Why Aren't Pension Plans a Priority for Companies?

Companies face difficulties implementing pension plans due to lack of volume, preference for individual plans, and general lack of awareness. New trends and laws are driving their adoption.

Recent and especially frequent regulatory changes around pension plans have given us the opportunity to analyze the difficulties in their implementation alongside companies and employees.

In this article, we try to answer specific questions about the use of employment pension plans to date, taking advantage of issues from this past year such as: what has caused sectors like Construction not to consider opening pension plans for their employees until they were required by collective agreement? Or digging deeper, why have barely 30% of the target employees under this agreement been enrolled in an employment pension plan?

Read on to discover all the lessons learned by the Arca team while building technology to simplify the management of this benefit.

1. Obstacles for Companies and Employees

These are the lessons learned from a pension plan industry unable to accelerate adoption by companies:

1.1. It's an Assets Under Management Business That Needs Volume to Guarantee Relevant Revenue

Despite the employment pension plan being an agreement between two parties—company and employee—it has really become an agreement between provider (bank or insurance company) and company. The conditions are imposed by the bank or insurer, presented as a tailored proposal for the company. Only this way can they guarantee substantial stable contributions over time that generate enough revenue from their management fee on assets under management. The typical conditions requiring both company and employee to contribute a percentage of salary become a barrier that hinders access to new clients. On one hand, for the company it means suddenly raising salaries by a certain percentage, which represents a commitment to the company's cash flow. On the other hand, because the employee, unfamiliar with this type of benefit, focuses on the fact that from its implementation, their monthly take-home pay will be lower. An obstacle to accessing the value that a salary increase in the form of savings represents, growing progressively partly thanks to reinvestment and the compound interest effect.

1.2. An Employee Didn't Need Their Company—The Individual Pension Plan Was Enough

The individual pension plan, in which more than 7 million Spaniards have deposited part of their money (Inverco.es data), had been the tool through which they could deduct up to €8,000 on their tax return. An individual could independently decide which pension plan to deposit money into to avoid paying the corresponding income tax. The company had no involvement in this matter where a worker only needed to contract with any bank or insurer. Until 2022, when the tax rules changed for individual pension plans, limiting the deduction cap to €1,500 and placing the company at the center of the equation, since the cap rises to €8,500 if savings are made through an employment pension plan.

1.3. No Solution Is Needed for a Problem That Doesn't Exist

If the mantra is that public pensions are guaranteed, then any service offered is improving a product that works perfectly fine.

The custom regarding pension plans has been the tax incentive rather than their true purpose: guaranteeing a right to collect at retirement. This has had several consequences. Consumers have left their money in pension plans that ensure loss of value—analyzing data from Inverco, we find that 80% of money invested in pension plans has not beaten inflation over the last 20 years. Thanks to recent 2018 regulations limiting management fees for pension plans, the most inattentive savers could prevent continued high charges that reduce the favorable effect of compound interest on well-invested savings. These same savers have also understood the pension plan as a scam, having been sold on the idea that it's the miracle formula for not paying taxes, only to later realize they don't pay today but will when they retire.

The convenience of the employment pension plan for having control over future income has been completely relegated, ignoring that for a Spaniard—and even more so for those without a public pension—company contributions would allow them to increase their savings and investment capacity faster than individually alone.

1.4. Widespread Lack of Awareness

According to the Caser Pension Observatory, less than 1% of companies offer employment pension plans in our country. For talent management and compensation policy teams, the low penetration of this benefit means we are far from making the employment pension plan a standard. Something that already happens with other more widespread alternatives that also have tax and labor implications for company and employee, such as health insurance or meal vouchers.

It is this same lack of awareness that keeps a company from considering hiring a consultancy specialized in compensation and benefits. It's quite paradoxical that to understand whether something has value for the company itself, it has to bear the cost of a project estimating the impact of the pension plan on the organization. What ends up happening is that these consultancies limit themselves to serving large corporations that already have budgets dedicated to studying the compensation market. And for such company profiles, consulting team structures are created with costs that become unaffordable for the remaining 99% of companies in the Spanish business fabric, which simply repeats the mantra "this benefit is not for me."

2. New Generations and Labor Market Trends

As we can see, employment pension plans have faced obvious reasons that have hindered their progress. While it is true, companies and employees are witnessing and participating in certain trends that change priorities when shaping company policy.

Social Security contributions have been, according to popular wisdom, the price to pay to guarantee public healthcare and pensions, although far from sufficient—83% of companies already provide private health insurance to their workers with some favorable advantage compared to the employee contracting it individually (Health Insurance Barometer 2023, Adeslas). We are now witnessing the rise of the retirement social security system as a company-offered benefit, and these are the motivations for change:

2.1. Talent with International Perspective

Globalization also extends to talent hiring policies. Going abroad to work was the way to build a cushion in large corporations that even today still have their expatriate programs.

These days, international mobility has changed—it's a way to maximize an employee's options by viewing the labor market as global, seeing it as an opportunity to improve employability at a faster rate. These early employees who decided to move to the United States or the United Kingdom were pioneers in asking if there was an equivalent to the 401k or the state Auto Enrollment during selection processes to return to work at a Spanish company. This labor market education process has been accelerated by the increase in companies that, having headquarters in those foreign markets like the American or British ones, seek candidates in our country without needing to relocate to their central office.

2.2. Legal Mandate for Companies

The closest example we've seen came first in the United Kingdom, when in 2012 Auto Enrollment of employees into a pension plan with employer contributions began, and 10 years later, 86% of workers already had their social security plan with company support. Twelve years later, in 2024, the obligation for companies to automatically enroll employees was born in Spain. While in the UK it was a transition period starting with the largest companies and progressively smaller ones, in Spain the obligation has been sector-based by collective agreement: all construction companies (the pioneer sector) had a deadline to adapt at the beginning of 2024, regardless of their size and available resources to face the change.

2.3. Awareness of the Unsustainability of the Public Pension System

It may be that Spaniards still move in a gray area when it comes to understanding the specific workings of the country's public pension system; but the progressive aging of the population and the structural unemployment problem are already well-known obstacles when we talk about maintaining sustainable contributions for the country.

Additionally, at the beginning of 2024, a tangible comparable appeared on every employee's paycheck—the MEI or Intergenerational Equity Mechanism. Every employee in Spain has suddenly and without any say seen their take-home pay reduced this year compared to the previous one, due to the implementation of this new concept that justifies withholding more taxes from the employee to pay pensions.

2.4. Radical Change in Consumer Motivations

Recurring conversations with HR teams through which we improve our product at Arca converge on a common point: "the employees on our payroll are young and still far from retirement."

These managers are dedicated to collecting the disparate will of the team they must transform to return a common benefit capable of pleasing all workers. Far from this, the employment pension plan has traditionally aroused the interest of a specific part of the workforce—those whose retirement age is closer. The utility that HR teams are accustomed to witnessing makes it difficult to rethink a new use for the employment pension plan and present it to the team: it stops being a convenience benefit due to proximity to retirement and becomes a real solution for young people inheriting an insufficient public pension system.

At Arca, we study the latest trends to improve our technology—only this way can we ensure we bring this benefit to reality easily for the company. Our transparency allows employees to understand the implications of their pension plan, without creating additional administrative burden for HR teams.

It has never been easier to offer your own social security system to your workforce. Start now with Arca!