Nestlé's pension funds have seen some radical changes in recent years, with moves towards more equities and wider foreign exposure. Fennell Betson reports
Nestlé's Jean-Pierre Steiner wears two hats. The first is that of managing director of the Swiss pension funds, the other is that of corporate pensions manager. This second group role is gaining in importance," he says.
In his 25 years with Nestlé, first as investment manager and for the past five or so years as managing director, he has seen radical changes in the group's two Swiss funds, which have combined assets of Sfr5bn($3.4bn). There has been a determined push from a traditional bond and real estate portfolio to an equity-related allocation of around 68% and net foreign currency exposures of 35%.
"In 1991 we made our first strategic allocation study, using an external consultant, and this enabled us to fully use the leeway that federal regulations give us in terms of equity investment and overseas investment." Normally, these limit pension equity exposures to 50% and overseas investment effectively to 30%.Steiner explains: "We have made full use of article 59 of the federal pensions ordinance which says that you may override the limits if, among other things, this is justified to the satisfactionof a neutral, external expert."
The Nestlé pension arrangements, which are nearly 50 years old, are run as two schemes. "This is because of the way the law is structured in Switzerland. All the regulations fit better into a defined contribution (DC) rather than defined benefit (DB) plan. So our federally regulated fund is a DC one, to which the staff and company contribute on a 50/50 basis. In addition, we have a fund financed exclusively by the company, to supplement the first scheme." This "top hat" plan provides pay-related benefits on retirement only, but is open to all staff from factory floor upwards.
Over three quarters of the portfolio is internally managed by Steiner and his team of managers, including the 15% in real estate. Equities account for about 60% of assets. Around 8% of the portfolio is in emerging markets through five external managers; three smaller cap portfolios are also outsourced.Some 40% of the internally managed equities are on a passive basis, going up to 50% in the case of the US, says Steiner. "Over the past three years, all our managers have been beating their benchmarks, if they do so again this year, I will propose reducing the passive portion." The bond portfolio is split 50/50 domestic to overseas.
Performance comparison has never been satisfactorily tackled in Switzerland in his view, but he has been working with other larger funds to set up their own universe to compare results. This should come on stream this year. "We have also initiated a relationship with Micropal to compare our performance with funds here and abroad." But in comparisons with so-called second pillar funds operating under the same investment constraints and managed by Swiss financial institutions, Steiner says: "I believe we could rank in the first decile over the last three and five years in almost all the categories measured."
At last December's trustees meeting, it was decided to increase the strategic allocation for private equity from around 1-3% of the portfolio. Up to now this has been directed towards the US, but he hopes that there will also be opportunities in Switzerland, where venture capital is slowly becoming more organised. The bulk is likely to go to Europe and Asia, as well as the US. A new step will be an allocation to hedged funds, which could be up to 3% of assets. "We probably will have two different vehicles, one for macro managers and one for more specialist ones." Because of the expected low correlation factors, he hopes this exposure will help diversification and reduce risk on the downside.
The increasing overseas equity exposure has resulted in more attention to building currency overlay programmes. "We have been fully hedged on overseas bonds for a long time." The approach on the equity has been kept simple, with the aim of reducing volatility, and has been concentrated on the dollar, yen and sterling only.
Steiner handled tactical asset allocation until last year, when he passed responsibility to one of his colleagues. "Over the past 10 years, what TAA has added has been marginal. It is surprising but the trustees seem to believe more than we do that we can add value through TAA and they would probably be unhappy if we did not try to do something in this area."The strategic asset allocation is approved by the trustees, being put forward by a committee on which Steiner and two finance directors sit. "We are the three trustees most exposed to financial markets."
With the growing maturity of the two schemes, the regular flow of contributions is no longer sufficient to meet the benefits outflow, but the rents, dividends and interest income provide sufficent coverage.
Steiner has no qualms about the equity exposure, which is likely to go higher with the private equity and hedged fund investments. "With our consultant, we have determined very clearly that it is better to have a large equity proportion and even to sell equities if necessary, although with additional risk." He sees nothing surprising in this approach. "The cash flow we might need will never be that large for the coming years."
Outside Switzerland, where the group has 36 funds worldwide, the activi ty at the centre has so far been more on the benefit than the investment side, he says. "We have a preferred standard scheme, but it has to be tailored to local conditions." Around 85% of liabilities are designed around DB plans.
But with Sfr10bn in overseas pensions assets, Steiner is making efforts "to centralise part of the investment activities". He has prepared multinational guidelines, going into detail on: asset allocation, manager selection, setting benchmarks, defining mandates, operating TAA, how to use derivatives and global custody.There has been a positive response, particularly from the smaller schemes, and now Steiner hopes to get someone on board to travel around the world to provide expertise in these areas in person. "The funds would certainly welcome more help from us," he reckons. In addition, regular meetings for senior managers are held at the Vevey HQ in Switzerland. The Nestlé management is very much behind efforts to co-ordinate more on the pensions side, as they become increasingly aware of the potential financial gains.
The biggest initiative on the investment side has been that of international pooling. "This means managing together the part each pension fund is allowed to invest overseas - we are not interested in pooling domestic assets as these can be handled locally as well as anyone can." The programme started a number of months ago and now has around $400m under management.
A number of compartments have been opened, covering global equities, emerging markets, small US caps and so on, with each section run by a different manager. "More will be opened as needs become known," says Steiner. While participation is voluntary, schemes that are able to are encouraged to. "We give guidelines as to how much they should put internationally and so on." The economies of scale can mean lower charges even for the bigger funds, such as the UK. "For the smaller schemes, it means access to managers they could not get to otherwise."
At this initial stage a conservative structure was chosen. "We have left the assets physically separate, so the manager is running a number of portfolios in parallel, under the same guidelines," explains Steiner. The next step will be to have some type of pooled unitised vehicle, which may happen later this year or more probably next year.
"We are, of course, very interested in the pooled fund pension vehicle (PFPV). No one knows precisely how it will work, but we are quite willing to be a leader and test the real situation. The PFPV seems to fit exactly what we want to do!"Nestlé did look at common trust funds, but was concerned about the tax implications. "You could change the tax position for some schemes."
Steiner accepts that, however attractive the potential of these initiatives, it is down to the local trustees to accept them. "In the end, they have the final say and we respect that. We just try to strike a good deal for them, which also makes good sense to us, but if you cannot sell the idea - that's just too bad. We cannot force them." IPE"