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Lego: piecing it together

When the founder of the Lego company, Ole Kirk Christiansen, came up with the brand name, he was apparently unaware that it means ‘I put together’ in Latin. It is appropriate in this context as that is exactly what the company, based in Billund, Denmark, has been doing recently with regard to its worldwide pensions arrangements.
But despite having established a presence in 28 countries since it was founded in 1932 it was only two and a half years ago that the company started taking the issue of global pension benefits seriously. Worldwide the group employs over 8,000.
“Before that there was no direction coming from corporate headquarters,” says Jackie Brown, the company’s global rewards manager. “The schemes were very much whatever suited the local market at that particular time; they were run either by regional HR or by the local business managers.”
So what drove the change? “Corporate headquarters realised there was a lack of knowledge and that they needed to take more control,” Brown continues. “So they decided to get someone in to manage the process and to find out what the company had by way of pension schemes in the group and whether they were compliant. They also wanted to set up a global policy and make sure that it would be compliant from a local legal and funding perspective.”
Following her appointment at the end of 2003 Brown initiated a global audit of the company’s pension plans. She also appointed consultant Willis to assist in the process. The audit, now in its final stage, looked at how the company compares with the market from a design and contributions perspective. “If we find that we are too low or too high we modify accordingly,” says Brown.
The audit has been divided into geographical stages; the first covered northern Europe which includes Benelux, the UK and Scandinavia. “We have agreed the modifications and have now started implementation,” she explains.
Examples include the company’s UK operation’s change of stakeholder providers. Brown notes: “We felt that the management charge was too high and we didn’t like the service we were getting.”
She explains that the benefit audit also looked at possible economies of scale through the use of preferred insurance providers for pensions and risk benefits: “We have never really capitalised on that. It will take a year or two if not more to evolve so that we can gain maximum economies of scale.”
But there are no plans to pool assets for the time being. “It is down to a lack of time,” Brown says. “The trouble is that I am on my own with a global reward remit and just don’t have the time to do everything. It is a question of picking the low-hanging fruit for now.” She adds: “Also, we have recently appointed the head of tax and treasury to take a more proactive role with managing pension liabilities.”
Lego is surely unusual in being a multinational with just one person dedicated to pensions. “The trouble is that we are not doing very well as a company and as we try to turn it around it is a case of if it is not broken don’t fix it,” says Brown. “We need to prioritise what we do and do something only if it is really going to turn the company around. It is a case of working with what we have for now.”
She explains that the company also carried out a re-broking exercise on its risk services. “This has saved us a lot of money. We have saved members 30% on the annual management charge of the pension scheme alone, just by actively re-broking and being much more proactive in the management of the scheme. We didn’t change design – we just changed providers. It was almost too easy.”
Brown hopes to achieve further savings by taking what she describes as “a truly global view of benefits” and by capitalising on the strength of the brand. “In Denmark we have just renegotiated terms with our existing pension providers and have saved ourselves in the region of £500,000 (e718,000) in the process. They didn’t want to lose our business. They also realised that there was potential for more business from a global perspective.”
She sets out the new philosophy: “We want to manage our global benefits much more proactively and get the providers to work for us rather than just accepting their quote.”
But regarding major savings on a global level, Brown says: “We have a lot of small plans around the world so I don’t think there would be that much we could save. So I think it is very much a staged approach.”
Another priority has been the development of a global benefit policy, but which will allow flexibility at local level. “This is intended to give us some very broad guidelines,” notes Brown. “There is no point it being too detailed because there is no way you can have the same scheme in every country.”
So there are just two sets of parameters – to pursue a policy of going to defined contribution (DC) as far as possible and to ensure that the company is, as Brown says, “at least median if not upper quartile” from the point of view of the design of benefit programmes.
With regard to the policy of moving to DC, Brown explains that in some countries the company has not been able to make the move for local legal reasons or because there are historical schemes in place. “But in most cases we have moved to DC or set up a DC scheme.”
Globally Lego still has 12 defined benefit (DB) schemes. “They are the ones we are having to keep an eye on from an accounting perspective,” says Brown. She adds: “we are keeping an eye on the schemes we have in place and where we can change them we will.”
The company’s scheme in the Netherlands was recently changed from DB to a mix of DB and DC. That was helped by changes in legislation there. “It took a while,” says Brown. “We had to work with employees and unions to turn it around.”
From the point of view of DB schemes and pension liabilities it is significant that Lego follows IAS19. “We need to have a consistent model so that we know what our liabilities are globally,” Brown says. “We don’t have to do this; it is just an internal decision to have best practice.”
But as mentioned earlier, flexibility at local level is an important element. Brown stresses: “the idea is not to manage the funds centrally”.
For example, the level of the contributions depends on the regulations and the funding position in each country. “It would be difficult for us to stipulate what the contributions should be,” says Brown. “Markets just don’t allow that to happen. Employees have different values on different benefits; in some countries pensions are widely valued; in some they are not. So we make decisions on a country basis.”
It is therefore no surprise that asset allocation and management varies by location; there are no corporate guidelines. “At the time we didn’t know how many DB plans we had,” Brown explains. “As we are moving towards defined contribution we didn’t feel it was that relevant to stipulate which asset managers should be used.”
Willis is also used as a broker for asset managers.
But while there are no guidelines there are certain underlying principles. Brown notes: “As a family owned company with family values and highly respected standards in terms of caring for our employees so we would not take a risky stance.”
Brown maintains close contact with local operations. “I have a Willis contact in as many countries as I can,” she says. “I maintain contact through the group client manager and he reports back on a regular basis as to what is going on - that we are compliant and are doing things correctly. Any decisions are always made by Lego and always involve me.”
On the whole she is happy with the way things are being managed at a local level. “There is always the odd case where they are not sure what they’re doing but now that I am on board they know that there is someone who can help them. Things are much better than they were. Our schemes have been surprisingly good I am pleased with the audit findings.”

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