European "reserve" pensions weather crisis-Aon

* Pensions based on reserves offer competitive advantage

* Generous state pensions give companies a head-start

LONDON, May 26 (Reuters) - European companies paying pensions out of reserves, as opposed to paying into a separate pension scheme, are proving more resilient than expected through the financial crisis, a report said on Tuesday.

Aon Corp AOC.N, an insurance broker and consulting firm, said the system where benefits are paid out of current income meant that during the credit crisis companies were able to divert their pension asset towards their businesses.

This system, also known as book reserved pensions, makes up around half of pension schemes in Germany, for example, Aon noted, though the German system also involves generous state provision.

"This offers a competitive advantage in the context of a credit crunch," the report said. "Book reserved systems used in Germany and Austria are well adapted to capital-constrained economic conditions."

The book reserve system has been criticised by some analysts as an unsustainable way to pay for pensions. The funded pension model, which involves companies covering pension liabilities by funding pension schemes that invest assets on the market, was seen as a better option.

"The German pension system has proved to be robust and flexible in the face of both recession and crisis in financial markets. A strong insurance sector provides protection against the risk of sponsors (companies) being unable to meet their pension liabilities," Aon said.

German employers are backed by the third-highest state pension level in Europe after Austria and Spain.

Aon said European countries offering generous state pensions are giving companies a competitive advantage over countries with less substantial provision because they effectively subsidise their labour costs.

Countries with less generous defined benefit pension arrangements, such as the Netherlands, Ireland and the UK -- which also operate costly defined-benefit corporate pension funds -- emerged as the hardest hit by the current crisis, in terms of competitive advantage.

"Low state intervention (is) usually regarded by economists as an expression of superior national competitiveness," Aon said. "The past year of severe dislocation in financial markets has turned the equation on its head - at least for now." (Reporting by Cecilia Valente; Editing by David Holmes) ($1=.6331 Pound)