mast image

Special Report

Impact investing

Sections

Lucent sheds light on pensions

Lucent Technologies is one of the leaders in the fast-growing communications networking industry. With more than 150,000 employees worldwide, 25,000 of them based in Europe, and a presence in more than 90 countries, the approach towards employee benefits is a reflection of the changing nature of the company .
Lucent has defined benefit plans covering the majority of its employees and retirees, and post-retirement benefit plans for some employees that include healthcare benefits and life insurance coverage. Pension plan assets worldwide amounted to around E50bn during last year.
“The tendency has always been to cover our employees under defined benefit plans but this is changing now,” says Arthur Smit, regional treasurer for Europe, Middle East and Africa, based in Hilversum. “From this office we monitor all the pension plans within this region, but this is only a small part of the function,” he says.
Most countries within the Europe, Middle East and Africa region run pension plans through insurance companies, reinsured via pooling arrangements. “Usually where there are pension plans they are insured plans. Outside the US, only the UK, Ireland and the Netherlands have their own pension fund,” Smit says. “Also, when we start operating in a new country or when the number of employees is too small, the best solution is to use insurance companies to cover pensions. These plans are run locally with local insurance companies, reinsured via pooling arrangements.” Smit continues: “In Ireland and the Netherlands we are running a DB plan and in theUK we use a hybrid DB/DC model. I think that the tendency is to move to the use of a combination of both systems.”
In 1999, Lucent changed its pension plan benefit for US management, technical and non-represented occupational employees. Under these changes, all employees taken on after January 1999 who are not participating in a DB plan will receive a different pension benefit known as account balance programme. All the other employees will retain their current pension benefits.
Other benefits only provided to US employees are saving plans which allow employees to contribute a portion of their compensation on a pre-trax or after-tax basis following specific guidelines. The company matches a percentage of the employee contributions up to certain limits. On top of these saving plans, US staff can also have access to stock-based compensation plans. This benefit is provided to certain employees who receive stock options and other equity-based awards, according to the trend followed by more and more big companies. Although none of these benefits apply to non-US employees, these models could be exported in the near future as has already happened within multinationals.
Focusing on the Dutch pension fund, Smits says: “The Dutch entity was originally a joint venture between AT&T and Philips. The employees came out of Philips and therefore participated in the Philips pension scheme. In 1993 we established our own pension fund and the pension fund assets attributable to our employees was transferred into it.” Last year the Dutch pension fund had around Dfl1bn (e455m) under management and no major changes have been implemented recently. The need for a move to a different system can be found in the changes in the type of workforce that the company is facing. In the Netherlands, Lucent used to be a very large manufacturer but now manufacturing is being outsourced and we have a more highly skilled workforce.
“In the Netherlands the average employee now is 38 years old and has at least a degree and demands another kind of retirement system, which is different from before outsourcing manufacturing,” he says. “We won’t be moving to a pure DC plan but probably to a hybrid system like in the UK.”
Smit, who is also trustee of the UK pension fund, compares this scheme with the Dutch one. “Both pension funds are pretty similar in terms of management structure,” he says. “However, there are some differences in how the assets are managed.”
Lucent’s pension funds have a board of trustees, appointed by the company, the workers and the retirees, which play an key role in all decision-making processes. The board has to approve an outline of the strategy for the pension fund, before sending it to the asset managers.
All the asset management is outsourced. The two managers running the assets of the Dutch pension fund are ABN AMRO and Schootse Poort. They have to study the board’s proposal and define the strategy to follow.
In terms of investments, the introduction of the euro has affected the asset allocation strategy with more investments focused on Euroland. Although Smits admits that they are quite pleased with the work of the managers, he highlights the need for some changes to be made. “There are things that need to be improved,” he says. “We are still working with the same model that we had seven years ago. The problem is that the liabilities have changed and we haven’t corrected the asset allocation in that respect.”
The need for improvements is also encouraging the fund sponsors to use a different approach when investing. “We still don’t have a sector approach but we see it coming,” he says. He adds that they are also considering to take into account alternative investments such as venture capital. “When we started we thought that were too small to consider this type of investments, but now we have grown this approach is beginning to make sense. It’s something that needs to be looked at.”
Regarding expatriate benefits, Lucent runs different systems in accordance with the terms of the expatriate contract. “Depending on each specific case, employees stay under their country of origin’s plan if they are transferred,” Smit says. In this respect, he comments on the need for improvements in terms of employee mobility. “Pension arrangements are big handicaps restricting the mobility of workers,” he says. As the situation is different in each country achieving a greater harmonisation is very difficult. “For instance, one of the problems we have right now is the UK which is becoming extremely expensive in pension terms,” he says. Smits also highlights cultural differences between countries: “If you look at the Netherlands, I would say that people in general are not very investment-minded,” he says, adding that this is now changing. “There is a trend towards offering more choice to Dutch employees which is already a fact in the UK where people are more investment-councious,” he adds. “In the Netherlands we have very paternalistic schemes and, until recently, people liked that. Now, it seems that they are becoming more aware and they want to know where their money is invested.”
“I do see legislation in the UK and the Netherlands converging with respect to funding requirements, protection from the company and so on, but I believe the different pension schemes and tax regimes through the EU are so wide apart that I do not see real harmonisation for the coming years,” he comments.
Obstacles for this harmonisation are also present on the investment side. “In terms of investment, the big difference between countries is the liability mix. Asset allocation strategies depends on each country’s economic situation,” he says. “For example in the Netherlands low inflation is favouring investments in bonds to a larger extent than in the UK that has historically higher inflation rates.”
While overall polices don’t seem to be part of the short-term plans of the company, the coming months could bring changes in benefit models for the different local pension schemes. “However, before implementing any changes it’s crucial to improve communication,” Smits says. “Communication is not only necessary because people like being informed but also because they have to be informed, they have to get more involved in order for them to assume responsibility in managing their own pension assets. This is a huge issue.”

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2548

    Asset class: Fixed Income, Emerging Market Debt Hard Currency (Active).
    Asset region: Emerging Markets.
    Size: CHF 300-400m.
    Closing date: 2019-07-30.

  • QN-2549

    Asset class: Fixed Income, Emerging Market Debt Hard Currency (Passive or Passive Enhanced).
    Asset region: Emerging Markets.
    Size: CHF 300-700m.
    Closing date: 2019-07-30.

  • QN-2550

    Asset class: Fixed Income, Emerging Market Debt Local Currency (Active).
    Asset region: Emerging Markets.
    Size: CHF 250-350m.
    Closing date: 2019-07-31.

  • QN-2551

    Asset class: Fixed Income, Emerging Market Debt Local Currency (Passive or Passive Enhanced).
    Asset region: Emerging Markets.
    Size: CHF 250-350m.
    Closing date: 2019-07-31.

  • QN-2552

    Asset class: Fixed Income, High Yield (Active).
    Asset region: High Yield (US).
    Size: CHF 500-600m.
    Closing date: 2019-07-29.

  • QN-2553

    Asset class: Fixed Income, High Yield (Passive or Passive Enhanced).
    Asset region: High Yield (US).
    Size: CHF 500-1'100m.
    Closing date: 2019-07-29.

  • QN-2554

    Asset class: Global Real Estate (Equity, unlisted Funds).
    Asset region: World (ex-Switzerland).
    Size: CHF 200 mn (potential for further growth).
    Closing date: 2019-08-07.

  • QN-2556

    Asset class: FX Hedging.
    Asset region: Global.
    Size: Mandate size of CHF 1.5 bn.
    Closing date: 2019-08-09.

  • QN-2557

    Asset class: All/large Cap Equities.
    Asset region: China A-shares.
    Size: Unit linked platform (0m USD in initial investment).
    Closing date: 2019-08-01.

Begin Your Search Here
<