German companies may be handicapped in labour competitiveness because of pensions costs, according to figures from international consultants.

Watson Wyatt Investment Consulting has produced a country-by-country comparison of the average return companies obtain from pension investments (see figure 1), which gives German companies and German-based subsidiaries the most to worry about.

Mark Scott, senior investment consultant at Wyatt’s head office in the UK, ex-plains: Because Germany has so small an exposure to equities, we calculate that it is going to cost German companies £62 of contributions to pay somebody £100 of pension benefit when they retire. That means they will only get £38 of return.”

“This has significant implications for global competitiveness, wages and prices in the company. Germany is, in pensions terms, a very expensive place to do business. In Hong Kong where managers are aggressive with their asset mix - almost 80% is invested in stocks - it costs £20 less per employee to fund £100 of benefit.”

The result, Scott adds, is a better cost per employee, thus making companies more competitive. By comparison, the average German pension fund has 8% exposure to equities (see figure 2).

Scott points outs that while there have been several high-profile cases of company pensions schemes in Europe changing their asset mix, many funds have yet to em-brace change. However, they may be encouraged by changes to European investment regulations and in Germany’s case, the increasing size and importance of the German stock market.

Watson Wyatt also makes an international comparison of investment management fee levels as a percentage of assets (see figure 3). Here Hong Kong is the most expensive, while Japan, as Scott ex-plains, provides the best value. “In Japan, they pay their managers very little, but the managers are also the brokers so they make some money that way.”

However, he admits that it is not a perfect graph because of hidden or “dirty” fees. “Dirty fees have become more explicit because clients are demanding more information. Clients want separate figures for custody, for brokerage and for money management.”

In the five years that Watson Wyatt has been collating the fee data, levels have remained relatively stable and, unlike changes in equity exposure, Scott sees little pressure for international convergence.

The tables are part of ongoing research by the consultant of the broader aspects of global benchmarking for the last five years. “Many firms are trying to either regionalise or centralise the oversight of their pension investment programmes. They are not only examining best practices within a country but global best practice.”

Scott adds that where the clients are the pension executive in the international headquarters, they usually have an additional global role to their responsibilities. So they want to measure performance compared to local peers and to global best practice, as part of a global strategy.

To this end, Watson Wyatt provides benchmarking for many aspects of investment activity beyond the obvious performance criteria. While not producing rankings in areas that are difficult to de-fine quantitatively, Wyatt’s research does allow a company to make a qualitative assessment of how it differs from normal practice and whether this is to its benefit or detriment.

“Different countries are at different stages of their investment life cycle, which affects whether they use insurance companies, banks or stockbrokers, pooled funds or segregated portfolios,” he says.

Watson Wyatt has also collated information on the different systems of custody provision, the merits of different monitoring arrangements, investment philosophies and the extent to which it should concern a company pension manager, fee levels and asset allocation.

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