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Impact Investing

IPE special report May 2018


AstraZeneca opts for flexibility

With some 55,000 employees worldwide in over 100 countries, Anglo-Swedish group AstraZeneca is one of the world’s leading pharmaceutical companies, providing medicines for serious medical conditions such as cancer, cardiovascular and respiratory problems.
It was formed as a result of the merger of Astra of Sweden and UK group Zeneca in April 1999. Its corporate headquarters are in London, whilst its extensive research and development base is in Sweden. The international pensions office is also in Sweden.
“Our basic corporate guideline towards pensions is how best to establish a flexible scheme within a given market. And the basic principle within the guideline is to establish defined contribution (DC) schemes wherever possible,” says Michael Runnakko, international pensions and benefits manager at Södertälje in Sweden.
Though based in Sweden, Runnakko is actually a member of the company’s international compensation and benefits team that is located in London. He says that the merger provided an opportunity to have a real good look at the way pensions and benefits were administered around the world in both former companies and the subsequent review led to the current guideline and principle. “We established our pensions objectives this way and we are basically driven by the move to DC arrangements, even in countries like Japan, which has a strong defined benefit (DB) culture.” But he admits that this isn’t always an easy task, and many DB schemes survive. “Switching to DC plans can be very difficult because of collective bargaining agreements and the lack of the legal infrastructure on which to build them in many countries,” Runnakko explains.
All AstraZeneca’s main markets now have DC plans except the UK and the US, which both have matured hybrid systems containing both DB and DC elements. And it’s in these two countries along with Sweden that the company’s workforce is concentrated. “Basically, the UK, US and Sweden account for 30,000 employees and practically all of these are scheme members,” says Runnakko, adding, nonetheless, that the majority of the group’s overall 55,000 strong workforce is covered in some way or another.
Other than these three main AstraZeneca pensions markets, the group also has retirement provision schemes in all the western European countries in which it operates. “Outside western Europe and the US, we have a pension plan in Japan and South Africa. Other areas, where we have been unable to establish a viable scheme are covered by a risk pooling plan,” Runnakko says. These include countries in Africa and Eastern Europe, such as Russia and Poland.
Other than straightforward retirement provision, AstraZeneca also provide healthcare and social benefits where possible.
New schemes should reflect local conditions and the competitive environment they will operate in, and are established according to locally sourced information and requirements. “New plans must not partake in any form of social engineering and the DC principle is a guideline, not a straitjacket for local managers,” says Runnakko. However, he stresses that it would take a lot to convince the board to go for a DB scheme these days.
Structure-wise, Runnakko is responsible for coordinating the group’s pensions, benefits and healthcare operations centrally from his office in Sweden. Then there is a network of locally placed benefits managers, particularly in the three main markets.
Runnakko is also active on the investment side, which again is located centrally in Sweden. He works in close contact with the group finance department, which is located in London, where there exists a dedicated pensions investment coordinator.
“Then we have a board of trustees in the UK. But not elsewhere. Trustees area very much a UK thing. Certainly in Sweden the concept surrounding pensions is different,” says Runnakko. He adds that the concept of having trustees for a pension plan fits much more with DB plan culture than DC, and this is why a board still exists in the UK.
There is a general ongoing investment review every three months in the three largest countries, but in others the time between reviews can be as much as two years, Runnakko explains.
The UK scheme is by far the largest, with reported assets of £4.2bn (E6.8bn) in 2000. The Swedish fund is currently worth some SKr2.4bn, but Runnakko says that the complexity of the American fund makes it hard to specify its value. “It’s a fragmented situation in the US, with both large DB and DC portions that are constantly evolving.”
Investment policy decisions are usually taken after asset liability models have been conducted, although the Swedish fund normally mirrors the strategy adopted by the UK fund. “The Swedish fund is too small to warrant a separate investment strategy, so it generally follows the UK fund’s lead in that respect. However, it does conduct its own ALM studies,” says Runnakko.
Hedge funds are used quite extensively, though Runnakko could not give any more details and the basic fixed income/equity asset split is undergoing some changes. “The original 30% bonds against 70% equity split is evolving to a 50/50 split,” Runnakko explains. “The basic strategy is to move towards bonds but this is not because of market conditions or any new risk-adverse strategy but purely and simply because the schemes are maturing.” Runnakko says that no other alternative investment classes are used at the moment and there are no plans to incorporate any in the near future. “We’re quite happy with the way things stand at the moment.” Investment policy decisions are taken by investment committees in conjunction with the group’s finance department. In addition, in the UK, this is an area in which the trustees get involved.
The portfolios are actively managed in the UK and US, but generally passively managed in Sweden and other smaller countries.
Runnakko says that a new part of the investment strategy is to have ongoing performance measurement of the various funds’ managers, which are all external. “This is a new policy and is not an indication that we are unhappy with our current managers.” AstraZeneca uses consultants for both actuarial and investment advice.

Runnakko would also like to see a greater degree of investment coordination for the company’s various schemes. “This won’t be done nationally but regionally on a supranational basis.”
The captive insurance programme that is used in countries that have no savings plan doesn’t generally extend to pensions provision and the objective is to keep just one pooling network. “The captive insurance is mainly used for healthcare benefits. We have discussed a possible convenience pool to cover areas of poor service and performance but nothing has been decided,” says Runnakko.
There is an old Astra network still in place, but this a leftover from the merger and is considered a runoff business.
For the truly internationally mobile employees, AstraZeneca has set up an international fund. “This new fund is registered in Guernsey and includes a spouse fund,” Runnakko explains. “It is intended solely for employees that can’t belong to either a home or host country arrangement. They may transfer out of it once they become more permanently based. It also helps in periods of transition. It has a potential membership at the moment of around 300.”
The international plan is DC in nature, since AstraZeneca believes that DC structures can support employee mobility in a way that DB cannot. “It is also open to ex-pats but not to those leaving a home DC plan to move into a host one,” adds Runnakko.
Runnakko believes that companies should act more at corporate level towards establishing a pan-European pension fund since at political level, things have barely made it off the ground. “I heard it mentioned as a goal of the European Commission 10 years ago and it’ll be another 10 years before anything major happens. There’s no point sitting around waiting for Fritz Bolkenstein to establish his pan-European pension fund.”
Runnakko feels that a supranational pension fund on this scale should not be considered as a competitive instrument among companies but that it should lead to increased intra-company communication and coordination in terms of benefits and pensions. “Although we would welcome more directives at political level to drive us forward, we need to act ourselves.”
Nonetheless, Runnakko is aware of the enormity that such a task presents, especially given his background as a tax lawyer. “Tax harmonisation would be an obvious advantage, but would be very difficult to actually achieve. Swathes of new legislation would be needed and existing legal frameworks would have to be smoothed out,” he says.

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