Getting the balance right
The recent announcement by Belgian telecommunications group Belgacom that it had formed a new Treasury Council to be chaired by Phillip Neyt, director general of the pension fund, serves to highlight just how important the relationship between corporation and occupational pension fund has become. Belgacom’s hybrid first/second pillar e2.5bn scheme is the country’s largest pension fund.
Reasons for the dovetailing of the two are manifold. Firstly, the sheer size of many pension funds today, with some several times larger than the capital of their sponsors makes them a crucial component of the financial operating structure of the business.
This theme was picked up by Mark Capletone, director at Barclays Capital, the investment banking division of Barclays, at the recent presentation of the group’s annual equity/gilt study.
Capletone pointed out that one problem for companies with defined benefit (DB) pension plans was the “operational leverage” that such funds impose on their sponsors.
He noted that in the UK, British Airways’ pension plan assets, for example, were three times larger than the company capital, adding that “privatisation” of public expenditure on pensions, just in the UK, had created a “fiendishly complex subject”.
Such funds, should they remain DB, are only likely to grow as governments continue to seek occupational or individual pension coverage to fill public sector expenditure holes.
The “operational leverage” on the sponsor, created by a DB scheme with its large liabilities and uncertain returns, is one reason why Capletone notes that he prefers the defined contribution (DC) approach to pension funding.
Neyt at Belgacom is already working within the reality of a company with a large DB plan that includes both statutory first pillar pensions and the complementary pension scheme.
But he notes that the rationale behind seeking to harmonise the relationship between the company and its pension funds through the new treasury council is not just to ensure good governance and risk management but also to exploit any potential business upside.
The new council will meet weekly to discuss strategy, new products and financial vehicles, not only for Belgacom, but for the group as a whole – which includes Belgian mobile phone arm Proximus and the group’s Dutch subsidiaries.
Members of the council will include Belgacom’s CFO, the general manager of M&A, global business development managers and the company treasury executive.
Neyt explains how Belgacom is expecting to benefit from this crow’s nest view over company, pension plan and the financial terrain ahead. “What we do already at the company/pension fund level is treasury cash pooling, but what we will now be discussing are the bigger issues, while also looking at the relationships we have with our banks and reviewing these. It should create opportunities and we will become more closely linked to the company than we already are. On the financial side we simply will have a more global view.”
Neyt notes that, while the fund remains legally separate from the company, economically he has always felt a certain integration, commenting plainly: “The more return we have the less money the company has to put in. For this reason we are quite close and have done a lot of ALM studies together.”
The treasury council, he says, will have a specialist who will translate the risk elements of the pension fund into the corporate equation, such as whether any shortfalls affect the company’s profit and loss account.
“We have index-linked liabilities and when we do an ALM he will look at what the impact of inflation will be on the liabilities and how the company revenue will react to inflation.”
One thing Neyt says he hopes to avoid is the situation he has noticed in large DB plans in the Netherlands – overfunding. “I see a lot of pension funds who behave very independently from the company – you see it in the Netherlands, and there are some funds in Holland which are around 200% funded. It can’t be the objective of a company to put too much money in the pension fund either.”
The overfunding issue at Belgacom has been made more acute by a programme of accelerated funding the group has initiated in its main fund - with the objective of closing a financing gap, which currently stands at 75–80% of its PBO (projected benefit obligations).
Says Neyt: “What’s really an issue for us is to see with the government about overfunding, because we don’t want to be in a situation where the overfunding cannot be used.
“This is a defined benefit plan, it overfunding is not in the interests of employees and the shareholders are not very happy about putting more money in than is needed.”
One issue here, he says, is that the Belgian legislator does not recognise the notion of PBO. “As we are funding the assets on a going forward basis – the minimum legal liability level we have to have in Belgium is only Bfr80bn (e2bn) and we have Bfr140m for the moment. So you could say we are very overfunded against Belgian legislation, but not on an economical growth concept basis.
“We are transparent in terms of IAS/FAS and on the books of Belgacom. When we have 100% PBO the problem is fixed and for the volatility of the assets and liabilities we should build a form of corridor to reflect international accounting standards.”
Such a global overview, he adds, will also aid the implementation of pension arrangements for the group’s mobile workers and the harmonisation of benefits policies at a group level.
“That is nearly a reality. When I joined Belgacom five years ago I saw that some subsidiaries had their different histories and insurance contracts etc. What we are trying to do now is to pool the assets and harmonise the benefits because Belgacom has the bargaining power with insurance companies to negotiate better on a group level than through each affiliate separately.
“Once we have defined and co-ordinated the benefits in turn with the human resources department and raised competitivity, then we will optimise the financing of the benefits.”
Neyt says the council’s main aim will be to discuss both the potential downside and the upsides of the company/pension fund relationship: “We try to manage the pension fund as a profit centre, but we don’t want the prime objective of the company to be putting money into the pension fund.”
“What we will do is integrate all the financial risks. We will not consider the day-to-day management of the treasury, but we will be more of a sounding board for discussing large strategic items – such as the effect of mergers and acquisitions.
“It is no longer just the pension fund, but the company also.”