Beating the cross border drum
The cost of running pension schemes separately rather than on a unified basis in Europe runs to additional costs for employers amounting to millions of euros, Lex Dorleijn of Fortis Bank said when addressing the Multi Pensions 2000 Conference in Amsterdam held jointly by IPE and the conference organisers IBC, last month. “The large multinational in Europe might have a dozen or more schemes, each with its own fund and administration system and subject to restrictions on investment choice.
“The cost of managing these schemes on this basis, compared with unified US schemes runs to additional billions of euros every year. Not every multinational faces the same problems. Those with one or two very large European operations usually find the individual pension funds have the critical mass to achieve these economies. “But the multinational with many small schemes scattered across Europe has real problems, as the opportunities for achieving an efficient cost effective investment strategy are very limited without the ability to pool assets in central funds.”
Looking at the proposals in the recent proposed directive on pensions, he believed that substantial economies of scale could be achieved, if one financial institution could manage the different schemes for the one firm. “This would require mutual recognition of member states supervisory regimes. Pension funds must be able to manage schemes of firms located in other states.”
Geoffrey Furlonger of Lombard International Assurance asked what are the prospects for pan-European pensions? “I think all the ‘fatal barriers’ to pan-European pensions could be removed by perhaps 2005.” This was based on the likely time it would take the directive to come into force as well as any test cases on the tax issues, so he reckoned five years’ time was realistic.
The directive is important for cross-border pensions, as it could eliminate the barriers to cross-border affiliation, while the common rules on minimum standards of prudential provisions led the way for mutual recognition of systems including tax systems. But Furlonger added that it was still possible to have pan-European pensions, without adotion of the EU directive. But it was not possible to have “true pan-European pensions” without the removal of the tax barriers. Currently, these prevented contributions to a pension fund in another EU country receiving the same treatment as on contributions to a domestic plan.
Looking at what was being done on the tax side, he pointed to the Pan European Pensions Group, which he chairs. This is made up of 19 multinationals sponsoring a test case before the European Court of Justice. “We had a case planned against the Dutch government, under which a multinational Kaeverner was transferring individuals from a Dutch to the UK scheme. Very unsportingly, the Dutch government changed the tax rules.” While this was a positive result, the group was now proceeding with another case.
A Swedish case brought by an unnamed insurance company where individual entered into pensions schemes in other countries but were refused tax approval in Sweden. The European Federation For Retirement Provision, which proposed the European institution for retirement provision, which initially would obtain tax acceptance in respect of Ireland, the Netherlands, and UK in respect of this vehicle.
Furlonger expects a new directive on tax issues from the EC , but this is likely to apply only to mobile employees.
The proposed pensions directive would only need a qualified majority within the council of ministers in order to be approved, pointed out Koen De Ryck of Pragma Consulting in Brussels. If there had to be unanimity, he reckoned the proposal would be dead.
His research shows that while there would be support in most member states for the proposals. “But the scope of the directive needs to be more precise. Small groups (under 100 employees), should not be left out,” he said. But at the same time excessive burdens must not be imposed on these business. In the case of Portugal, some 90% of the labour force would be excluded on this basis. “A solution needs to be found here.”
There was support for including a minimum funding requirement, but on a ‘dynamic basis’ as otherwise the rigidity and contribution volatility of other funding measures would be “unacceptable and not practical”. This is an area where the EC has not gone as far as the reactions their research found.
He pleaded that the resulting directive should not be a reflection of the “lowest common denominator of agreement in the EU”. Transition periods were advisable to let countries use these on their way to meeting the directive’s full requirements.
No company introducing a pension fund nowadays would have a defined benefit plan, claimed David Birtwistle, vice president global rewards of Getronics (UK), at a panel discussion on DB, DC and hybrid solutions. “If a DB company with a blank sheet of paper would not have a DB scheme, why should they not be looking to move to DC anyway as a modern way of pension provision?”
The road to DC is the right one, he argued as the world generally took a more short term view. “Employees’ needs have changed, they have become more sophisticated.” The trend would be for more employers to look at DC, with some closing schemes to new entrants. “I do not think that really tackles the issue. If a company thinks that DC is right, there was no point in having a 40-year lead time to getting DC in place. Employers should look at their existing work force and ask if there was some way of migrating these to DC, whether it is for future service only or whether there was some way of converting past service.” The main reason for changing was that a company needed certainty over its pension costs.
Christoph Schenk, cheif executive of ABB Vorsorge in Switzerland said that his group’s experience of moving from DB to DC was if you waited until people are ready, most DB plans would just continue. “People can only be made aware through being in DC plans.”
The system in Switzerland meant employees had to be in the plan of their employer, whether this was DB or DC. “If you can make people aware of what pension funds really means then they want the freedom of choice. Give them the choice of pension plans they will choose the best and most transparent for the lowest cost. This suggests free markets.” He reckoned that if people had this freedom the number of pension funds in Switzerland would reduce from 11,000 currently to about 20.
Commenting on the employer giving up the possibility of lowering costs through DB investment returns when going DC, Birtwistle said that with DC, “companies are prepared to pay an extra amount in their pension costs for the benefit of knowing they have stability of costs going forward.”
From the point of view of providing a scheme that met member’s needs and gave options, Schenk said: “One solution is the hybrid scheme, as there are different needs to be met. Options can be given, which are sometimes more valuable. There are options in our case which makes us that bit more competitive than other schemes. Flexibility is the key.”The number of managers a DC plan should have was a question put to the panel session on selecting asset managers for DC schemes. “It depends on the size of the plan and in the case of the smallest plan it would be a minimum of three,” said Wolfgang Lotze, pensions advisory group of Siemens Financial Services in Munich. “On average, our DC schemes’ manager numbers are between five and 10.” He added that the group found it difficult to find managers willing to participate around Europe on smaller plans. “In general US medium sized plans with assets of $1-$5bn have an average of 11 managers.”
Petra Zamagna, chief investment officer of Aventis, based in Strasbourg, commented that the advice of 401k sponsors in the US was that it was not a very good idea to offer very wide choice. “In terms of communication with members, it was better to be concentrated. This could be a minimum of three and not more than a maximum of 10, with perhaps five to seven being the best.” If a sponsor wanted to offer alternative investments and so on, it could increase significantly, but this made it more difficult to handle. “Do you really give a service to the employee if you offer too many choices?”
On the question of integrating different DC managers on one stable platform, Lotze said Siemens would do such administration only on an outsourced basis. “Our employees deal with external providers on administration, and they usually handle the educational aspects as well?”
David Duncan of asset manager GAM said in the group’s experience that most DC pension funds, used an outside administrator, mostly global custodians. Luc van Cloosters of Fortis Investment Management, based in Brussels, pointed to internet systems, such as offered by his group. “This is a DC tool that takes care of administration and helps us and the pension fund to manage the assets, and provides member information.”
Zamagna believed that asset management should be separate from the administration, but important to see that the chosen managers could work with external administration systems.