How BASF has it taped
Let us rewind to the year 1888. In that year BASF was one of the first companies in Germany to set up a Pensionskasse.
Fast-forward to the present: Today it caters for BASF’s German employees with a funding of around E4.5bn, and forms part of a network of schemes with a total funding of E9.6bn to provide pensions for the company’s 82,000 employees worldwide.
Each local country operation is responsible for the implementation of its own pension arrangements. All the administration takes place locally. “The design of the plan is based on the local conditions and takes into account local regulation and the packages offered by other companies,” says Gerhard Klugger, vice president of compensation and benefits at BASF’s head office in Ludwigshafen. “In this respect we are different from American companies which take the view that as their US model works in the US it must therefore be suitable for each local market as well.”
But BASF head office has set out pension principles for the steering of local operations’ pension schemes. For many years the introduction, design and further development of the company pension plans has been co-ordinated from head office with the support of a small group of in-house specialists.
Klugger explains that there is a tendency towards centralisation of the international benefits programme “in those areas where centralisation is possible”. The pension principles are central to this strategy.
He adds: “All local plans have been designed based on these principles; when they change something they must consult with us so to ensure that the principles are being adhered to. There is so much money at stake and risk that we have to have a degree of centralised steering.”
The principles state, among other things, that within the framework set by the global pension principles the design of the pension plans must conform with the objectives of the local company – business, financial and personnel.
The design must also take into account the level of risk that is acceptable to the company. “For this reason defined contribution (DC) plans are preferred over defined benefit (DB) plans plans, and final pay promises must be avoided,” notes Klugger. “We want to reduce the risks associated with running a pension scheme. Of course this means that the employee must assume some risk. Demographics are other risks that we have to think about when we talk about reducing risk.”
Indeed the 10 principles were updated at the end of last year precisely to make explicit this central company objective of risk reduction.
In some countries the company is closing the DB plan to new members and offering DC to new members. “But then we still have the problem of managing both schemes,” says Klugger. “In some countries we offered the option to continue the DB scheme or to join a DC scheme; in certain cases more than 50% of employees have decided in favour of DC. There are some countries such as Belgium where the legal position makes it difficult to change from DB to DC.”
The local companies are also responsible for the choice of asset managers. “Although we do not stipulate which asset manager a local office should use, we do exchange experience and give support and guidance regarding the asset managers selection,” says Klugger
Strategic asset allocation is subject to some central control. While the detailed investment strategy is formulated by the finance department of each local operation, head office stipulates that asset allocation must be based on an ALM study and controls allocation to asset classes and selection of management styles. The study must be carried out every three to five years.
Each subsidiary must report the status twice a year and performance results on a quarterly basis. “We need to know the funding status of each local plan,” Klugger adds.
Tax and overall cost efficiency are also key to the company’s strategy.
Other guidelines include the level of benefits offered by the fund. “Of course we want to be an attractive employer in terms of the total compensation package offered,” says Klugger. “And in so doing we must comply with all local regulations.”
BASF contributes to most local schemes. Head office provides support for its local country operations; the level of support depending on the resources available in each case at local level. Klugger notes: “We do not need to provide so much support for our operations in the US for example, because the size of the operation means that they have a full range of know-how locally. But we would provide more support to a smaller company that does not have the resources. We would help with the introduction of a scheme because the local staff would not have the necessary expertise. There are examples of this kind of relationship in our operations in South America or in Asia.”
Klugger describes the specialist pensions group at headquarters as an internal consultant. “We support the local operations with our expertise in pensions and in so doing we also ensure some form of central control.”
The company also uses external consultants often on a local basis.
Asset pooling, a tool used by other companies to leverage greater bargaining power with asset managers is not under consideration at BASF at present. “But we do not rule it out,” says Klugger. “When EU guidelines regarding the setting up of a single fund are further developed I would view the matter differently. Currently we have a pension fund in Germany with a funding level of E4.5bn so we have the necessary volume and size in this scheme; we wouldn’t be able to get much more in terms of savings on our investments through pooling. As we work in many cases with the same managers across the different countries the total business is taken into account when negotiating terms, regardless of whether that is all in one plan or in several. So we can also get economies of scale that way.”
The creation of a single plan to cater for several countries is still some way off. “As long as I have different social insurance and tax systems in each country in Europe and different gaps in the system of state provision I can’t create a central plan,” explains Klugger. I have to produce a different solution for each country. Some plans – Germany, Austria and Japan also use book reserves; elsewhere there are other means of financing the pension plan. These are factors which we have to take into consideration when we think about centralising pension arrangements. If these various systems become more harmonised we will think about centralisation of our plans too, of course.”
Europe, that champion of integration, is a case in point. “We monitor the development of the EU pension directives but currently the basis created by the EU for a Europe-wide pension plan is not yet sufficiently developed,” says Klugger. “But I believe this will change soon.”
The lack of tax harmonisation necessary for such a plan is his main concern. It is also necessary to clarify other legal requirements.
The pension liabilities of the BASF group including the German pension fund total E9.8bn, of which E6.2bn is funded and E3.6bn is accounted for by book reserves. “The British and Americans are not used to book reserves but we do it this way,” says Klugger. “The proportion that is externally financed is relatively high by German standards. Many other German companies have a higher proportion in book reserves. We have had a Pensionskasse since 1888 and so have used an external funding. We are happy that we can finance both internally and externally because this construction makes us more flexible. Many other German companies only use book reserves.”
There have been no big changes in asset allocation recently, although the allocation to equities is higher than is the case with most Pensionskasse. This is partly due to the fact that BASF operates a different form of Pensionskasse to that more commonly found in Germany, and this dates back to the end of the second world war. Last year the company introduced a new tariff within the existing Pensionskasse which offers the benefit that an insurance company would provide. Klugger explains that “this has been introduced also due to demographic changes”.