Bringing consistency to schemes in 19 countries
As a growing multinational with a young workforce, Vodafone faces atypical challenges when compared to more traditional companies. The pension benefits provided to its employees must be relevant to their expectations and must fit within a total reward package, which also has an emphasis on Vodafone shares.
The Vodafone group has always had a policy of supporting defined contribution (DC) plans In every country where Vodafone has established a presence, DC plans have been implemented. Where defined benefit plans dominate (Germany and UK) this is a result of the history of the original parent companies.
Whilst the establishment of DC plans has always been the effective policy, this had not been formalised until earlier this year when compensation and benefits guidelines were agreed within the group. This includes a section in relation to pensions, which sets out the areas where group policy should be followed and where local considerations must take precedence. Whilst encouraging DC, Vodafone says it recognises its limitations. As a result, its guidelines include the following statement: “Benefits should be provided in a structure that shares substantive risks fairly between employees and the employer, according to their respective abilities to bear such risks.”
In the past year, as well as formalising its guidelines regarding benefit structures, the group has drafted corporate governance and investment guidelines. The emphasis in the investment guidelines is on the DC plans in which most of its employees participate. Vodafone says it is particularly keen to ensure consistency within the Euro-zone border and in the area of default funds offered to the membership. The company takes an active and responsible approach to its DC plans, outlining its belief that the corporation’s responsibilities do not just end when the contribution is paid. As a result, Vodafone favours occupational unbundled plans, rather than bundled stakeholder-type equivalents.
Furthermore, the company believes it is important to have clear corporate governance rules established within a wider corporate governance framework to deal with issues such as self-investment by funds in Vodafone securities and the levels of responsibility needed for pension-related decisions.
The group also realises that there is little point in having clear guidelines for benefit structures, corporate governance and investment if these are not understood and agreed by local operating companies. To this end, in September this year, the company brought together 20 of the key individuals with responsibility for compensation and benefits for a two-day conference to discuss compensation and benefits issues including pensions.
Similarly, Vodafone feels there is also little point in having guidelines if there is no way of judging whether they are being followed. To this end, over the last year, using internal resources rather than external consultants, full details have been gathered on all 57 pension arrangements in the 19 countries where Vodafone operates directly. These audit details have been summarised in a consistent format, which includes details of the benefit structure, administration and membership, financing and actuarial and investment and accounting.
According to the group, these summaries are proving particularly useful in dealing with the impact of the introduction of FRS 17 and the upcoming changes relating to international accounting standards. Vodafone already has a complex set of accounting standards to satisfy for its DB plans, having to provide local numbers on FAS, SSAP 24 and FRS 17 bases as well as any local requirements. The group has a worldwide agreement with a firm of consulting actuaries to provide all actuarial services and says this has proved effective in ensuring that the work is completed efficiently and consistently. A ‘rules of the road’ document, drawn up with the consultancy concerned, ensures that all local parties fully understand the relationship between the companies.
The group pension function has also worked closely with local companies where they face particular local issues. Two European examples from the last year are the establishment of a new pension plan in Hungary and the opening of a contractual trust agreement (CTA) in Germany to externally finance pension liabilities. In both cases, local company staff worked with group pensions acting in an internal consultancy role.
Vodafone has also made significant commitments to the funding of its DB pension plans given the difficult market conditions of recent years. Special one-off contributions of £72m (e105m) to the UK plan have restored the funding position, while e140m was paid into the German CTA as an initial contribution, with a commitment to fully fund the benefits over the coming few years.
Turning to risk benefits associated with pension plans, the group has had a successful multinational pool in place with Swiss Life for a number of years. However, in the last year, a further review of multinational pooling has been undertaken and a further pool has been established with MIA covering Hungary, Japan, Netherlands and Spain. This is expected to return dividends of in excess of £250,000 a year. Vodafone’s policy is to re-distribute dividends to the local companies rather than retain these centrally. The company’s Spanish human resources director described the establishment of the new pool as “an excellent example of the synergies that can be attained in Vodafone Group”.
With regard to the future, the company says it is taking a proactive action to investigate the cross-border synergies that may be available to its DC plans, particularly in Europe. To this end it has issued an invitation to selected providers to provide details of what services they could provide now, in advance of any tax harmonisation, to the group’s DC schemes. The responses and meeting with the providers concerned are being analysed, but Vodafone says it hopes to see cross-border synergies particularly in the web-enablement of its DC plans and in the investment manager selection processes. Once again, the firm has taken an inclusive approach to this initiative, by involving, from the outset, the operating companies which will be most impacted.
Vodafone Group has over the last year, built on the strong foundations of a clear and effective policy to favour DC plans to formalise and disseminate policy; audit current plans; assist local companies to meet local requirements and seek practical synergies across borders.