Liam Kennedy spoke with Benedikt Köster and Sven Rogge about Deutsche Post DHL’s pension risk management framework and its implementation
From a tall modern block in a suburb of Bonn, employees of Deutsche Post DHL can observe a vast swath of the former West German capital, the Rhine and the surrounding countryside. The tower is an anomaly in this elegant and distinctly low-rise university city, one that has had to re-invent itself since the departure of parliament and government for Berlin.
In fact, many government ministries retain offices and employees in Bonn, and the presence of the postal service can be explained by the fact that it was not only once state owned, but actually an operational part of the former postal ministry until the 1990s. The modern Deutsche Post DHL has left that bureaucratic past behind; history may account for the presence in Bonn, but the distinctive tower, visible across town, symbolises a new Deutsche Post DHL and of course a re-invented Bonn that is no longer a capital city.
After its privatisation and IPO in 2000, Deutsche Post made a spate of acquisitions, including the international logistics company DHL in 2002 and the UK logistics specialist Exel in 2005.
These acquisitions created a global logistics company, but the company also acquired pension funds around the world. A pensions competence centre at the company’s headquarters in Bonn manages these issues, headed by Benedikt Köster, vice-president in charge of group pensions and supported by Sven Rogge, senior expert, group pensions, with responsibility for risk and asset management.
At the end of 2010, Deutsche Post DHL has a projected benefit obligation of €12.3bn and assets of €7bn. These assets are divided between Germany, which accounts for the lion’s share, and the UK, with €3.3bn, the Netherlands with €750m and Switzerland with around €450m. There are a number of small, partially unfunded plans around the world.
One of the most significant major changes of late has been the agreement of a new risk management framework at the end of 2008, which was implemented for German and UK plans in 2009 and 2010 aiming for lower funding level volatility. Other plans are intended to follow.
According to Rogge, there are three arguments for risk reduction for occupational pension schemes. First is the impact of single events, such as the sub-prime crisis or the unfolding euro crisis, and the expectation that future market volatility will be higher with return opportunities rapidly changing across asset classes. “This requires a pro-active asset and risk management strategy,” he says.
Second, Deutsche Post DHL’s corporate pension management framework demands an investment strategy that “should aim for the continuing improvement of the funding status by generating sustainable and reasonable returns within an acceptable risk framework”. The pension competence centre is also mandated by the board to implement mechanisms to avoid huge losses in pension assets and to reduce the volatility of the pension funding gap.
Third, the financial health of the sponsoring company - covenant risk - is also of key importance for the pension funds themselves. Rogge notes that short-term market developments have a significant impact on key figures used for regulation and supervisory purposes and that there is a mutual impact for pension schemes and the sponsor.
He also notes the need to balance member interests with those of the corporate sponsor and the requirements of the regulator, and economic requirements such as overall safety and techniques such as cashflow matching, liquidity considerations and return targets. “A pension portfolio should be designed to fulfil the overarching principle of a pension plan to pay its future obligations within these partly conflicting requirements and interests,” he says.
For Deutsche Post DHL, a risk management framework depends on the funding status and should be designed to improve the funding status and avoid deteriorations, participate in positive market movements and avoid (major) losses in the asset portfolio.
In terms of concrete action, strategies have varied by country, although the general risk management goal is common to all funds. “The overall objective is to implement best practice ideas, more transparency and a better fee structure,” Köster comments.
As Köster and Rogge explain, implementation of the new risk management framework required a communication exercise for the benefit of local trustees.
Perhaps the biggest step-change was with the DHL UK pension fund, which moved to the new structure in May 2009 in a process that was assisted by the consultant LCP. Köster notes the heavy involvement of consultants in investment decisions in the UK, and emphasise the communication process that he had to undertake to implement the corporate’s preferred solution for equity management, for instance, which was Allianz Risklab’s overlay for downside risk protection in a strategy that was implemented in 2010. The head of pensions at DHL UK is no less than Ray Martin, a pensions veteran of more than 25 years with experience at Guinness, ICI and Rexam and a former chairman of the UK NAPF’s investment committee.
The overall asset allocation for the UK fund is 70% fixed income, 20% equities and 10% alternatives, including hedge funds and private equity, with pre-determined steps to bring down risk in the portfolio. “We had to recognise that there are cost implications with risk management strategies,” concedes Köster.
In the Netherlands, the local fund Pensioenstichting Transport (PST) ran a governance project in 2009. Beside major improvements in internal governance structures (such as the nomination of an independent chairman of the board of trustees), the fund has appointed TKP Investment as a sort of balance sheet manager recently. This will enable PST to improve the overall risk management framework and operations.
Due to the local regulatory regime, funding level protection has always been an objective of Dutch pension risk management, and the fund has a strategic interest rate hedge for 50% of the liabilities and is currently implementing a mechanism to increase interest rate risk protection if rates rise to predefined levels.
Despite the low number of active members, the allocation to market risks (such as equity, spreads and property) is relatively high. So one of the next steps is the improvement of the market risk management framework. However, given the current public discussions regarding a new pension system in the Netherlands, this step cannot be taken until the outcome is definite.
Back in Germany, the company has transferred assets from its old support fund (Unterstützungskasse) to a different funding vehicle - a Pensionsfonds (Deutsche Post Pensionsfonds AG). Some €650m of assets, and corresponding liabilities, were transferred to this vehicle in late 2009 in a process assisted by Towers Watson. This also uses a risk overlay for the whole portfolio. The support fund and a contractual trust arrangement (CTA) vehicle - an on balance sheet vehicle for the management of pension assets assigned to fund direct promise (Direktzusage) pensions - do not use any overlay structure due to their low-risk investment strategy. Mercer is retained in Germany to advise on asset manager selection issues for the Pensionsfonds, while Cologne-based Heubeck AG is the scheme actuary
Managing these global pension funds and staying abreast of local regulatory changes is challenging. But for now, the company has ruled out either pooling its pension assets through a global custodian or taking the even more dramatic step of creating a pan-European pension fund with an IORP structure. So instead of centralised implementation, the Bonn head office has guided the local pension funds through a locally nuanced process and intends to stay on a course that incorporates central direction and local implementation.