The main focus of those responsible for pensions of Bayer’s 93,000 employees worldwide has been the move from defined benefit (DB) to defined contribution (DC).
“This year we have concluded the process with the completion of the move of our US employees to the DC system,” says Lutz Cardinal von Widdern, head of pensions with global responsibility for pensions at Bayer’s headquarters in Leverkusen. “Last year the company’s employees in Brazil were moved to DC. “These last countries were the most complex cases,” Von Widdern says.
The process of change to DC started at the beginning of the 1990s. Since then it has been gathering momentum; we have now moved nearly 40 countries from DB to DC.”
In the main Bayer has introduced DC plans for new employees, but with some exceptions. “In the US, Japan and some smaller countries we introduced DC for all employees,” says Von Widdern. “The programme of change to DC has been carried out in accordance with local employment law. We also consulted with the unions throughout and encountered no problems on that front.”
Like other companies, Bayer’s shift to DC is driven by a need to keep its risks and potential costs associated with pension provision to a minimum. “There are the usual arguments,” says Von Widdern. “We want the risk to be shared between employer and employee and not to be carried exclusively by the employer.”
Bayer’s 93,000 staff are spread across 70 countries; Von Widdern notes that most of these belong to some form of pension scheme. There are 56,000 employees in 15 countries who still belong to a DB scheme.
The company’s pension liabilities total e14bn worldwide of which Germany, UK and US account for some 95%. Assets are around e8.1bn, and most of the difference is represented by the book reserve of around e5bn set aside for the company’s German employees.
“The events in the capital markets from 2002 to 2004 left their mark,” explains Von Widdern. “We have seen improvements since then but there is still a degree of underfunding in some plans outside Germany.
Regarding the German pension system he notes: “At present there are no plans to externalise the book reserve. For reasons of liquidity we cannot take e5bn and move it into a fund just like that.” But Bayer has made changes for its German employees as well. It has set up a new pension fund for all employees joining the company from this year, into which both employer and employee contribute 2% of salary. Known as the Rheinische Pensionskasse VVaG it is, as Von Widdern explains, “like a life insurance with a relatively low guaranteed rate of interest of 2.75%, combined with a profit sharing arrangement. This is not a 100% DC but what we call a ‘defined contribution orientation’ plan; this is our only option in Germany. In this way the risk for Germany is moving towards something we can calculate.”
In terms of how it co-ordinates its pension operations worldwide the direction has been one of centralisation. “There will be no change there,” says Von Widdern. “Through this we wish to ensure that certain principles are adhered to such as the move from defined benefit to defined contribution; the need for scheme members to contribute to their pension schemes, among other things.”
He points out that the company has responded to IFRS and its requirement for much more reporting in terms of the development of the liabilities and assets.
“We have a global reporting system and have introduced a global database system in order to have access to the global liabilities and asset values,” he says.
He adds: “It is important that the information flows into Bayer’s accounts in an ordered consistent manner,” he notes. “So the company controls this very centrally. In the past there were problems of consistency.”
And the controls do not end there. “Everything in terms of plan design, the structure of the benefits and searching for consultants in each country is controlled centrally from Leverkusen,” says Von Widdern.
But there is local flexibility. In each country there is an individual plan that corresponds to the local market conditions and takes into account what the competition is doing. “For example, the contributions are different in each country in accordance with the competitive situation,” Von Widdern explains.
He adds: “The individual countries may make suggestions which we work through together,” he continues. “Then the matter is passed to the board for a final decision. Any decision affecting the level of benefits is always taken at the company headquarters.”
He explains the underlying principle: “We distinguish between governance and services: governance is something we do centrally in Germany; services including the payment of benefits are carried out locally. “
As for any further centralisation Von Widdern notes: “I can’t centralise much more than I have done already.”
The task of checking the assets and liabilities is encased in a solid hierarchy. There is an actuary in each country who gives his figures to the global actuary for checking and consolidation. “I also have two actuaries in-house who check the figures and the locally applied parameters with the global actuary,” says Von Widdern. “And then the figures go from here centrally into the group balance sheet.”
Assets are invested by each country individually. “We do not invest the assets on a pooled basis,” says Von Widdern. “In general the countries are big enough to obtain a reasonable level of diversification of their assets. The liability structure is different in each country due to different profile of the members – age, sex and so on – and as we do an ALM for each country it would be difficult to pool the assets. However, investment risks are monitored centrally on a local and group-wide consolidated basis.”
In each country managers are chosen by beauty contest. “Their performance will be measured locally in cooperation with headquarters on a regular basis,” Von Widdern explains.
In terms of investment policy the local legal requirements need to be taken into account. “This is done in accordance with principles laid down centrally that aim to ensure risk-controlled investment,” he continues. “We also set investment limits on the asset classes taking into account the ALM results although in principle there are no bans on investing in certain asset classes.”
He adds: “In each country we examine the investments very closely to ensure that they are in line with local needs. We provide strategic principles for managing each portfolio. Each year we review the asset allocation in line with changing market conditions.”
Von Widdern would not be drawn to disclose the limits.
DC plan members have the opportunity to choose between different funds. In certain countries this applies only to employee contributions; in others the employees can also invest their employer contributions in their vehicle of choice.
But Bayer keeps a watchful eye on how its employees invest the contributions. As Von Widdern explains: “They have the choice to invest in more or less risky assets but we place limits on the investments to avoid the risk of a member’s fund suddenly becoming worthless. So there is a great deal of freedom for the
individual member, but not complete freedom.”
As for the relationship between the headquarters and local operations, Von Widdern has no complaints. “We work very well with the local Bayer colleagues,” he says. “We are in an information routine with them; we are also happy with the local asset managers, consultants and actuaries who are chosen by the local unit in cooperation with headquarters.”
So what of the future? “There are no further changes planned for the time being, given that we have just finished introducing DC worldwide and have re-ordered things in Germany,” Von Widdern notes.
But in spite of this, the challenges keep coming. “The Bayer world changes all the time and if we acquire new companies we have to adapt everything to Bayer’s needs again,” says Von Widdern. “Other than that the main challenge is to control and manage the local liabilities and corresponding assets on a global basis. This allows the information to flow into the group balance sheet correctly.”