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IPE special report May 2018

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Caterpillar makes tracks towards DC plans

Multinational Caterpillar manufactures machinery and engines and offers financial services for customers and dealers worlwide. The company which operates in more than 30 countries and has its products competing in more than 200, has around 67,000 employees covered under different pension plans depending on the geographic area.
Although multinationals are becoming more aware of the need for implementing global strategies in terms of employee benefits and retirement, Caterpillar is taking a local approach.
“Depending on the region we have different pension schemes. We want our plans to be competitive so we are not trying to establish a uniform worlwide plan for our pension schemes,” saysJean-François Vielliard, pension fund chairman at Caterpillar in Geneva.
Some of the pension funds provided by the company are defined benefit (DB) schemes but most of them follow the defined contribution (DC) model.
“Our pension fund in Switzerland was established in 1965 and everything was managed by an insurance company,” Vielliard says. In 1985 they decided to become autonomous and they started giving mandates to three financial institutions according to the rules of the Swiss law. “In 1989 we thought that was not a good formula and since then we have been giving specialised mandates. We have about 10 now.”
The scheme is based on a DB plan based on years of service and the employee’s average earnings near retirement. “About two years ago we made a study and we came to the conclusion that it would be safer for the company to use a DC plan and we made a recommendation to stop the DB plan,” he says and adds: “But we are still using DB and it will stay like that for the time being.”
The fund covers 485 people under the Swiss payroll. “We have people from other countries such as the UK, Belgium and France.Until recently, all international employees working in Geneva were transferred into our pension fund, but now, if before they came here they were working for a few years in the UK, for example, they will get a UK pension for that period and a Swiss pension for the time they spend with us,” says Viellliard. “It is more complicated for them but the previous formula was very expensive for the company and they have accepted this
situation quite well.”
The fund is managed by a board of six trustees, three designated by the company and three elected by the employees for a three-year mandate. “This is the rule in Switzerland,” he says. “When you have an autonomous pension fund you have to have a board that is equally represented by the company and the employees. This board elects a chairman who has double vote.”
In terms of investment all the work is done by external managers. “Although the employees’ opinion is important and we sometimes follow their recommendations, we find that very few of them have an investment philosophy, so the managers are the ones in control of the portfolios.”
“In general we are very pleased with the work they are doing,” he says. “We have had an average performance of 9.5% for the last nine years. This might not be seen as a very high return in countries like the UK, but for Switzerland, with all the investment limitations we have, it’s quite a good result.”
The fund has increased its equity exposure from 25% in 1989 to 50% in 1999, which is the limit allowed by Swiss law. Vielliard believes that only a change in regulation could improve investment results. “There is a discussion on the revision of the Swiss law for pension funds which will probably come out in 2003. This new law could increase the limit for equity investment, or even eliminate it. In my opinion we need more freedom on the investment side,” Vielliard says. “The situation differs from one pension fund to another but I think that especially those funds which are fully funded should be given the licence to take more risk.”
However, all changes in legislation should be considered very carefully in order to avoid past failures. “A law introduced a few years ago which allowed people to withdraw money from their pension fund in order to invest in real estate proved to be completely unsuccessful, as many French people working in Geneva invested that money in property in France and not in Switzerland.”
Concerning the euro and the way the single currency is affecting the Swiss market, Vielliard comments: “Although we are outside the Euro-zone, there are many people, especially in the French speaking canton, who think Switzerland should join the single currency and the interest rates on Swiss francs are already following the euro rates, so the environment is changing. But in terms of investment the euro is considered as another foreign currency.
“I think that the limitations we have on bond investing should disappear one day, allowing euro bonds to be considered as domestic bonds, but I don’t know when this is going to happen.”
Apart from prioritising European and Far East equities, their investment strategy also includes a sector approach. “We are investing some money in a technology fund,” he says. “We would like to increase this approach but we find that even though everyone is talking about investing in the sector, some managers still don’t know how to do it.”
Vielliard adds: “Being chairman of a pension fund is very interesting job but it is also very complicated. It requires a good knowledge of the legal environment and the investment markets and also getting involved in administrative tasks where you have the rules of the plan and you have to interpret them. It can be very tricky.”
“In general we are quite happy with the way our pension fund is working, and the only improvements I can think of are related to the investment limitations that we currently have.” Paula Garrido

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