Rexam, as the fourth largest consumer packaging group worldwide, is used to thinking big and to thinking globally, particularly when it comes to pensions. It has a number of funds across the world, but the two principal ones are in the US and the UK.
Pensions manager, Terry Faulkner says: “From the governance aspect, Rexam takes its pensions liabilities very seriously, in that looks at them on a global basis, though recognising that governance in each country means fiduciary responsibility remains with the local relevant body.”
A group-board-appointed pensions committee reviews pension benefit especially from the liability viewpoint on a global basis. “Nothing changes without that committee being aware of it,” he says. This high-powered body includes the group chairman, finance director, HR director and the US company president, with Faulkner acting as secretary.
On the investment side, a global investment committee, also board appointed, looks at asset allocation, investment managers and performance on a global basis. “So each quarter we see what asset classes we are invested in and what we are particularly interested in is the total balance sheet exposure to equities, for example. Currently, this is about 40% globally.”
This is not far from where the group thought it might be when doing its global strategy review some years ago. “But what helped us was that in 2000 we switched our North American fund into bonds – our timing was brilliant.” This $2bn (E1.9bn) fund is now 85% in bonds, as a result of a transition using derivatives in that November and making the physical move just over a year later.
The strategic move was made fundamentally because of the pension funds’ equity risk on the group’s balance sheet. “So each quarter, we review our asset allocation on this global basis”.
The Rexam approach is that once the global balance sheet is in the required shape, then each country is looked at separately, so at the time of the review, the UK’s equity exposure was still considered satisfactory, he says. “With hindsight, we might have taken other decisions.”
The pensions committee reviews funding quarterly, with a report from the actuaries on the UK funding side, establishing of new pension plans and approve amendments to plans in any locations. “At our last meeting, we looked at the implications on the pensions green paper in the UK for company strategy, recruitment, retention and design aspects. It also acts as the fiduciary for the UK as it has the role
of appointing the directors of the appointed trustee company. As well as all the other things that need company approval.”
The actuarial report each quarter is not a full valuation, but looks on an estimated basis at the funding position, the long term rate, on discontinuance and after the priority liabilities are settled, Faulkner points out. “We can plot the trend over the quarters and know how we will be affected by changes in the capital markets or in interest rates, on a country by country basis.” These issues are taken extremely seriously and at a high level in the group, he stresses.
At its quarterly meetings, the investment committee also looks globally. “It gives advice as it doesn’t make decisions which is for the trustees in the UK and Erisa committee in the US to do.” For example, it monitored the transition of the US fund into bonds very closely but a top level, so as not to interfere with local responsibilities. This committee is drawn more widely, and includes the UK trustees, because of their acknowledged expertise. Faulkner believes the structure, which pre-dates his arrival at Rexam is a good one.
As to how the group-wide strategy and the local requirements come together, Faulkner says it is a mixture of the two. “Both sides should have a view and the two should come together to get resolution.” While the UK trustees will not necessarily be interested in the US situation, the company will be putting forward the group viewpoint. “That is the strength. But what has to be remembered is that the company provides the contributions and the ability to maintain the plan going forward, so that is a big influence.” So while the trustees will have the final decision, there is the need to consult with the company under the UK’s pensions legislation.
With transparency and openness, there is unlikely to be any confrontation, he believes, pointing out that the papers that go the pensions committee also go to the trustees. “Thanks to open feed-back, both sides know what the other is thinking. There is an element of trust.” Faulkner has no doubts that the system works to the overall benefit of everyone involved. The UK trustees will understand that by immunising its balance sheet by switching to bonds in the US fund, the group can support a 70% equity strategy in the UK fund and not over-expose itself.
This year is important in the UK, as a number of plans are being merged into one consolidated scheme, the three-yearly actuarial valuation happens, followed by an ALM study and fund a full asset allocation review, both UK and global. Faulkner will be even busier as he takes on chairmanship of the NAPF this month.
Currently, about 40% of the UK fund’s assets of around £800m are indexed with BGI, with £200m active international equities with Frank Russell’s manager of managers, with UK equities and active bonds handled by UBS GAM. “We still have some property and private equity, but this is residual from our former balanced managers, before we went specialist.”
In the US Frank Russell manages all the assets, as the fund there wanted to outsource as much as it could having had an in-house department with 20 or so managers. The attraction was to have one manager looking after all the investments, handling all the cash flow requirements, with a corresponding reduction in in-house staff. “It is not the same in the UK, where there is value in having the in-house team,” he says.
The flexibility in a multi-manager arrangement comes from not having to monitor the stocks held or the managers, he says. “What we have to understand is how Russell are managing the managers. Why they are changing or not changing managers. Why are we not getting the expected performance, who is on their buy list and so on. So it is a different way of managing.” To leave the programme would however be like leaving any other manager, with the costs involved. “Our experience is the performance of the whole fund is extremely good, and you cannot look at individual managers, as it is how they are mixed together.”
Private equity has served the fund well, though it has become more difficult to guage what flows are going to come through and when. But the fund is briefing trustees in advance of the asset allocation exercise as to all the potential asset classes. “Asset allocation requires a lot of build-up, it’s not a snap decision. And this fits in well with Myners.” The fund has its programme of briefings worked out for trustee meetings for the next 18 months. “This makes sure they are ready
for when the results come through.” Hedge funds has been a item for consideration. Real estate is being looked at again.
The fund does not automatically strategical rebalancing every quarter. “What we do use is cash flows to move from where we are overweight. In the UK we look at the allocation to the manager against the benchmark and the particular asset class against the benchmark. So the most underweight manager is built up again.”
The overall annual return that Rexam wants from the fund is the retail price index plus 5.5%, which is set out in the statement of investment principles, the SIP. “As we measure this on a rolling eight-year basis, it is only in the last two quarters that we have gone below this!” The fund until recently had a good surplus, but even now is not significantly below the 100% margin, Faulkner reckons.
He believes pension funds will move more to liability-related asset allocation. “When we did our ALM for our US fund we found that 75% of the liabilities related to pensions in payment and vested, 10% was to do with actives, and 15% was to do with surplus. So our assets were 75% corporate bonds, 10% in inflation linked bonds TIPs, and 15% in equities. There was some thinking around the question of liabilities with some form of matching assets. Certainly, it was not pure, but it served us well!”
Elsewhere in Europe, Rexam has a £30m Dutch fund, which plans to be 105% funded by end of year, and an Irish DB plan with £5m assets, and some DC plans. The pension directive developments in Europe could be of real interest to Rexam, Faulkner believes. “As we have three DB plans, there are economies of scale if we could have one pension fund in one country where we could pool assets and there would be administrative savings too.”
So he is watching developments closely but without holding his breath.