Over the past 18 months, BP has been undergoing a radical rethink of the adequacy of its global pension arrangements, prompted by its recent European joint venture with Mobil. The two companies had more than 30 pension schemes to review between them at the time of the deal which stipulated that both the operating and pensions assets would not be transferred between the two companies but would remain with each other in a joint venture operation.
We looked initially at the possibility of harmonisation" said Bruce Garner, head of pensions at BP Pensions Services, while addressing a recent conference in Cannes. "But we concluded that the schemes were already similar enough to put harmonisation in force for us." Bringing together Mobil's and BP's operations in Europe was taken at cost of about $250,000 within 12 months of setting up the deal, which meant, said Garner, that as harmonisation means either uplifting one set of scheme's benefits to match those of another or downgrading them at a cost, it was better in most cases to leave the schemes as they were. "We chose to walk away from harmonisation more often than not," he said.
Having said that, while BP has "walked away" from harmonisation, the fund is actively considering backing some of its its future underfunded continental schemes into the 'overfunded' UK plan. "The BP pension fund in the UK is very robust at least, in practicality it has a substantial surplus and we would love to have the opportunity to back future unfunded French and German liabilities into the UK fund," said Garner, who also stated that ultimately the fund would like to move its national liabilities into one European liability.
BP's pensions arrangements in Europe are fairly dominated by its UK fund with assets currently standing at $16.5bn - more than twice as much as the estimated $8bn of total assets held throughout Europe which include a new insured defined contribution (DC) arrangement in France. But that number is set to increase once BP enacts its plan to move insured pension arrangements to a UK-style trust in its Dutch scheme. BP is also planning to set up an offshore DC arrangement for its offices in Turkey either later this year or early in 1999.
When reviewing the pensions arrangements of the joint venture operations in Europe, this was done either in conjunction with Mobil or separately, but were all fundamentally based on a set of 'pensions principles' or a framework within which BP wanted its subsidiaries and Mobil associates to operate and report. "These pensions in principle included an intention to move where we could from unfunded to funded pension scheme arrangements, but there was certainly a bias towards defined contribution because we wanted to make sure there that we could take pensions provision off the balance sheet."
He added: "One principle which more or less is cast in tablets of stone is in fact that we will delink pension provision by the company from that of the state provision. The state is unlikely to be able to support decent pensions going forward - we were certainly not going to fill the vacuum which is likely to be created."
The move to DC brought up the issue of risk transfer, a subject which BP has not been comfortable with. "We're still very sensitive to this issue of risk," said Garner, "not just from an employee's point of view but also taking account of the core corporate reputation being attached to this as well. We have to be concerned about the adequacy of the pension which may come through in time for these people, particularly if the trend over the past few years repeats itself at some later stage for people to retire earlier than perhaps they are normally expected to."
For this reason, BP are putting a heavy stress on the communication and education aspect of the pension provision which Garner refers to as "critical" for the employees. "We are asking them to take serious investment decisions to provide their pension in the future in retirement. This is something that we don't underestimate as difficult to resolve."
Amongst this set of principles has perhaps emerged the most interesting initiative which will set many an investment manager, custodian and consultant alike on a marketing frenzy. The "preferred provider" initiative signals that the trend amongst multinationals to search for ways and means to 'unify' their subsidiaries' pensions arrangements worldwide is a very real one.
BP's initiative was originally set up to look at the ways in which administration, consultancy and actuarial skills could be better managed and coordinated cross border. BP found in its research that typically, for its schemes in continental Europe, local service providers were being used time and again and the services across schemes were quite fragmented. But by using the corporate 'clout' of BP HQ, the theory was that as well as gaining a more consistent approach to pensions management, the initiative could also reap rewards in terms of negotiating fees and securing 'bulk discounts' for the provision of these services across a number of schemes within the group.
However, Garner insisted, to 'im-pose' a set of rules and service pro-viders on its subsidiaries is not in the BP philosophy, so in parallel to discussing this approach with the service providers, BP has to still win over the hearts and minds of its employees, particularly as there is a risk in some cases of job losses, should certain services such as administration be outsourced.
"The preferred provider initiative and its aims to try and produce for us in the corporate sector still has a fairly light touch on our European pensions arrangements," he admitted. "We have already introduced the preferred provider concept in Germany - it only relates at the moment to the oil side of the business and not the petrochemical side."
BP has already saved more than $500,000 on an annual basis since adopting this approach, said Garner. After setting up in Germany, the scheme is now moving on to the Netherlands, with Switzerland likely to follow later on in the year. Following that, BP has plans to expand beyond Europe into Australasia and "ultimately", said Garner, the US.
While the original plan was just to find 'common' actuarial and administration capabilities, the initiative has evolved in recent months to include the investment side of the business. "We are currently undergoing a review programme, identifying potential key players, possibly European partners as we would like to call them who can provide investment services across Europe," he said. "We are trying to gather information for the present time to see and understand what the regulatory environment is in each of the countries in which we have interest and not just what that regulatory environment is as such, but what those standards are as well as what the limitations are."
The fund is carrying out a detailed analysis of investment managers which includes: investment styles and philosophies; ownership situation; credit ratings of both the manager and parent company; the insurance of the underpinning company; internal processes and controls; compliance procedures; track records; fee levels; size; assets under management; and custodial arrangements.
"And ultimately," said Garner, "We are interested not just in their European reach but whether they have a global reach potentially as well."
Also, in light of BP's stated move towards the DC arena, the administration capabilities of the manager is also being examined, though Garner expressed no preference for either a bundled or unbundled approach. "We don't have a bias one way or another. But we are interested where the bundled approach is being offered just to see how well seated their systems are."
Naturally, BP is not looking for one manager who can service all asset classes and styles across all schemes. However, BP also faces the problem of rejection from its own subsidiaries to the choices it makes as a 'suitable' manager(s). "When to it comes to this tricky issue of selecting the investment manager, we are going down the preferred pro-vider concept which is plural rather than singular," he said. "We don't ex-pect ultimately across Europe to do business with one single provider. And therefore we are not going to dictate, we are going to advise. We shall be encouraging our local associate companies to choose from amongst those that effectively we recommend to them."
BP's approach up until recently has been to maintain an arm's le ngth relationship with its associate companies. But times are changing. "It is clear to us that with assets and liabilities globally exceeding $25bn we cannot just let the locals run it all their own way with little or no objection or professionalism for the corporate overview being taken from time to time," Garner said.
"So what we are also addressing not just for the European area but globally is this set of guiding principles, a set up of procedures and factors which set out a framework for BP's expectations globally in the management of its pension arrangements and of course it has to address the core issue amongst others of the role of corporate headquarters in relation to that arrangement."
In essence, BP is looking to develop a statement of investment principles which would cover the areas of how adequately addressed are the liabilities under present arrangements and whether or not there should there be a form of asset liability modelling. And if there should be whether they should be reflected in an investment policy statement of investment principles.
Ultimately, Garner foresees the role of the of the subsidiaries evolving from running the schemes to managing the service providers locally which have been chosen in accordance with head office. "There is inevitably an element of trusteeship which overlays all this, whether its a committee of management or a form of trustee."
Should the £30bn ($48bn) deal with Amoco go through, and the US company's pensions assets are integrated with BP's, even more healthy pickings lie ahead for those service providers who have what it takes to be a global provider."