Why pensions can be a strategic financial factor for your business

For many companies, pensions sound like something for HR to deal with. But anyone who takes a closer look quickly realises that it is anything but a side issue: it directly affects the strength and value of your organisation. What you do – and do not – do with it has more consequences than many people realise.

Joanne Kellerman, chair of the board of Pension Fund Zorg & Welzijn, recently put it well in the FD: the pensions sector may lack the glitter and glamour that surrounds the rest of the financial world, but it does something that is “far more fundamental”. “It is what really matters. For most people, their biggest asset is not their savings account, but their pension.”

Yet for many people, pensions remain a blind spot – and the same applies to employers. This is clearly visible in the transition to the new pension system. It must be completed by 2028, and most large pension funds are well on their way. Thirty have already made the switch, together representing more than half of all pension scheme members (52%). However, there are also employers—often SMEs—that arrange pensions for their employees through an insurer or a premium pension institution (PPI). Of this group, around one third of companies have already moved to the new system.

A major personnel cost

What you don’t know, you don’t value, says Bastiaan Starink. He is professor of labour markets, pensions and taxation at Tilburg University and a partner at PwC. “Pensions are an abstract and technically complex subject. Even HR professionals tend to prefer focusing on more tangible fringe benefits, such as learning and development programmes.”

Entrepreneurs, too, do not always have pensions top of mind, adds Gerard Boonstoppel, CFO at online pension provider BeFrank. “By nature, entrepreneurs focus more on core business operations—bringing their product or service to market. Pensions are often not the first priority.”

Unjustifiably so, according to the experts. Many entrepreneurs are not fully aware that pensions have a significant impact on the financial health of their business. Starink: “It is the second-largest personnel cost after salaries. Pension contributions typically amount to between 15 and 25 percent of payroll, depending on the quality of the scheme. Some organisations contribute much less, but in that case it can hardly be called a pension scheme.”

Supporting employees’ financial wellbeing

According to the professor, that investment is absolutely worthwhile. “Many employers see pensions purely as a necessary obligation. You want to be a responsible employer and take proper care of your employees, and this comes with it.” However, the idea of using pensions strategically is often missing. “Employers do not always realise that a good pension scheme is invaluable for their employees’ financial wellbeing. It provides peace of mind—not only for your own retirement, but also knowing that your partner and children will be financially provided for if you pass away.”

Add to this that financial stress is a major cause of absenteeism, he continues. “If you can relieve your employees of that concern, you will see that they feel better overall. That benefits both your people and your business: happy employees are more productive and more engaged.” A good pension scheme is also simply a sign of appreciation. “People want to work for an organisation where they feel valued. This is a way to demonstrate that appreciation—and in doing so, to retain scarce talent and attract new talent.”

That said, employers must make these benefits visible. Starink: “Employees need to perceive the scheme as valuable; otherwise it becomes a waste of money. Make the importance clear and be transparent about contributions and investment performance.”

Easier to explain

The new system will help companies make pensions more understandable and transparent, Boonstoppel adds. This is because it is much simpler in design. “In the old system, there was a tiered structure based on age. As employees grew older, the employer’s contribution percentage increased. For older employees, companies sometimes paid four times as much—or more—in contributions than for younger employees.” This led to undesirable side effects, including age discrimination.

In the new system, this so-called progressive contribution has been replaced by a flat, age-independent contribution. It is a fixed percentage of the pension base, the part of the gross salary on which pension is accrued. For employees, this is far clearer, says Boonstoppel. “The old system with different age cohorts was simply opaque. Now they can easily check whether their employer is contributing the correct amount.”

There are also major advantages for employers. In the new set-up, they can make strategic choices about how heavily to invest in pensions, depending on the nature of the business. “A hospitality company with many young employees who change jobs frequently can make different choices from an organisation that wants to retain talent for a longer period.” That said, employers must remain within legal frameworks, and contributions cannot simply be changed at will. This is done in consultation with social partners, such as trade unions and/or the Works Council.

See pensions as an opportunity

Finally, the new system makes it easier for companies to forecast pension costs in advance and understand how these will develop over the longer term. This is very helpful when preparing cash flow projections, Boonstoppel explains. “The contribution recorded in the financial statements is the actual and only expense. That provides clarity in liquidity planning.”

Investors and potential buyers also value this. In acquisitions, the pension scheme is an important part of due diligence, Starink notes. “Older schemes can contain hidden risks, such as unforeseen indexation or obligations towards inactive members—former employees who have accrued pension rights that remain within the employer’s scheme.” Think of annual indexation to compensate for inflation, adds Boonstoppel. “Such obligations can significantly reduce the value of a company.”

The experts observe that many entrepreneurs allow their pension scheme to continue unchanged for years, often without realising it. Be aware of the risks, they warn, and view the transition to the new system as an opportunity to reassess your pension scheme—ensuring it aligns with your business strategy and stage of development. “Where risks and opportunities come together, that is where you can truly make a difference as a business.”