, is
demonstrating its mettle. Using the book reserved system is particularly
advantageous when capital has been severely constrained by difficulties
in the banking market.
This report, based on interviews with Aon business leaders throughout

Europe, provides an overview of how the effects have been felt in
10 EU countries and Switzerland. Collectively, this group has pension
assets in the region of €4 trillion, covering a population of circa 300
million.
10 www.aon.com
June 2009
Analysis by country
www.aon.com 11
June 2009
Austria – no Austrian pension fund assets amounted to €11.5 billion in 2008 or circa
€1400 per capita. Aon Consulting estimates that these lost 10% of their
value last year.
guarantees
The total asset figure is small because fewer than 20% of Austrian
employees have a company-provided scheme. Most depend on a
relatively generous state pension providing annual defined benefit
payments of up to €38,000.
2009 will be a challenging year for pension funds with little in the way
of new business, a difficult performance outlook and rising regulatory
costs. This could drive consolidation of some funds which have
tended to compete with each other on the basis of cost rather than
performance. For most, their reputations as investors will have been
damaged by the current crisis. Pension funds are entitled to invest up
to 70% in equities, although in practice the average exposure has been
around 30%.
Where companies do sponsor pension schemes, around two thirds use

a DC model. The remaining one-third offer DB benefits, usually on a
book reserved (BR) basis (See section on Germany for further details
on BR). Companies can also provide pension benefits to employees via
direct insurance and occupational group insurance. However, the direct
insurance option has proved unpopular, mainly because employees
must pay income tax on the insurance premiums. Occupational group
insurance is relatively unknown, having only been introduced as an
option at the end of 2005.
The biggest single issue affecting DC schemes in Austria is the absence

of guarantees on either capital or benefit payments. Schemes pay
an annuity that is set annually in light of the previous year’s fund
performance with no minimum guarantees. In view of recent public
outcry, the government may introduce legislation to change this, but it
has already made clear that guarantees would have to be underwritten
by employers, not the state.
Waltraud Viehböck The pensions impact of the financial crisis on companies in Austria is,
Senior Consultant, Aon Jauch & Huebener
Employee Benefit Consulting GmbH
on balance, modest because of the relatively small size of the pensions
T: +43 (0) 57800 139 industry. DC pension scheme members are feeling most of the pain
E: w.viehboeck@jahu.at although this is ameliorated by high state benefits. For companies with
DB schemes that have to find ways of meeting liabilities, the book reserved
system allows them more flexibility than the funded models such as those
used in the UK and the Netherlands. Companies offering DB pensions also
perceive a positive impact from the recent crisis, namely motivating and
retaining employees who recognise the superior benefits of DB schemes.
12 www.aon.com
June 2009
Denmark - There has been little pensions impact on Danish companies as a result
of the financial crisis. Danish pensions are highly regulated and secured
by contracts with insurance companies that, by law, have to maintain
fully insured capital surpluses to cope with financial market volatility such as that
experienced in 2008/9. Pension savings stood at over €430 billion
(€80,000 per capita) at the end of 2007. The system is almost entirely
DC. The maximum state pension is DK 130,000 (€17,500).
Denmark’s high income tax has encouraged a high level of pension

savings, which are uncapped and fully tax deductible for employers
and employees if they are paid into Danish savings vehicles. The EU has
demanded that Denmark extends tax deductibility to foreign financial
service providers. So far the government has not complied and the rule
remains intact. The Danish government is also reviewing the national tax
regime and may impose caps on tax deductibility.
The insurance companies’ capital buffers have withstood the pressure

of market volatility to date. Those Danish insurers with higher equity
market exposure have suffered more than the others, but all are still in
“green light” territory and have sufficient flexibility with regard to their
capital reserves to meet all liabilities while maintaining solvency levels.
Michael Leth A fully insured, DC-based pension system means that, in relative terms,
Senior Consultant, Aon Consulting Denmark
pension liabilities are not a significant issue for Danish employers. The
T: +45 32 69 72 88
E: michael_leth@aon.dk
system is dependent on the effective management and regulation of
insurance companies. It is too early to say whether changes in the tax
system could affect the successful balance of interests between pension
stakeholders that has been achieved.
www.aon.com 13
June 2009
France - buffer funds The limited development of private pension assets in France compared
to other EU countries is due to the fact that the French pay as you go
system provides a good “replacement salary” on retirement, especially
feel the strain for lower salaries. However, the “replacement salary” is deteriorating
and even for individuals on lower salaries, this will make private pension
funds more attractive for employees.
The majority of companies provide private pension for their white

collar workers. In total, this represents a small amount of assets when
compared to the pay as you go systems.
In addition to these private pensions systems, dedicated funds were

established in the 1990s to compensate for the deterioration of
replacement salaries over time. The economic turmoil has had an impact
on these funds.
Fonds de Réserve pour les Retraites (FRR) is a social security fund run by
the government. Association Générale des Institutions de Retraite des
Cadres (AGIRC) covers higher paid workers while Association pour le
Régime de Retraite Complémentaire des Salariés (ARRCO) is designed to
support the pensions of the lower paid. Between them the funds hold
assets of over €100 billion. All three are at least 50% invested in equity
because of their long term investment horizon.
Bertrand Pitavy Relative to their European competitors, French companies do not face
Sales Director, Aon Consulting France
any direct significant competitive challenges arising from the impact of
T: 00 33 1 58 75 63 46
E: bertrand_pitavy@aon.fr
economic and financial turmoil on their pension liabilities. Instead the
impact will be diffused and felt by individuals and companies through
the tax system.
14 www.aon.com
June 2009
Germany – book German pension fund assets totalled €355 billion in 2007 or
approximately €4,300 per capita. The maximum annual state pension
provision in Germany is €26,400.
reserves back in
Included within total pension assets are assets of approximately €150
fashion? billion that have been specifically allocated by companies to support
contractual trust arrangements (CTAs) within book reserve pension
schemes. We estimate that the value of CTA assets, which have grown
rapidly from a low level since 2001, fell by between 15% and 20% in
2008.
Companies offering book reserve pensions use actuarial valuations to

assess employers’ liabilities to the contracts. Benefits to retirees are
paid out of companies’ current income. Book reserve pensions, about
three-quarters of which are DB, make up around half of German pension
schemes. Approximately 50% of these are covered by CTAs.
The remainder of German pension fund assets is made up of

pensionskasse, support funds, pensionsfonds and direct insurance
arrangements. Three quarters of pensions provided within these systems
are DC. Under German pensions law, DC schemes must deliver a
minimum return (currently 0%) - in effect a capital guarantee. Most
companies choose to mitigate the risk of guaranteed minimum returns
by opting for insurance structures.
There is a high degree of security for pension scheme members within

the book reserve and support fund systems. Sponsoring companies are
required by law to insure their pension liabilities under these schemes
(including active scheme members as well as retirees) against the event
of corporate bankruptcy.
While book reserve pension schemes were traditionally unfunded,

for the largest companies this practice has changed as a result of
international accounting standards. IAS19 encouraged stock market
analysts and rating agencies to take greater account of pension liabilities,
with a consequent impact on share prices and credit ratings. Larger
employers have sought to neutralise this by matching pension liabilities
with external funds or insurance contracts that can be counted as
pension assets for accounting standard purposes. There is no regulatory
requirement governing the amount of capital that companies must
commit to CTAs, but whatever capital is committed can only be used to
support pension fund liabilities.
In those cases where liabilities are not supported by specifically allocated

capital, German companies offering book reserve pensions are allowed
to support liabilities with other business assets. This flexible approach
holds advantages for the company, enabling it to invest capital freely
and not tying it specifically to pension liabilities.
Apart from book reserve arrangements (with or without CTAs), German

companies administer and provide benefits through tax-efficient
insurance contracts.
Germany continued
15 www.aon.com 15
June 2009
German insurance companies’ investment policies are conservative,

investing about 10% of their portfolios in equity markets. The impact
of the financial crisis on this sector has consequently been low. While
German insurers did not lose capital in 2008, their financial returns
have been unexciting. This could create challenges in the short term
because they are required to deliver a mandatory minimum return to
pension investors, which is set at 60% of the average ten-year return on
government bonds.
The current minimum interest rate for new insurance contracts - which
has to be maintained for the life of the contract - is 2.25%, while the
average return across all insurance contracts is around 3.4%. The
higher average figure is a result of minimum interest rates having been
much higher in past years. Insurers may struggle to achieve such high
returns in current markets.
Michael Krueger The German pension system has proved to be robust and flexible in the
Consultant, Aon Jauch & Hübener Consulting GmbH
face of both recession and crisis in financial markets. A strong insurance
T: +49 208 7006 2658
E: michael_krueger@aon.de
sector provides protection against the risk of sponsors being unable to
meet their pension liabilities. Furthermore companies providing book
reserve pensions can choose to employ capital exclusively to support
the pensions scheme (via CTAs) or elsewhere within the business. This
means that German pension assets can be used counter-cyclically to
create economic advantage compared to some European competitors.
However, demographics provide a counter-balance to this positive
outlook. Germany’s age profile, with its relatively low proportion of
under-15 year olds and younger workers, means that companies may be
carrying demographic risk on their balance sheets. Short-term competitive
advantages may therefore be tempered by longer-term challenges.
16 www.aon.com 16
June 2009
Ireland - a Irish pension fund assets totalled €87 billion in 2007, or approximately
€21,000 per capita. According to the Irish Association of Pension Funds
(IAPF), Irish pension fund asset values fell by an estimated 24% during
changing 2008. In the private sector, about half of Irish pension members are
in defined benefit schemes. In 2007, 40% of defined benefit schemes
environment were closed to new entrants, but we expect this figure to have increased
substantially since that time. Defined contribution assets now make up
approximately 30% of all Irish pension assets.
Significant increases in the cost of funding defined benefit pensions,

together with the recent turmoil in equity markets, has put the long-
term affordability of defined benefit pensions in question. It is estimated
that 90% of Irish defined benefit schemes are currently unable to
meet the statutory minimum funding requirement for defined benefit
schemes. As a result, many employers are facing significant deficits that
must be recovered over a relatively short period of time in most cases.
This is a huge challenge for employers and trustees of defined benefit
schemes.
Under the current legislative framework, the interests of retirees are

given firm protection but working pension fund members are more
exposed. The impact of this is particularly evident with regard to defined
benefit pension funds winding up on grounds of employer insolvency.
In some cases, securing the full interests of retirees may consume the
entire pension fund, leaving no benefits for working members. We
would not be surprised if the average defined benefit pension fund
could only afford less than 50% of the active workers’ accrued benefits
on winding up. EU law states that each member state must implement
a system that provides adequate protection of members’ accrued
benefits on employer insolvency. In the recent Robins case brought
before the European Court of Justice (ECJ), the ECJ commented that
where a system allows a member’s losses to exceed 50%, it could not
be considered to provide adequate protection. Consequently, the case
was referred to the UK Courts and the UK government settled outside
the Courts. In the current environment of underfunded schemes, the ECJ
ruling in the Robins case is seen as an exposure to the Irish government.
It should be noted that if a legal case were taken, the defendants on this
point of law would be the Irish state, rather than an individual company.
Ireland continued
17 www.aon.com 17
June 2009
In late April 2009, the Minister of Social and Family Affairs announced
the introduction of important developments in the treatment of defined
benefit pension schemes. These new reforms have been included in the
Social Welfare and Pensions Bill 2009.
The aim of these new reforms is to ease the pressure on trustees and
employers and to protect the benefits of all members of pension
schemes by providing greater flexibility in the treatment of defined
benefit pension schemes. These measures include the introduction of
a government scheme – Pension Insolvency Protection Scheme (PIPS),
changes to winding up priorities and changes to allow more flexibility in
the restructuring of defined benefit schemes. The extent to which these
measures will tackle the problems outlined above is not yet known and
the detail is awaited in regulation.
Andrew Krawczyk With a median age of under 35, Ireland is one of the countries with
Consultant, Aon Consulting Ireland
the youngest age profile in the European Union, which gives it a clear
T: +353 (0) 1 266 6267
E: andrew_krawczyk@aon.ie
advantage in the current crisis. Pension funds are a long-term investment
and asset values may recover before most pension scheme members
retire. This makes it all the more important for pension scheme trustees
to communicate effectively with scheme members, explaining the
long term nature of the investment. This is a challenge for industry
professionals, trustees and the authorities operating in a heavily regulated
disclosure regime. Although there is a significant amount of information
being provided to members under this regime, the effectiveness of such
communications is questionable.
In the current economic environment, members, trustees and employers

are facing huge difficulties in the management of their defined benefit
schemes. It is hoped that the introduction of the new measures in the
Social Welfare & Pensions Bill 2009 will help ease these difficulties.
18 www.aon.com 18
June 2009
The Netherlands - According to the Dutch National Bank, Netherlands pension fund assets
fell by 17% during 2008 to €575 billion, reflecting pensions funds’
large (though decreasing) exposure to equity markets. Together with
swap-struck insurance companies, total pension assets are in the region of €750
billion. At €46,000, the Netherlands is still the third richest country
in Europe, after Switzerland and Denmark, measured in terms of per
capita pension fund assets. First pillar state pension provision is modest.
Retirees resident in the Netherlands for most of their lives are currently
entitled to just under €13,000 pa.
Most Dutch pension funds offer index-linked defined benefits to their

members, with defined contribution plans only accounting for around
10% of the market. Employer contributions form the bulk of cash flows
into the funds, with employees paying in the order of 10%. The DNB
said in March that contributions would be increased from the current
level of 15.1% to 16% of salary.
In funding terms, the country is one of Europe’s hardest hit. Since 2007,
pension fund liabilities have been determined by interest rate swap
yields (rather than the nominal 4% which had applied before the rule
change). This has increased liabilities against a backdrop of falling equity
asset values. The pension fund of a large organisation in the oil industry,
for example, fell from being 180% funded at the beginning of the year
to just 85% by the close. The scheme’s asset value, by comparison, had
fallen 40%.
The Dutch National Bank, which regulates the pension fund sector,
demands a minimum funding level of 105% of liabilities, and many
Dutch pension funds have now slipped below this benchmark. DNB has
recently relaxed its strict requirement for a three-year recovery plan in
the face of complaints from fund sponsors. Companies have now been
given up to five years to restore 105% funding.
The Netherlands continued
19 www.aon.com 19
June 2009
Wim Hoek Dutch companies are paying the price of maintaining one of the safest
Managing Director, Aon Consulting
Netherlands
pension regimes in the world. It has also the highest proportion of defined
T: + 31 10 448 7648 benefit pension liabilities in Europe, which further ties up Dutch companies’
E: wim_hoek@aon.nl capital resources.
While employers provide 90% of employees’ pension fund contributions,

there is very little effort on the part of companies to “market” this fact to
the workforce. The result is that generous pension benefits are assumed to
be an employee’s right and there is little competition between employers
to demonstrate the value (and indeed the cost) of pension provision. The
general outcry over the fall in value of pension funds offers an opportunity
for companies to communicate the value and cost of the total benefits
package more effectively to employees. Given the depth of the financial
crisis, retirees will be required to share the cost of pension fund recoveries.
Retirees are already doing this through suspension of index-linking. Low
inflation is, of course, mitigating the effect of this for pension recipients.
20 www.aon.com 20
June 2009
Norway - a changing In many respects, Norway is one of the strongest of the countries under
review. At 39 years, the median age of the population is lower than most
European states, while the official retirement age (67 for both men and
pension environment women) is higher. Furthermore, the country’s generous state pension
scheme, which accounts for two-thirds of all occupational pensions, is
backed by the Government Pension Fund, Global, formerly known as
the Petroleum Fund of Norway.
While the global fund has clearly benefited Norway, like the mineral
riches that produced it, it is not an infinite resource. Norwegian
demographic trends indicate that the fund will become insufficient to
cover future liabilities. It is already being used for purposes other than
pension provision.
Apart from the state pension, nearly all pension schemes in Norway sit
on the balance sheets of major life insurance companies. Companies pay
regular insurance premiums for which the employee is the beneficiary.
The insurance regulator inspects these companies rigorously and insists
on action - immediate topping up of the fund from insurance company
reserves - should any pension scheme show a deficit. The life insurance
companies themselves are not allowed to go into deficit.
Within company schemes, the number one issue in Norway is the shift
from DB to DC. Currently around 50% of private sector employees
have DC arrangements. As companies pay higher insurance premiums
for employees on DB schemes, they are incentivised to encourage
employees to switch to DC.
While employees’ opposition to the switch has been strengthened

by the global collapse in share prices, there is some room to improve
communication on this subject. Most employees are unaware of or
indifferent to the fact that they can influence the performance of their
pension funds through direct investment decisions. This is evidenced by
the fact that 90% of employees in Norwegian DC pension schemes do
not take the opportunity to choose the fund’s investment option.
Investment is a further key issue, in that the life insurers are following
low-risk, low-return investment strategies. When they bid for pension
scheme business, the companies are by law required to offer guaranteed
annual returns in the region of 3% to 4%. This year they have been
taking capital from reserves in order to meet the required returns.
However, life insurers cannot enhance returns through greater equity
investment without additional risk capital. They are also pressing for the
facility to offer guarantees, averaged out over three to five years, which
would provide them with greater flexibility in volatile markets.
Dag Erik Aspaas During the coming years we will see major changes in the Norwegian
Head of Aon Consulting Norway
pension environment. The state pension scheme will change from
T: +47 67 11 22 92
E: deaspaas@aon.no
2011, affecting both current DB and DC schemes. Public pensions schemes
are also on the agenda and the future design of these schemes will be a
major issue in this year’s tariff negotiations.
www.aon.com 21
June 2009
Spain - Most of the Spanish population continues to rely on state retirement

provision, based on a defined benefit model with an earnings-averaging
formula over the retiree’s last 15 working years. The maximum state
unemployment pension is generous at slightly above €34,000 per year.
dominates Spanish pension assets totalled €73 billion or 7.5% of GDP in 2007. We
estimate that losses on occupational pension funds in the region of 10%
in 2008 - relatively low as a result of conservative investment policies.
While private pension providers have targeted the country as a growth

market, these have not proved popular. As private pensions have
greater freedom of asset allocation, they have suffered more as a result
of the stock market collapse. This is likely to further hinder their future
development.
The credit crunch means that the key issue facing Spain and its pension
funds is unemployment, which is forecast to reach 20% in 2009. As
well as trying to persuade banks to release more credit into the system,
some policy makers have been studying the possibility of liquidating
occupational pension fund assets as a means to relieve the needs of the
long- term unemployed.
Occupational pensions take one of two forms in Spain: qualified pension

plans and retirement insurance policies. Where they take the form of
retirement insurance policies - approximately half of the market - the
funds are under threat because of the large numbers of workers being
laid off. When a worker leaves a Spanish employer he or she is entitled
to surrender the pension plan and place it in a new fund. As well as
incurring dealing expense, such activity may force insurance-based
retirement schemes to sell long term investments inefficiently. Qualified
pension plans are less affected because their assets are marked to market
on a daily basis.
With unemployment rising rapidly, the social security system is under

strain. It is likely that state pension provision will change, raising
minimum and reducing maximum payments. The earnings-averaging
formula is also likely to be extended over a longer working time frame,
thus taking in years characterised by lower earnings.
Asset allocation is an issue in Spain because funds are required, in

most cases, to follow a uniform asset allocation policy across the fund.
Younger members of a pension scheme, for example, cannot have a
higher exposure to equities than older members. Pension fund control
committees (similar to a trustee board in the UK) have opted for more
Spain continued
22 www.aon.com
June 2009
conservative investment policies as a result. Although low share prices

look attractive, Spanish pension funds are unlikely to become less
conservative in their investment policies in the short term.
A positive result of the financial crisis is that Spanish pension funds

are seeking to increase the frequency of their financial and actuarial
reviews. Pensions law requires a review every three years. With the first
round of these mandatory reviews now complete, many pension fund
control committees have recognised that they should be conducted at
least annually.
Control committees are also recognising the need for additional

training. In many cases fund managers offer free training facilities, but
the appetite is building for more independent knowledge and advice on
all aspects of the control commissioner’s role.
Jorge Garcia Perrote Generous state pension provision means that second pillar pensions play a
Director, Aon Consulting Spain
relatively minor role in Spain and also accounts for the slow growth of the
T: 00 34 91 34 05 584
E: jgarciap@aon.es
private pension market. Conservative investment policies have sheltered
pension funds from the worst of the collapse in asset prices. Continuing
high levels of unemployment will, however, place considerable strain on
the social security system over the medium term.
www.aon.com 23
June 2009
Sweden - cool, calm The Swedish system incorporates DB, DC and state pension elements,
delivered to retirees through insurance contracts and collective
agreements.
and collective
The first pillar of pension is a state-regulated Pay As You Go system,
whereby working individuals contribute 16% of their salary to pay
for the pension benefits to existing retirees. Provision is supported by
six AP funds that act as a capital buffer within the system. These had
total assets of SEK 7,180 billion (€650 billion) at the end of 2008 - a
slight increase over 2007, reflecting conservative investment policies.
However, liabilities grew by circa 6% - faster than assets over the year -
pushing the system into deficit.
An additional 2.5% of a worker’s salary is paid into a state-controlled

second pillar fund, PPM. This operates the premium-determined (DC)
element of the system. PPM invests in up to 700 eligible privately
managed investment funds, from which the member can select up to
five. The asset value of holdings with PPM fell by just over a third in
2008 to SEK 230bn (€21.2billion) compared to 2007.
The structure of pension provision, whose introduction was completed

in 2003, is heavily regulated and controlled by collective agreements.
While the system has come under pressure in 2008 and has recently
gone into technical deficit, it has proved relatively robust. The impact on
international competitiveness of employers is neutral.
Ola Larson While Swedish people are concerned about falling stock market values,
Managing Director, Aon Consulting Sweden
most understand that the system itself is basically sound and does not
T: +46 8 587 84132
E: ola_larson@aon.se
require repair. The biggest challenge facing pension fund and insurance
company managers is asset allocation strategy - how to claw back the
money lost over the past year - and communication with pension scheme
members. The financial crisis will also be felt directly by retirees, because
index-linking will be reduced until assets and liabilities in the AP funds
are re-balanced. Previous bonuses based on investment performance will
disappear, at least in the short term.
24 www.aon.com
June 2009
Switzerland - Swiss pension assets totalled CHF 730 billion (€483 billion) in 2007.
Absolute growth in assets was strong up until 2007, increasing by
approximately 50% since 2001. In 2008, Aon estimates that these
room to manoeuvre pension assets will have fallen by between 8% and 10% to circa €435
billion - €445 billion over the year. Occupational and private funds sit
alongside a state system that provides a maximum annual pension of
CHF 27,360 (€18,160).
Swiss occupational pension funds are mostly DC with attaching

guarantees. The guarantees mean that most pension plans are regarded
as DB in international financial reporting standards. The schemes are
legal entities, separate from corporate sponsors and regulated by
cantonal or federal financial ministries.
On retirement an individual’s total savings contributions over time

(which must be at least equalled by employers’ contributions and are
linked to a minimum interest rate) are converted into an annual pension
or paid out as a lump sum benefit. Both the minimum interest rate and
the conversion rate are set by government for the mandatory part of the
benefit and are mainly driven by political debate. The current minimum
interest rate is 2%, while the conversion rate is 7.05% for men and 7%
for women.
The primary issue in Switzerland is funding. As in the Netherlands, Swiss

pension funds have followed a fortress model targeting high levels of
surplus funding. However, unlike the Dutch, the Swiss authorities are
more flexible about recovery plans and only call funds to account when
funding falls below 90%.
As well as making adjustments to benefits and contributions, Swiss

pension funds can - provided they can demonstrate good reason -
change the liability side of the equation through the interest on the
savings accounts.
Rolf Th. Jufer The flexibility of the Swiss system means that on balance, the pension
CEO, Aon Consulting Switzerland
regime represents a competitive advantage for companies in Switzerland.
M: +41 79 253 01 66
E: rolf.jufer@aon.ch
Although the minimum interest and conversion rates give most pension
schemes DB status in accounting terms, the liabilities are not as open-
ended as a traditional DB pension. Though weakened by market events in
2008, funding levels are still relatively high (approximately 98% in the first
quarter 2009) and the absolute level of pension fund assets per capita is
very high, compared to most other countries.
www.aon.com 25
June 2009
UK - race to reduce UK pension fund assets exceeded £2 trillion at the end of 2008 or
£33,000 (€35,000) per capita. This represents the biggest single pool
of pension assets in Europe.The Organisation for Economic Cooperation
DB liabilities and Development (OECD) estimates that around three-quarters of UK
pension fund assets are held in DB schemes.
The state pension system is poor, relative to all of its European

neighbours, providing an annual maximum benefit of £4,700 (€5,100).
UK pension funds have diversified away from equities in recent years,

including to less correlated growth. The National Association of Pension
Funds believes that equity investment accounts for just under half of
all UK pension fund investment, down from around 60% in 2006. The
OECD estimates that this resulted in a 13% drop in UK pension asset
values in the first ten months of 2008.
The number one issue in the UK is funding of defined benefit pension

schemes which, despite diversification, are still heavily invested in
equity. The collapse in global equity markets has once again thrown this
challenge into stark relief.
Unlike Switzerland and the Netherlands, funding levels decreed by the

regulator are not absolute, but variable according to the strength of
the sponsoring company. The Pensions Regulator demands minimum
funding levels that are higher for weaker companies and expects
companies to close deficits as quickly as they can afford to do so. With
recession hitting UK company revenues, some scheme sponsors will not
be able to afford the DB deficit bill.
DC schemes create different challenges. Companies wanting to cut

costs by persuading employees to retire early will find it more difficult to
do so with DC schemes so badly hit by the stock market collapse. (The
converse of this is that when markets recover and pension funds are
healthier, companies may find it difficult to persuade employees to stay.)
UK continued
26 www.aon.com
June 2009
Increasing corporate bond yields that have characterised the credit

crunch initially favoured the market for pension scheme buyouts. These
almost trebled in volume in 2008 compared to the previous year, rising
from £2.8 billion to £8.2 billion as a result of companies recognising the
opportunity to exchange their liabilities for a cheaper insured solution.
While yields increased further in late 2008, this was accompanied by
growing concern about default and liquidity, as a result of which buyout
activity dried up. It is not possible to predict whether or when there will
be similar opportunities emerging on the other side of this recession.
Paul McGlone Continuing recession will hasten companies’ efforts to reduce their DB
Director of Propositions, Aon Consulting
liabilities. More schemes will close, both to new members and to future
T: +44 (0)20 89704732
E: paul.mcglone@aonconsulting.co.uk
accrual for existing members. 80% of companies have already closed
to new members and 20% have now also closed to accrual for existing
members. We expect this proportion to rise above 50% within three
years. Furthermore, recession will raise concerns about the strength of the
sponsoring company and the extent to which pension schemes can rely
on corporate sponsors to meet their pension liabilities. There is a question
mark over the strength of the UK’s Pension Protection Fund. The PPF has
recently increased the cap on levies that it can raise from DB schemes
to support the pension liabilities of defunct sponsors. However, it is now
reaching the limit of its levy-raising powers and won’t be able to raise
substantially more without Parliamentary legislation.
www.aon.com 27
June 2009
Conclusion From the sponsor’s perspective a pension scheme is a financial liability,

whose cost varies widely according to which country the sponsor is
based in. Global turmoil in financial markets has exposed the national
variation in liabilities more vividly than before, creating greater challenges
in some European countries than others. Where the financial liability is
greatest, there should be the most focus on the part of governments,
regulators and company boards in managing it more effectively.
DB pension schemes, whether they are directly sponsored by employers

or provided through insurance contracts, will continue to be the prime
target. Companies can curtail their DB liabilities through closure of
schemes to new entrants, buyouts and benefit reductions and through
switching to DC.
Recession is in effect an opportunity to attack these strategic issues more

directly than has been the case in the past. A “benefit” of the current
widespread recession is that most employers will be experiencing if done
properly identical pressures, so an active campaign to reduce pension
liability should not result in staff defections, if done properly.
However, it is also important to minimise staff disaffection. Change

will be resisted by most pension scheme members, which underlines
the necessity for good communication strategies by scheme sponsors.
These should offer a frank and clear illustration of the consequences
of failure to change: in particular the continuing loss of domestic and
international corporate competitiveness.
Within DC schemes, members appear to be simultaneously apathetic

about investment choices and enraged about the fall in value of
their pension assets. Scheme sponsors could do a great deal more to
encourage member involvement in the management of these assets, for
example through investment strategy selection. Such involvement might
also help members to recognise pension benefits more clearly, both as a
key part of their remuneration and as a cost to the employer.
It is not beyond the realms of possibility that recovery in equity markets

over the next year or two will, once again, close the gap between
pension fund assets and liabilities, but the long-term corporate winners
in the current crisis will be those companies who have taken the
opportunity to manage their pension liabilities most effectively.
28 www.aon.com
Notes
www.aon.com 29
June 2009
Notes
30 www.aon.com
31
Austria Spain
Waltraud Viehböck Jorge Garcia Perrote
Senior Consultant, Aon Jauch & Hübener Director, Aon Consulting Spain
Employee Benefit Consulting GmbH Rosario Pino 14-16
Geiselbergstraße 17 Madrid, 28020 Spain
1110 Wien, Austria T: +34 91 34 05 584
T: +43 (0) 57800 139
Sweden
Denmark Ola Larson
Michael Leth Managing Director, Aon Consulting Sweden
Senior Consultant, Aon Consulting Denmark Primusgatan 20
Strandgade 4C Box 12820
Copenhagen, DK-1401 Denmark Stockholm, 112 97 Sweden
T: +45 32 69 72 88 T: +46 8 587 84132
France Switzerland
Bertrand Pitavy Rolf Th. Jufer
Sales Director, Aon Consulting France CEO, Aon Consulting Switzerland
Défense Ouest Bederstrasse 66
420 rue d’Estienne d’Orves Postfach
92700 Colombes, France Zurich, 8027, Switzerland
T: +33 1 58 75 63 46 T: +41 79 253 01 66
Germany UK
Michael Krueger Paul McGlone
Consultant, Aon Jauch & Hübener Consulting GmbH Director of Propositions, Aon Consulting
Luxemburger Allee 4 11 Devonshire SquareLondon EC2M 4YR,
45481 Mülheim an der Ruhr, Germany United Kingdom
T: +49 208 7006 2658 T: +44 (0) 20 8970 4732
Ireland
Andrew Krawczyk
Consultant, Aon Consulting Ireland
The Metropolitan Building
James Joyce Street
Dublin, 1 Ireland
T: +353 (0) 1 266 6267
The Netherlands
Wim Hoek
Managing Director, Aon Consulting Netherlands
Admiraliteitskade 62,
3063 ED Rotterdam Netherlands
T: +31 10 448 7648
Norway
Dag Erik Aspaas
Head of Aon Consulting Norway
Vollsveien 4
Postboks 14
1324 Lysaker, Norway
T: +47 67 11 22 92
T: 0800 279 5588

E: enquiries@aonconsulting.co.uk
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Contents 04 Executive summary

The ways in which pension benefits are delivered in different European

Such differences have a significant impact on the competitiveness

Companies worst affected by the impact of financial and economic

Insured pension models in Denmark, Norway and Sweden have

Guarantees on DC benefit operate in some countries, notably

Liability calculation methods vary between countries, inhibiting

Employee benefit provision can have a significant impact on a company’s

About Aon Consulting employs a comprehensive network of employee

As well as affecting the perceived sustainability of each country’s

In some countries, such as the UK, the Netherlands and Ireland,

Other countries - most notably Germany - allow for a more counter-

Differences in national pension law within the EU have created other

The varying approaches in different countries to pension benefit

State pensions 40,000

Pensions assets 90,000

per capita 80,000

Where DC schemes are growing, pension scheme members are taking

The long-term characteristics of pension funds mean that the problems

The success of a pension scheme rests fundamentally on maintaining

An urgent priority amongst DC schemes is to help employees develop

Demographics Sustainability of pensions is highly dependent on national

According to a 2008 European Commission study, Ireland and Spain

Population (Ages 15-64)

15-24 25-49 50-64

population under 14 years)

 emographic Trends, Socio-Economic Impacts and Policy Implications in the

European Union - 2007 published by the European Commission, 2008.

Winners and losers We estimate that, in terms of competitive disadvantages arising

Companies operating within countries with generous state pension

This report, based on interviews with Aon business leaders throughout

Where companies do sponsor pension schemes, around two thirds use

The biggest single issue affecting DC schemes in Austria is the absence

Denmark’s high income tax has encouraged a high level of pension

The insurance companies’ capital buffers have withstood the pressure

The majority of companies provide private pension for their white

In addition to these private pensions systems, dedicated funds were

Companies offering book reserve pensions use actuarial valuations to

The remainder of German pension fund assets is made up of

There is a high degree of security for pension scheme members within

While book reserve pension schemes were traditionally unfunded,

In those cases where liabilities are not supported by specifically allocated

Apart from book reserve arrangements (with or without CTAs), German

German insurance companies’ investment policies are conservative,

Significant increases in the cost of funding defined benefit pensions,

Under the current legislative framework, the interests of retirees are

In the current economic environment, members, trustees and employers

Most Dutch pension funds offer index-linked defined benefits to their

The Netherlands continued

While employers provide 90% of employees’ pension fund contributions,

While employees’ opposition to the switch has been strengthened

Spain - Most of the Spanish population continues to rely on state retirement

While private pension providers have targeted the country as a growth

Occupational pensions take one of two forms in Spain: qualified pension

With unemployment rising rapidly, the social security system is under

Asset allocation is an issue in Spain because funds are required, in

conservative investment policies as a result. Although low share prices

A positive result of the financial crisis is that Spanish pension funds

Control committees are also recognising the need for additional

An additional 2.5% of a worker’s salary is paid into a state-controlled

The structure of pension provision, whose introduction was completed

emographic Trends, Socio-Economic Impacts and Policy Implications in the