Endesa prepares for merger challenges

Spanish electricity group Endesa is facing big challenges. The consolidation process that the group started in 1997 through several acquisitions of other companies within the sector has now reached its highest peak, with the announcement of a friendly merger with Iberdrola, which will result in one of the world’s largest electric utilities by company value , operating cash flow, installed capacity and number of customers.
The merger will lead to an ambitious market project of international expansion and diversification as well as making competition more dynamic in the Spanish market.
Prior to the merger, Endesa represented around 45% of the Spanish electricity sector, with also significant presence in the telecommunication sectors.
During the last couple of years, Endesa has expanded its international operations , especially in the Latin American continent where it now has around 10% of market share in the electricity industry. Through the acquisition of Enersis, a Chilean electricity holding, the Spanish group consolidated it s position in countries such Chile, Argentina, Peru and Colombia among others.
At present Endesa group employs more than 30,000 people , around 18,000 in Spain and 14,000 in Latin America. “During the last few years there has been a reduction of our Spanish workforce,” says José Aubareda, pensions manager at Endesa in Madrid. In 1996 the company employed more than 24,000 people in Spain. “One of reason behind this is the need for keeping costs down at moment of increased competition,” he says.
Endesa has had presence in Europe for several years and it’s now trying to enter this market more aggressively . “This is one of the areas we are
systematically working on,” says Aubareda.
“Our group is the result of different companies working together and in terms of pensions and employee benefits our approach follows this philosophy,” says Aubareda.
“Each company within the group had its own complementary pension system, and we are doing our best to find the best solution to co-ordinate this situation.”
“At the moment , employees moving from one company to another within our group will always remain covered under the origin company plan,” he says. “We are facing within the same country the same problems that many multinationals have to deal with regarding employees moving from one country to another but we think the way we are doing now is the best way to do things at present, especially taking into account the merger took place not so long ago.”
Basically, what the group has doing so far is to respect the old systems that operated in the companies they have acquired , trying to work out how to improve efficiency. “The electricity sector in Spain has very particular characteristics , because unlike in many other industries in the country, employees in the sector have always had a complementary pension scheme. “It’s always been part of this sector’s culture,” Aubareda says. “What we are now doing is to try to update this old defined benefit systems to today’s circumstances, because they were very expensive and above all very risky for the company.”
Aubared a adds: “We are respecting the differences among the various plans and implementing new systems for new staff, but we are not mixing them because at this stage that would be very complicated.”
A new law published last year requires Spanish companies to externalise their pension reserves by establishing a pension fund or an insurance contract by the end of this month, and Endesa is in the process of doing so. “During the last few years we have been trying to limit risks and prepare ourselves for the externalisation ,” says Aubareda. Endesa is now planing to externalise Ptas 400bn (e2.4bn) representing the pension reserves of most passive member an pre-retirees of the group, around 25,000 people. The externalisation will be done by setting up insurance contracts and it is expected to be split into at less 10 insurance providers.
“This is only one of the externalisation process we are involved in,” says Aubareda. “The whole process is complicated and we have had difficulties that we’ve been facing through negotiations. However, it’s true that this month’s deadline have accelerated the process.”
Another important externalisation process that the company is dealing with at the moment is the transformation of the firm’s old mutual into a pension fund which will be completed in the next weeks. This mutual has assets for Ptas80bn and during the transformation the company will contribute for the remaining expected working life of present employees with around Ptas100bn.
“For the active members and new staff we are setting up new plans under Spanish law following defined contribution models,” Aubareda says. “Because our employees belong to different collectives they are covered under separate systems. We know that in the near future we will have to co-ordinate this more.”
Regarding their approach to pensions and other kind of benefits for those employees working for Endesa’s subsidiaries in other countries, the group does not have an overall strategy in place. “You have to take into account that our most important international operations are in Latin America and pension systems in that region have nothing to do with the arrangement s we have over here, because they are not because they are primarily not supplementary systems but a substitution of the old public systems, so the margin to intervene there is very narrow,” he says. “Thinking of the next few years we might be doing a closer follow up of the work that fund managers are doing there but in terms of administration each plan will probably remain linked to national circumstances. However, our presence in these markets is very recent and in the future we will try to harmonise this more.”
In terms of mobile employees, staff going to work abroad will remain in their origin plan since in most of the cases this relocations are temporary. In some cases individualised solutions can be applied.
In terms of investment , for the Spanish pension plans within the Endesa group, the number of assets under management is still very small but will increase in the next few months once the externalisation process is completed . “Regarding asset allocation the portfolios have been quite conservative with a very high exposure to fixed income assets,” Aubareda says. “But following the trend within the market our exposure to equities, especially to Euro stocks, has increased considerably and we are going in the direction of investing not less 50% of the total assets this way,” he says.
The way the group has been operating so far in terms of pension plans might help during the merging process with Iberdrola, an plans to co-ordinated this more are not yet being set up. Although is still early days for discussing how the new merged group ‘s policy towards pensions and employee compensation will be, employees of both companies will be offered the possibility of professional development on the grounds of integration and equal opportunities . The fact that international expansion is among the first priorities of the newly formed group the years to come will bring more pressure on the need for co-ordinating employee arrangements more in order to achieve a greater harmonisation within the group’s subsidiaries across the world.

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