Philip Morris' flexible approach
Multinational group Philip Morris Management Corporation is looking closely at how the euro may affect its European investment management and benefit schemes.
Any necessary changes will almost certainly provide a template for the group's worldwide strategy, as global pension provision decisions are made by a small working group, which concentrates on prominent markets.
Philip Morris employs around 155,000 people in its three main business sectors - tobacco, food and brewing - with almost 60% working outside the US in about 90 countries.
Such a wide global spread necessitates a focus on those countries which are more important to the company in terms of investment, as the defining pillars of company policy," says Carla Edelstein, director of international employee benefits at Philip Morris' New York headquarters.
"The challenge of the euro is therefore vital to us, and we are carrying out a large number of asset liability studies at the moment to re-evaluate our investment categories in Europe."
These, she says, include whether the company will be pursuing a policy of investing domestic and foreign equities within "euroland", or amongst the "out" countries. The group is also looking closely at situations where excess assets have arisen, and how these would be redistributed.
"Above all, we do not want to be tying money into pension funds when we don't have to. So we are keenly scrutinising any changes in legislation that arise with Emu and in particular with the continuing reductions in social security provision across the continent," she says.
The company has reacted comprehensively to the changes in pay-as-you-go (PAYG) provisions thus far, with secondary pension schemes in place across most of Europe. Where this is not the case, Edelstein says there is a process to ensure the possibility of "delinking" from any state social security set-up.
Although Philip Morris has regional HQs in Switzerland and the UK, these do not get involved in matters of policy. This centralisation of investment processing and pension implementation is where Edelstein feels the group differs from other multinationals, which tend to adopt a more regional approach.
"If the annual benefit cost of any scheme we run or start up is over $100,000, then I must be involved in overseeing and approving any decisions from New York," she notes.
However, she explains the investment management philosophy of the Philip Morris group as an attempt to find the "right balance" between local practice and company policy.
"Our guiding principle is not to be too rigid in the way we operate overseas, as this never works. Of course, with company policy emanating from a central corporate level, it would all seem to be one-way traffic. This is not the case though. We are constantly evolving and learning from local markets as much as influencing them."
Edelstein cites the case of the Netherlands, where Philip Morris "discovered" the Dutch preference for choosing domestic investment managers, even when tendering for foreign equity mandates.
This was only noticed once relationships had commenced, but the company eventually adopted this local trend, as well as taking on board some Dutch benchmark tendencies that differed from the company norm.
Similarly, the company does not hold a rigid strategy on the question of whether it should operate defined benefit (DB) or defined contribution (DC) pension schemes at a local level.
Recognising the trend towards DC, Edelstein remarks that the company does not have a preference for one or the other. "Again, we are open to influence. For example, in Austria we developed a DC system after it was suggested as a local addition to the DB scheme. Following its success we have set up a number of hybrid DB/DC plans for other countries."
This sort of co-operative relationship with local markets suits the company's principle of providing basic pension necessities at minimum cost to its employees. It also facilitates the provision of benefits that will allow employees to prepare for their own future needs, Edelstein explains.
However, she admits the company is still up against many of the traditional paternalistic practices in the domain of pension provision. Of the battle to overcome these, Edelstein says: "We're not there yet, but the experience being gained in making these changes is helping us in the way we approach employee benefit schemes in developing markets."
As a result the company has implemented numerous basic insurance schemes for employees in these countries, despite being hampered by a lack of legislation to enable this.
On the question of internationally mobile employees, the company operates an "umbrella" plan similar to other multinationals with benefit and tax information adjusted cross-border. The preference, though, is to keep employees "whole" and "home", as Edelstein describes it, to simplify these issues.
In terms of its investment management, Philip Morris is moving to-wards the use of common managers dealing cross-border in the same classes of assets. "We have a benefit investment group at the company which is working globally with trustee and foundation boards to try and consolidate our use of preferred asset managers," Edelstein says.
The company already uses Mercury to manage global foreign bonds in Switzerland, Austria and the US, along with Fischer, Francis, Trees and Watts, which has mandates in Switz-erland and the US. Capital International also manages several mandates and State Street provides indexing and global custody services.
With Edelstein considering the biggest future challenge to be the increasing cost of employee benefit against the backdrop of faltering social security provision, she feels this drive for efficiency is vital.
Consequently, not only are the group's operations in Europe important in their own right, but essential to the corporation's future as a whole.
She concludes: "We must find good, effective investment managers who can complement our push to maximise economies of scale and meet this challenge. And with the euro set to bring increased transparency of labour markets and further the globalisation of information, it is essential we are ready for it, because of the implications it holds for us worldwide.""