Keeping tabs on 100 schemes
With more than 60,000 employees worldwide, the basic retirement benefit guideline at British American Tobacco (BAT) is that each scheme should be competitive in relation to local market practice.
“Our employees are literally scattered around the globe, with no real concentration in any one country. Trying to coordinate our retirement provision centrally would be very difficult to say the least. We have over 100 schemes throughout the world and these take many different forms,” says Jim Stephens, international pensions manager at BAT in London.
BAT has over 40 pension plans in Africa, all across the Indian sub-continent, Australia, Europe and North and South America. These vary from basic defined benefit (DB) and defined contribution (DC) to book reserve systems, provident funds and gratuity schemes.
Few companies have the international presence BAT does. “For many, international means across in the US or other developed countries. We are truly international,” says Stephens.
Everything is controlled more or less at local level and provision generally includes healthcare and disability benefits as well as retirement income. “We get involved providing guidelines, but the schemes are basically designed locally, using local managers and consultants, since these know their markets better,” says Stephens. Where regional audit committees do get involved, however, is to check that any new scheme is competitive in its market and that existing arrangements meet certain levels of control. Though the basic strategy is end-market driven, BAT does occasionally carry out control checks to make sure schemes are not out of line. “For instance, if the local market contribution rate is 3% but a scheme wants to set its contribution rate at 15%, we want to know why”. Retirement benefits at BAT are part of total compensation package. They are handled at local level by human resources. “We don’t tend to have pensions managers or committees as retirement benefits are part of a total salary package, just like bonuses or share schemes,” says Stephens.
The variety and divergence among the schemes and markets they operate in means BAT sometimes has to be imaginative when formulating new plans. Stephens says many of the markets they are present in don’t have adequate liquidity from an investment perspective, so self-investment becomes a possibility, as does offshore investments. Investing in government debt is also common. “The only trouble with offshore investments, however, is that many countries won’t allow them due to foreign exchange restrictions, so we obviously only consider them where they are legal and also acceptable to the local authorities. Anyway, having to be imaginative isn’t necessarily negative. Many smaller countries don’t have the pensions legislation of markets like the UK and US, so we can be more flexible in what we do.”
Stephens says the various DB and DC schemes work differently according to each country and confirms there are no plans to switch from DB to DC in the UK, as some other organisations have done recently. “A DC environment is what has evolved and companies are quite naturally responding to that. The government hasn’t helped by removing the ACT tax credit, which makes the provision of more generous schemes more expensive. He accepts that FRS17 showed a £500m deficit globally for 2001 however this was primarily in respect of unfunded liabilities in Germany and did not bear any relation to the UK scheme which is extremely well funded. “I look at pensions from a long-term investment perspective. FRS17 is an accounting standard and a snapshot, which is relevant to the company but not really to the individual member. The member should be relying on the trustee to safeguard their interests and ensure that sufficient funds are available to meet the liabilities using a longer term actuarial basis.”
Where there is a lot of worker mobility, BAT strives to keep workers in their home fund. “There’s no point putting a Chilean in the UK scheme, for instance, where the benefits would seem more generous because the cost of living and salaries are higher in the UK compared with Chile. It makes sense to keep them in their home fund, especially if that’s where they’ll retire,” says Stephens.
BAT does have an international pension fund but it is now more or less dormant. Stephens says it was established for British expatriates working overseas that were prohibited from joining a UK-approved scheme. “However, the fund, which is based in Liechtenstein, became more or less redundant when the law governing overseas workers and their pensions rights changed way back in 1978.”
Talk of international pension funds naturally lead to the question of a pan-European pension scheme. “I can’t foresee this happening. I went on my first seminar on pan-European pension funds 10 years ago and nothing has changed since. I don’t even bother going to the conferences anymore as no progress seems to have been made,” Stephens says.
Stephens believes that creating a pan-European pension fund is way down the agenda, as we would need to align social security and tax systems first to create the infrastructure and that is a long way off. He says there are so many differences in these areas that it would be practically impossible to bring them together. And he criticises the recent pensions agenda that the Spanish have been pursuing as part of their EU presidency. “The Spanish are proposing that DB must be fully funded immediately. All that does is show the a lack of understanding of what pensions are about and the fact that assets fluctuate in the short term. The Spanish do not have a history of DB schemes and their proposal will not help the development of pensions systems in Europe. It will just accelerate the move to DC.”
BAT introduced a multinational insurance pool with AIG some five years ago and Stephens confirms that the long-term intention is to go captive. “We want to get as much in the pool as possible first and I would like to see the move towards a captive arrangement within the next three years.”
The pooling arrangement covers both life and health insurance. But Stephens stresses that subsidiaries are not obliged to join the pool. “We provide the basic vehicle and hopefully attractive rates but if a company can do something better locally, then we accept that. As with our guideline in general, it has to be a local decision.”
Stephens says the challenges ahead include continuing to provide meaningful benefits and improving communication. “We don’t do ourselves any favours by not explaining our schemes properly to our employees. There’s no point providing an expensive DB scheme or competitive provident plan in a country like Mozambique if individuals don’t understand it. There’s still too much mystique surrounding pensions. We need to get out there more.”