Going for a mixed plan
Benjamin Attar, pension fund director for pharmaceutical and chemical group Rhodia in São Paolo, explains the upheaval within the scheme following its spin-off two years ago from French multinational Rhône-Poulenc.
“The merger of Rhône-Poulenc and Germany’s Hoechst on the life sciences side, sidelined the chemical side of Rhône-Poulenc’s business and so they kept only 25% of Rhodia shares. We used to have everything together in terms of pensions for the companies – there were no segregations between liabilities and assets because we had transfers around the group. By September 1999 the solidarity aspect was cut between the Rhône-Poulenc and Rhodia funds because each had different businesses and different cultures to look after.”
However, the Rhône-Poulenc side of the business stayed within the fund – known as the IRSS (Instituto Rhodia de Seguridade Social), he says. “We made the different calculations concerning contributions and investments and continued to manage both funds. A decision was then taken to transfer Rhône-Poulenc employees to the separate DC plan of Hoechst in Brazil.”
Such changes also coincided with a culture shift in IRSS’ thinking on pensions, says Attar. “In the beginning, the plan was defined benefit (DB) providing 60% of average salary.”
By 1997 Attar says IRSS was discussing future plans for the Rhodia group at the time that several Brazilian companies were going the DC route to reduce risk. “At this point we decided it was best to make the plan mixed,” he says.
From the 60% cover, 36% or 1.2% per annum remained in a DB arrangement paid in solely by the company, with a voluntary DC top-up plan for employees matched on a one-to-one basis by the company.
In the same year, a nylon and polyester company, Feri, jointly owned by Rhodia and Hoechst, split its ties – simultaneously forming its own DC fund – ‘Ferplan’.
In a further twist Feri was bought by Hoechst, meaning that Rhodia now managed two plans – a mixed one in the IRSS institution and the DC plan of Feri.
To complicate things further, Hoechst then left the joint venture and sold its polyester interests, which were bought by Rhodia and called Rhodia Polemy. Attar says this led to a review of the entire situation, including an in-depth ALM study.
“What we came up with is a plan for the Rhodia group which involves the joining of IRSS and Ferplan and consists of two tiers. The first part is paid by Rhodia on a cash balance basis. The company puts a credit on an employee’s account according to salary and age and guarantees a minimum return of 3% above inflation and maximum return of 6%. If the return is more than 6% it belongs to the fund.”
Attar believes the cash balance plan offers capitalisation with lower risks for the company but better overall visibility for members.
For employees seeking a supplementary DC arrangement, Attar says IRSS is looking to be flexible with investment choices and benefit payments such as annuities.
The plan will be implemented by the year end, provisionally launching with three investment choices – conservative, moderate and aggressive – after which the fund will select the appropriate managers to invest the assets.
Investment management is outsourced to four banks, two local – Itau and Unibanco – and two non-domestic players, Citibank and France’s CCF, which will manage assets through mutual funds.
“We give them an amount and make an asset allocation to meet the liabilities – then we say you may put this money into the stock exchange up to a maximum of 30% but then you can choose as you like. There are no exact mandates or benchmarks because you can’t be too relative in this market.”
The fund is also on the cusp of choosing an independent custodian.
Attar says the company is now in the transition period and examining carefully issues such as risk, but he notes that this work concerns the R$300m (e190m) fund’s 4,500 active members, not counting the 1,300 retirees and 300 vested people belonging to various forms of the old plans.