At least three issues are raising the stakes for better management of retirement plans across borders: plans are more likely to be in deficit, accounting standards are driving increased transparency and there is a greater focus on corporate governance worldwide. But success is elusive for many. Most multinationals encounter significant implementation barriers, such as varying legal frameworks, cultures, and fiduciary structures. Such impediments often mean that implementing a global retirement plan management framework does not progress beyond the first steps of data gathering and maintaining the status quo.
Regardless of whether fiscal or fiduciary issues are driving a company toward increased co-ordination across borders, most organisations would benefit from establishing a global retirement plan management strategy. As a starting point, strategies that build from a clearly articulated cross-border framework and those which focus on consistency in implementation allow a multinational to establish an effective governance and risk framework.
To prevent missed financial opportunities, unnecessary costs and unpleasant surprises, a retirement plan management framework should encompass four key areas: accounting, funding, investments, and benefit design. These areas should integrate with a fifth, governance. Policies in each of these five areas should be designed to link business objectives with return on investment (figure 1).
Survey data and experience have shown that a successful cross-border framework requires the following three conditions:
q Support from senior management;
q A co-operative corporate culture;
q Alignment with existing operations and protocols.
Global corporate staff with delegated responsibilities for establishing cross-border frameworks cannot control the first two requirements; however, they can affect them. Assessing the circumstances of existing plans, risk profiles, and costs can help build a business case to influence senior management and engender a more supportive cross-border environment. Such a value proposition should demonstrate:
q How employee benefit management can be used to balance shareholder and employee interests;
q An ability to control the financial impact of benefits;
q Risk reductions through global measurement and management tools;
q Methods for leveraging global buying power and reducing local plan and company costs;
q How returns and benefits will accrue to local companies and plans, as well as to the global corporation;
q Processes for effective monitoring and reporting.
Despite potential barriers, our firm’s multinational surveys have shown a consistent and strengthening trend toward using an integrated global plan management framework. This shift is evidenced in the number of firms implementing some form of global guidance across the key retirement plan management areas. For example, in the 2002 survey, 76% of respondents had no funding policies in place. In contrast, 88% of the 2004 respondents had implemented some form of global guidance regarding funding. The number of multinationals dedicating staff resources to implementing a global framework follows a similar trend (see figure 2)
The extent to which global corporations are directly involved in local plan decisions has also increased. 54% of respondents in the 2004 survey have formal interaction with local trustee boards. In 2002 and 2000, just 23% and 27% respectively had formal representation to and working relationships with local trustees. Similarly, there has been an increase in global corporate involvement in investment-related decisions and the use of preferred investment manager and investment consultant providers. The use of global investment policies and cross-border investment strategy setting tools, such as asset-liability models, has also expanded.
Getting started is generally the most difficult phase of cross-border plan management. Once credibility, protocols and communication networks are established, many multinationals find that, although there may be conflicts in opinions or differing regulations, implementation barriers are removed and value can be realised.
Typically, a company starts by identifying key goals for the first two to three years such a review might include analysis of benefit structures, assets, liabilities and funded status on an aggregate basis to identify existing and potential risks. Once a baseline has been constructed, the multinational can prioritise its key objectives for creating a cross-border management framework.
To move from planning to action, the next steps involve establishing communications among local plans, trustees and company representatives alike. How these communications are structured will depend on how the organisation conducts normal business operations and what its objectives for cross-border management are. Generally the foundation for communication is set during the data gathering stage.
Alignment with normal business is vital. If a multinational centralises everything it does, from purchasing to invoicing, their corporate culture is likely to support centralising retirement plan management communications and implementation. If a multinational uses pan-regional organisational structures, then retirement plan management should follow suit. While there may be exceptions, generally companies building on existing communication networks and reporting lines have greater success.
The phase after establishing communications and developing an understanding among interested parties entails formalising thoughts and guidance. Most multinationals benefit from an analysis of global strategic goals and practical objectives, compared with what is feasible, reasonable and desirable in the local market. Whatever guidance emerges from this analysis should again be aligned with what is normal practice within the organisation. So, if corporate guidance and policies applied to daily business are prescribed in detail, it is likely specific investment and funding policies would be accepted locally. If global corporate generally conveys strategy and goals in general principles and leaves implementation to local operating subsidiaries, then such policies and principles should follow the same broad form in the retirement arena.
Many organisations find global committees useful in bringing together different views and opinions concerning the various disciplines affecting retirement benefits. For example, a committee could include representatives from global human resources, global treasury/finance, general counsel, trustees from significant plans and representatives from global and local corporate staff. Survey results and experience demonstrate that the use of global committees to set policy or establish broad guidance has increased among multinational organisations during the past few years.
Many firms find that benchmarking is a helpful tool when assessing global position against business performance measures, typically those affected by pensions’ costs, such as earnings, cash flow or balance sheet. For example, we compile annual information on pension risk metrics in a database, to be used as part of the benchmarking and diagnostic process. For the UK, data is compiled from the FTSE 100 constituent companies and for the US, the benchmarking database contains pension and other corporate financial information for the S&P 500 companies. Experience has shown that companies using financial diagnostics to understand the impact of polices, in advance of adoption, are more successful at ensuring retirement plans are consistent with corporate cost and risk objectives.
Depending on how far an organisation wants to move toward global plan management, there are a range of tools or arrangements available to facilitate this process. Global asset liability modelling, risk budgeting, management information and reporting tools, preferred provider networks, and cross-border asset pooling all fall into this category. The appropriateness and application of each should be aligned with both the global strategic plan management objectives and corporate culture.
Global retirement plan management has become increasingly important to multinational organisations despite significant potential impediments. The most successful have senior management support, cooperative corporate cultures and align their plan management framework with existing operations and cross-border communications.
A clear global strategy for establishing a global management programme, which identifies key goals and ensures equitable implementation across borders, is a requisite first step to developing a global framework. There are many tools and services available in the market to help companies to establish and maintain global programmes. How far companies proceed toward centralising global plan management depends significantly on their objectives, as well as how the company runs its businesses on a day-to-day basis.
Stacy Scapino, European partner at Mercer Investment Consulting