Getting all in one picture
Eastman Kodak could become the first multinational to establish a pan-European system that will allow it to manage its European assets as if they were in one investment pool.
By the end of 1998 all assets in Europe will be managed centrally on a long-term eq-uity basis, saving the company an estimated $20m a year when fully implemented.
The UK’s defined benefit pension plan can already fit into this centrally managed system, but in continental Europe, it involves converting the current insured arrangements into look-through vehicles” for each country. In effect the assets are still held by an insurance company, but how the money is invested is centrally directed, in this case by State Street Global Advisors as part of an overall European asset allocation.
The process will be two years old at the end of this year, by which time all Ko-dak’s major European pension arrangements should have been adapted to fit the new structure. Conversion of the smaller arrangements will follow next year.
Explains Mike Stockwell, director of European pensions investments, who is charged with implementing the changes: “We will not isolate individual pension funds other than as far as legislation insists we do. We will be looking on the liabilities as a total European liability and we will be looking on the assets as a total pool of assets.”
Under the system, the im-pact of nationally imposed investment restrictions will be mitigated with an overlay structure including hedging which, as far as possible, will preserve State Street’s centrally determined asset allocation. The structure will also incorporate full tax efficiency and will be passively managed to further reduce management costs.
The intention is to lever investment performance from the low level produced by insurance contracts to the level of stock markets. “That brings savings of $20m a year on investment returns simply by making relatively conservative assumptions,” Stockwell adds.
Stockwell describes his European role as “primarily improving the cost-effectiveness of our pensions delivery systems.
“We are trying to move away from isolated companies looking at their own asset liability relationships to looking at one European pension fund in the sense of asset liability profiles,” he says. “The risk structure is very different, allowing us to take a far longer-term view with long-term equity investments, while accepting more cost volatility, which is what ACT causes in the UK.”
However, it is in the other European countries where the major changes will come. He explains: “We are currently investing on a very conservative basis, basically using with-profit insurance contracts which give lousy rates of return but with guarantees of lack of volatility.”
Seventeen schemes are to be brought into the new structure and, considering the prospective savings, the company “would like to see this done yesterday”.
In initial meetings with local companies Stockwell found himself as “the most unpopular guy there”, op-posed by local management and trustees, insurers and consultants. Indeed, he identifies local managements as the biggest obstacle in this line-up, because they have a mindset that regarded the avoidance of volatility as the principal concern. “We say to them that cost volatility is something the corporation can bear and that we want them to improve the investment returns with far more aggressive investment programmes,” he says.
“Nobody wants anybody looking over their shoulder trying to do their job for them so we changed our accounting policies and our reporting role so that they have the authority to make changes.”
Stockwell cites the different national investment frameworks and restrictions as the second most significant ob-stacle. “Country legislative structures won’t necessarily let us invest where we want to and how we want to. Clearly we have to abide by that, but there is nothing to stop us taking our collective asset allocation and overlaying the local country restrictions and seeing how we can adapt it to get where we want to be.”
The company has also met with resistance from insurers, and is involved in contracts that may involve huge penalties for withdrawal. “We tell the insurer that we are not going to give them another penny on the insurance contracts under these conditions nor are we going to vest from now on unless they allow us to achieve the investment management style we want,” he adds.
In this situation the company could look to set up a new fund but this would face taxation and other legislative difficulties, hence the look-through structure. “In terms of local legislation, with some of things we are doing, we are probably pathfinders. The insurance company can effectively retain the insurance contract but they appoint the managers we want, to create a look-through vehicle. Those assets are managed according to our instructions.”
The process also involves removing the risk premium from all other companies and pooling the risk benefits with one carrier - a procedure that “has proved to be a nightmare” in some countries.
In Germany, a priority country with the second largest pool of money, Kodak is adopting a look-through vehicle set up using an umbrella arrangement with insurers, while placing the risk premium with one carrier. “Clearly the insurer sees this as the way Europe is going to develop. They want to be in there, to be selling products and to be pro-active.”
The company has completed the look-through vehicle arrangements in Switzerland. In this case, removal of assets from the insurers in-volved little by way of penalty, but any attempt to establish a separate insurance contract would have opened the company up to investment restrictions incompatible with the overall asset allocation.
Although there are some differences in investment restrictions, Stockwell believes that the larger countries, notably Germany, the Netherlands, Switzerland and Belgium, pose similar problems. “