If there are any doubts about the restructuring in progress within German industry, you need look no further than the sprawling Hoechst chemical group. In the last few years, its workforce has shrunk from around 180,000 to less than 100,000 currently.
The process has been swift and deep. And it is ongoing, as the number is set to shrink even further. In the end when the merger with Rhône-Poulenc is complete and the new Aventis takes flight, the total group could employ around 80,000 in life sciences, divided between the agricultural and pharmaceutical businesses.
Of the original mamouth Hoechst work force, about half were in Germany and half abroad and these were the responsibility of Walter Schuster and his small team in Frankfurt, who look after the international benefits side of the group.
Schuster, who has been in this role for about 15 years at Hoechst, clearly thrives on solving the challenges that came his department’s way. They can be divided into two main areas, firstly, co-ordinating and implementing the group’s approach to benefits across the world and, then more recently, the intense activity related to the group’s downsizing. Now, of course, there is the new dimension of what lies ahead with the advent of Aventis.
The first and original role of his department came directly from board policy. “It has been a longstanding policy since the mid-1970s that any change to a benefit plan internationally had to be approved by a board social committee in Germany,” says Schuster. Initially, this was limited to pensions, death and disability benefits. “Later, the scope was extended to medical benefits, as in some countries, such as the US, these are an important part of plans, often involving a lot of risk and long term obligations for the company.” This policy was inherited by all companies under the Hoechst umbrella, including HMR, AgrEvo, Celanese, Herberts among others, all of which have their individual approval procedures But all have one thing in common: the technical check about the requested change is channelled through Schuster’s department.
So whenever a plan change is being implemented, such as a variation in the benefit formula, in the financing or the carrier, it needs to be approved. “Our department works as a facilitator to help bring about what the local companies wants and what corporate can and will accept.”
When it comes to implementing strategy, Schuster readily acknowledges that the longer term benefits are where the real difficulties lie rather than with the shorter term. “For short term benefits, we try to use pooling instruments, but that is a relatively easy job compared to the longer term benefits.”
For Hoechst, the fundamental issue has been knowing what its position is in relation to the financing of the its liabilities, a question that has come to the fore again and again in the restructuring process.
The most obvious area where this comes up is in having defined benefit (DB)or defined contribution schemes (DC). The group approach is to follow local practice, but there is no doubt that it is highly conscious of the advantages of and has a preference for DC. As Schuster points out: “With a DC plan it is very much easier to budget and costs are set out, so everything is much more under control.” He contrasts this with DB, where governments can interfere with regulation changes, such as indexation of benefits, mandatory vesting and so on, which can add overnight additional, unforeseeable liabilities and costs.
He also expands on their experience that local employees often share the corporate’s preference for DC plans but local benefit departments - in particular those of larger group companies - do not. Referring to the group’s experience in South Africa and Australia, where despite the local benefit departments’ opposition to a DC plan, Hoechst insisted, due to the particular circumstances of these countries, on the introduction of DC , but that the employees be given the option to join it or not. “The majority chose DC, as it was easier to understand. So we changed over and the DB plan in the meantime has practically dried up, as we opened the window to allow changeovers a number of times and most took the option.”
Schuster stresses that this change is not something Hoechst imposes
normally. “In those two countries, we saw specific risks with DB plans on the accounting and regulatory side. We still run a number of DB plans, where this is the prevailing custom as in the UK and the US, where, in fact, we have both types of plan. But in these countries, it is very important for us to ensure that there are no costs deferred into the future.”
This cost factor is easier to be sure about now than in the past, particularly with IAS 19 and FAS87, but he thinks that much more needs to be discussed in the areas of valuation assumptions and method. “We find that in different countries, there is a very different understanding of what FAS87 means, for example, as to whether death benefits or disability benefits have to be valued or not, regarding the attribution of benefits of the valuation of insured pension plans.”
He pays a great deal of attention to this area, where he has built up some expertise: “On such issues, we get into discussions with the local scheme actuaries to try to ensure that we are using the same principles world-wide also for valuations. We also have close contact with our corporate accountancy department and with our auditors, and see how best to proceed. So whenever we go out to discuss a benefit plan, we also discuss accounting issues.” The aim is to obtain a greater degree of uniformity. “It is in the area of accounting valuation where we want to be sure, particularly in relation to DB valuations, that we are talking about the same thing in each country.”
As a case in point, he mentions the issues posed by the TFR plans in Italy. “Should these be treated as DB or DC plans? I have seen both methods in use in multinational companies. Most US groups appear to treat them as DB because they interpret them as cash balance plans, which they are used to. We have always regarded them as DC and treated them as such, which is both more prudent and easier, in our view.” This he reckons is typical of the issues that come up in many countries, which require that the nature and structure of the local plan is discussed and understood.
“There can even be situations, where the local company argues that we do not have a benefit plan, or nothing is written down, or that it is just some good practice, or that an arrangement can be stopped at anytime, but sometimes the situation is not as clear cut and easy as that. So we have real discussions as to what the liability of the company is.”
The drive to obtain some uniform approach to these areas has been a goal for Schuster over the years. “By 1994, we had made quite good progress,” he says. But since then the restructuring has put a brake on this work. But he is hopeful that with the arrival of Aventis this can be given a new impetus.
The reformation of Hoechst involved countless sales and spin-offs of subsidiaries across the globe - in some countries the group had 20 different companies operating. “In the last three or four years, we have been very much involved in the negotiations on transfers of benefits, splitting and winding up of benefit and pension funds, trying to purchase annuities and so on.” It has been a hectic period for Schuster and his team.
But it has also been a fruitful period in that the group learned a number of lessons that he reckons will stand it in good stead in the future. One
fundamental result was to re-examine a basic tenet of the group approach to benefits internationally. “In the
past, we usually tried hard to profit from the merits of scale and in many countries we had quite some success in this respect. So, in the UK, for example, we tried to merge all pension schemes of all our subsidiaries into one uniform pension fund.” But in the restructuring, we found that when it came to spilt the fund when different parts of the business were being sold was that “no one wanted the pensioners, everyone only wanted active employees”. The consequences were that in some cases annuities had to be bought from insurance companies- a costly option. “Fortunately, in most countries we had well funded pension schemes, so it was not a big financial issue.”
As he puts it, the winding up and splitting up of funds is highly awkward and in the future this is something the group might well want to avoid given the trend to shorter life cycles of companies and businesses. “So we will have to find a new balance in the future between the efficiencies from a merit of scale and the flexibility of independent pension funds and benefit arrangements. In a share deal for a company running a pension fund there is usually no discussion that all pensioners in that fund will also be transferred over.”
Another area that the scaling down changes highlighted was the issue of fringe benefits that on the face
of things looked to be of no real financial significance. Schuster instances long term service awards, or post retirement benefits - not in the US, where the implications were well known, but in countries like the UK, France or Belgium. “We were always aware of these areas and tried to tackle them in order to have these benefits valued properly. Our local people were never very keen to get involved in this and we often were stuck in discussions on how much effort should be put into valuing negligible benefits.”
But it was a different story when it came to selling these companies and having these liabilities valued, when it could turned out in some cases that by no means were they negligible. “While it was not a big problem, it was certainly a larger liability than we had thought it was.” He feels that he is a wiser man as a result: “In future, I will less easily accept the argument that ‘the liability is negligible, let’s forget about it’.” He acknowledges that it is always a question of having sufficient resources to get around to deal with these
Another lesson learned that tilts matters further in favour of DC plan, is that it would have been easier to manage the downsizing if more of the plans were on this basis, as this avoids the minefields of valuing unfunded liabilities.
One result of all this corporate activity is that the team is now very much up to speed on due diligence exercises, not only passively where they respond to the queries of other groups, but actively as well, looking into the plans of other groups. “What we found was that we were quite knowledgeable and on top of the process, and were able to answer most of the questions put to us.”
One other area where some tightening up might make sense in the future is the matter of documentation, where the group was not perfectly up -to- date regarding their plans. “This may need to be improved on at our end.” While the detailed understanding of the group plans is high at corporate level, it is often not documented in a sufficiently concise way. It appears to him that US companies are somewhat ahead in this area. “Maybe it is necessary to increase the capacity in the department to improve in this respect. Of course, there would be an enormous amount of work involved in trying to keep track of all benefit plan changes in the whole group.”
In the new Aventis, with just two or three subsidiaries in the different countries it may be easier to keep such a high level documentation, he believes. Schuster also hopes that as the new structure takes shape that it will be possible to fulfil his ambitions of putting in place a uniform approach to accounting and valuation group-wide.
But a lot else has to happen before such plans can become operational in Aventis. “There appears to be mutual understanding between RP and Hoechst about the need to co-ordinate international benefits,” he says. Where and how this will be done, is not yet clear. Strategy for the area is likely to be handled from Strasbourg where the headquarters of Aventis will be located, with Frankfurt as a possible base for the actual dealing with and co-ordination of the benefits internationally. But wherever this base is it will have close links to Strasbourg, where the guidelines on benefits philosophy will be explicitly stated, he says.