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www.aon.com 01
Aon Consulting European Business Leaders Survey
June 2009
www.aon.com 03
Aon Consulting European Business Leaders Survey
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.
Book reserved systems used in Germany and Austria are well adapted to
capital-constrained economic conditions.
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Aon Consulting European Business Leaders Survey
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.
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
Aon Consulting European Business Leaders Survey
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.
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.
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Aon Consulting European Business Leaders Survey
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.
Source: Eurostat
35,000
30,000
€ (Maximum pa)
25,000
20,000
15,000
10,000
5,000
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Source: Eurostat
70,000
Total private pension assests
divded by the population
60,000
Euros
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Aon Consulting European Business Leaders Survey
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.
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.
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Aon Consulting European Business Leaders Survey
June 2009
Source: Eurostat
by age group
en
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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: Eurostat
Future workers (% of 25
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Aon Consulting European Business Leaders Survey
June 2009
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.
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.
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Aon Consulting European Business Leaders Survey
June 2009
Analysis by country
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Aon Consulting European Business Leaders Survey
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%.
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.
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Aon Consulting European Business Leaders Survey
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).
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.
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Aon Consulting European Business Leaders Survey
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.
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.
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Aon Consulting European Business Leaders Survey
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.
Germany continued
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Aon Consulting European Business Leaders Survey
June 2009
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.
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Aon Consulting European Business Leaders Survey
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.
Ireland continued
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Aon Consulting European Business Leaders Survey
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.
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Aon Consulting European Business Leaders Survey
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.
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.
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Aon Consulting European Business Leaders Survey
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.
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Aon Consulting European Business Leaders Survey
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.
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.
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Aon Consulting European Business Leaders Survey
June 2009
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.
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.
Spain continued
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Aon Consulting European Business Leaders Survey
June 2009
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.
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Aon Consulting European Business Leaders Survey
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.
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.
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Aon Consulting European Business Leaders Survey
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).
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.
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Aon Consulting European Business Leaders Survey
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.
UK continued
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Aon Consulting European Business Leaders Survey
June 2009
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.
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Aon Consulting European Business Leaders Survey
June 2009
28 www.aon.com
Notes
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Aon Consulting European Business Leaders Survey
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