Multinational companies are increasingly instituting centralised governance practices in their global pension management practices, as well as seeking to exert influence on the asset allocation decisions of their various pension funds world-wide, according to the findings of a new survey by consultant Watson Wyatt.
The survey, which Watson claims to be one of the most authoritative and comprehensive surveys of multinational pension activities ever, was conducted in the spring of this year.
The consultant looked at the practices of 42 multinational companies in 12 countries with responsibility for 1,877 international pension plans. The combined assets of the funds were some $488bn (e498bn) at the end of 2001.
Of the findings thrown up by the survey, Watsons highlights three.
The first, the burgeoning introduction of global governance, says the consultant, has really taken off over the past five years. Nonetheless, the trend is skewed slightly towards US multinationals, with the majority of multinationals that have not taken such steps based outside of North America.
Centralisation of governance, however, is not proving to be a particularly easy path for multinationals. Less than 15% of the respondents said they believed their plans were truly centralised, while 30% still describe their governance arrangements as decentralised – suggesting some way to go before multinationals have governance under HQ control.
The most common forms of governance approaches for multinational funds are revealed in the survey as HQ representation on local boards, central monitoring and the use of a common external advisor. Inversely, integrated decision-making, joint working parties and global risk management proved to be relatively uncommon among those surveyed. Significantly, use of collective education and IT for global governance was shown to be negligible amongst the group’s surveyed.
The consultant’s second major conclusion from the survey is that current practice in global pensions management by transnational groups can best be described as a mix of ‘monitor and influence’.
When asked how much representation there was from HQ on local pension fund boards, more than 30% of respondents to the survey replied that they had minimal local involvement from HQ, while only 15% said they had ‘significant’ HQ representation on the ground.
Where participation of HQ does rise is in the selection of local fiduciaries. Over 25% of firms said their headquarter operations were directly involved in the selection of decision-makers for local schemes.
Interestingly, the desire of North American companies to garner influence or gain central representation on local boards appears to be higher than that of multinationals elsewhere. Over 40% of the non-North American respondents have no influence over the selection of local fiduciaries at all.
This difference continues in respect of the frequency of meetings with local plans. Nearly 40% of North American headquartered multinationals conduct quarterly meetings with local plans, against approximately 15% of firms elsewhere.
Watson concludes that the thrust towards governance centralisation is undoubtedly being driven from North America, noting that the majority of plans are at least making progress towards centralisation while multinationals from other countries are still largely decentralised.
The third major conclusion of the survey concerns the influence of multinationals on the asset allocation decision of local plans. On the whole, the survey finds, multinationals do exert significant influence on the investment decisions of subsidiaries – often adopting policies that are notably different from domestic market norms.
Nevertheless, regarding direct asset allocation, around two-thirds of multinationals say they give little or no actual policy guidance to local plans. Again, however, North American plans emerge as prone to giving a guiding investment hand to their offshoots.
In terms of differentiation from domestic market investment norms though, the survey finds clear water between multinational and purely domestic pension schemes.
In particular, the average equity allocation for multinationals was markedly higher than the local market norm in Europe and Canada.
Drilling more deeply, Watson Wyatt finds that this effect is being driven mainly by US and UK-based multinationals, which have notably higher equity allocations in these markets. In contrast, the survey shows that Europe-based multinationals did not tend to have higher equity allocations in their headquarter plans.
While on a general level the survey reveals that this shift in equity allocations from the local norm to that of the parent company is certainly increasing, Watsons points out that there remain major variations between different companies. One reason equity investment may continue to diverge, says the consultant, is a desire to retain investment allocation in tandem with the specific liability profiles of any local plan.
In conclusion, the consultant points out that multinationals have had significant influence on equity allocations for subsidiary plans in terms of both a general upwards bias (for US and UK-based multinationals), and in terms of variation between individual plans (for all multinationals).
Noting that past experience shows local norms as the dominant driver of equity allocations, Watsons adds that the findings of the survey represent what it terms ‘welcome evidence’ of asset allocation being established on a company by company basis.
On the question of internal versus external management, the report finds that the latter is still in the majority, although once again practice seems to differ widely. While well over 70% of assets of UK and North American multinationals were externally managed, only 30% of assets of continental European multinationals were outsourced.
The survey notes that the proportion of externally managed funds for the Anglo-American markets is slightly lower than the market norm, surmising that larger multinationals may have the necessary resources to undertake internal asset management.
The use of passive management has grown rapidly in popularity among pension funds worldwide, and the report finds that this is no less the case with multinationals.
The surveyed funds utilised indexation to a high degree, with nearly a third of the sample having over 25% of assets managed this way. On the other hand though, around a third stated that they did not use passive at all.
Multinationals do still employ a proliferation of active managers; approximately 70% of respondents have more than 10 managing their assets, while 35% use more than 20.
Internally managed assets represent around 30% of the total.
In assessing as far as possible the average size of a multinational pension fund, Watson Wyatt found that average global assets per multinational amounted to $11.6bn per fund, albeit with significant dispersion in size. The smallest pension in the survey held just $600m in assets while the largest weighed in at $85bn.
Typically, the home pension plan(s) is by far the most important in size, representing 58% of global assets on average.
In terms of types of benefit, the pension plans assets of the companies surveyed come out at 71% defined benefit, 13% defined contribution and 16% hybrid plans.
On a slightly worrying note, the survey reports that 39% of large plans may be under solvency pressure with funding ratios below 100%.