The pension assets of US multinational Hewlett Packard (HP) – some $5.9bn (e4.6bn) in total (ex-US) at the end of last year – are treated with special care. The backdrop, as can be found elsewhere, is a policy of taking greater control from the centre.
The ‘Golden Circle’, the inner body of HP’s most senior pension professionals are drawn from the larger plans that have a larger funding and potential profit and loss impact for the company, which are their primary focus. A representative of the finance department at corporate headquarters in the US sits with them on the board of the Golden Circle.
The larger plans are: the UK, Germany, Switzerland, the Netherlands, Japan and, the most recent addition, Ireland. The defined benefit (DB) plans of these countries account for around 5% of the total ex-US pension which resides across 15 countries.
These plans are larger in terms of their total obligations than the company’s US pension total. Last year the ex-US accumulated benefit obligation stood at $5.4bn, so from this perspective the fund was in surplus by around $500m at that time. The projected benefit obligation was $6.3bn.
The Golden Circle committee is a central component of what HP describes as its risk mitigation strategy. Its responsibilities include the identification of potential asset managers to be used in manging country plan assets as well as reviewing existing managers in the areas of investment performance and compliance with respect to the investment mandate employed in any given country.
“We review the management list quite often,” says Donald Jackson, director of global benefits at HP’s US headquarters. “We keep abreast as to how the managers are performing against their respective benchmarks and whether the actual portfolio construction matches the mandate; we remove asset managers and bring in new ones as necessary. We encourage the use of the same managers on a worldwide basis so as to benefit from volume discounts where possible.”
Jackson adds that “we are also responsible for financial risk management, and making sure that the funding is where it needs to be”.
Reporting obligations play a key role in the strategy. “Outside the US we are responsible for the supervision of all plans to ensure that they are accounted for in accordance with what is required under US GAAP accounting and disclosure rules,” notes Jackson, “that all expenses and contributions are recorded correctly, for example.”
For financial disclosure and reporting purposes HP divides its pension operations into US and non-US. “We find this a useful management structure,” says Jackson.
HP aims to extend the Golden Circle to the smaller plans. “We will put this in place in time but obviously we have to tackle the larger plans first because that is where the majority of the risk lies,” says Jackson.
Furthermore, the same rules regarding disclosure and financial management that apply in the markets covered by the Golden Circle also apply in the smaller countries; the governance policy from a local statutory perspective is in place. Jackson notes: “As far as financial risk management and disclosure/accounting is concerned we are in constant contact with the local country team – regarding the expense they are incurring and any cash they are putting into the plan.”
HP works very closely with each plan’s actuary. The local actuary conducts actuarial valuations for local standards and also meets the US GAAP disclosure process that head office is required to follow.
As part of this process each country is required to conduct an asset liability study every three to five years to determine whether its asset allocation policy conforms with the expected plan obligations.
HP has a unique target asset allocation for each country plan. This is agreed with the local board and is a function of the local statutory requirements and the asset liability studies that are conducted. “The asset mix will depend on the make-up of the plan population and whether it is open or closed,” says Jackson.
For example, the split in the Netherlands is 50% equities and 50% bonds; in the UK the split is 70% to 30%. “At any point in time there may be a small deviation but we will rebalance to get back to the target asset allocation for that country plan,” Jackson explains. “Given the demographics of some of the plans that are closed there is definitely a preference for a tilt towards a lower portion of equities,” he says.
Last year, the weighted average target asset allocation for plans outside the US was 65% equities and 35% in bonds.
Risk mitigation means that the company is moving from defined benefit to defined contribution where possible. “Today if we are going to offer a plan we will offer a DC plan,” says Jackson. “But some of these DB plans have been around for a number of years and in several of our countries the regulations make it very expensive to shut them down. In many cases the company has closed defined benefit plans to new employees; they will go into a DC structure.”
Some countries have both a DB and a DC scheme; in others it might be just DB or just DC. “It is a mix across the countries because of the regulatory environment,” says
Jackson.
For some multinationals one way to mitigate risk is asset pooling, but this is only a consideration for HP at present; it is examining the possibility with the help of some external parties. “We are looking at the pan-European pension scheme to see if we can take advantage of some of the pooling opportunities as well as economies of scale in our provision of benefits,” says Jackson.
He adds: “We are actively taking a look at which countries might be a good location for a single pan-European fund, moving forward from a centralisation standpoint. Ireland is a distinct possibility because of the tax advantages that it offers.”
The trend for HP’s global pensions programme is undoubtedly towards increased centralisation; control is key and conformity and uniformity are essential to this process. “We want to make sure that we are in compliance from an HP sponsor perspective everywhere and we are managing those plans with strong fiduciary controls in place,” says Jackson.
He adds: “Ultimately the obligation rests on HP corporate. So HP is on the hook to ensure that retirees’ pensions are going to be funded, and we have managed that risk. I think you will see more centralisation going forward in an effort to mitigate the risk. Any volatility in the earnings as a result of pension activity is really what we are trying to manage.”
HP is very centralised in terms of the funding of its plans worldwide and is, as Jackson notes, “very involved when a plan needs certain amount of cash to meet local statutory funding requirements.”
For HP all roads lead ultimately to Palo Alto California. But as the company aims to shift risk to its employees where it can, maybe the gold is starting to wear off in places.

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