Multinationals try to hold the line
Multinational companies based in the Netherlands are re-evaluating how much control they need to impose on their different pension plans around the world in light of ballooning costs and liabilities.
But despite this increasingly close attention to their international liabilities and scheme designs – and the impact this is having on their balance sheet – no consensus has formed over the best approach and many of the largest Dutch companies are only now undertaking formal reviews of their schemes.
Over the next 12 months ABN Amro, the giant Dutch bank with e7bn in its local pension fund, which represents 80% of its global pension assets, is completing an inventory of its other plans’ benefit arrangements around the world, according to Lex Heijnis, director. This could lead to greater control by head office, he says.
Bart Van Silfhout, chairman of the board of trustees at the e115m Polaroid defined benefit scheme, says there was no central direction of its international schemes, or plans to change this. However, he says the financial accounts were consolidated and an employee of the US parent company sat on the trustee board for the Dutch scheme in order to maintain oversight of the cost of its liabilities and benefits. He adds: “Currently, the contributions are affordable and we have a coverage ratio of 115% but there has been a slimming down of the scheme, so when employees leave the company they are no longer insured.”
A medium-sized Dutch multinational says until this year it had had no real view on pension provision by its subsidiaries around the world. The pension fund’s chief executive said it was now setting up a corporate pensions committee to examine the consequences of its scheme liabilities on the company profit and loss account.
The committee, which has senior personnel represented on it, will now be responsible for carrying out a global asset/liability modelling study and examining the effect of local ALMs, the chief executive says. He adds that in future there would be pressure to use the same actuarial and, potentially, investment consultants as well as external fund managers on, for example, high yield bonds.
The committee will sign off on changes to asset allocation and changes to local scheme design and provide consistency on assumptions as to how liabilities are discounted or assets will perform and interest rates are charged, the chief executive says.
The financial cost for ABN Amro of maintaining local plans around the world, however, is already consolidated on a quarterly basis.
Unilever, the Anglo-Dutch conglomerate, makes assumptions for its four main schemes around the world that vary by jurisdiction. As at the end of 2004, the discount rate of liabilities was 5.3% in the UK, 4.5% in the Netherlands and Germany and 5.7% in the US. The inflation assumption was 2.8% in the UK, 1.8% in Holland and Germany and 2.5% in the US. The expected long-term rate of return on equities was highest in the US, at 8.2%, then 8% in the UK and 7.6% for the Dutch and Germans. For bonds the respective rates were 4.6%, 5% and 4.1%.
Unilever also takes close central control of its pensions as it has funded pension plans in more than 40 countries. However, those in the top 15 countries represent over 90% of its defined benefit pension assets and IAS 19 liabilities, according to Philip Lambert, head of corporate pensions at Unilever since 1993. The group has set policy guidelines for the allocation of money to different asset classes, with equities taking the largest share of assets with e8.1bn in the four principal plans. The pension plans use external fund managers for most of their money.
Unilever has set up an Investment Review Committee to cover the financing and investment aspects of its pension plans. It is headed by the finance director, with the head of corporate pensions, personnel director, treasurer and general counsel on board.
Lambert says: “This team is responsible for providing strategic guidance to the business as well as developing and supporting the governance structure for pensions.” As in other areas, he points out, Unilever has corporate policy statements for pensions covering benefit design, funding and investment matters, which are supplemented by detailed guidelines and an approvals framework to ensure compliance with the guidelines. In this respect, the corporate team acts as a watchdog for compliance as well as assisting colleagues in different countries in developing benefit, funding or investment proposals. “We work closely with local management and trustee bodies to ensure that a suitable consensus is reached on matters subject to corporate governance.”
He says that the guidelines and oversight that are applied cover various detailed matters, including investment strategy, use of preferred providers for core services (such as investment managers, custodians and actuaries), benefit design strategies and cash funding for benefit arrangements. “The corporate team also oversees the annual accounting exercise under IAS 19 to ensure a consistent approach is applied, including the assumption setting methodology.”
The committee at Unilever last year reintroduced employee contributions to its Dutch pension plan at 1% and increased the cost to UK staff from 2% to 5% of pensionable salary. After taking employer contribution holidays for many plans in the 1990s, Unilever contributed e462m to the pension schemes last year, up from e170m in 2003 and e140m in 2002. This had a knock-on impact on its operating profits.
Unilever accounts for pensions under the UK’s Financial Reporting Standard 17, which recognises liabilities and assets of the group’s retirement plans around the world at fair value on the balance sheet. For 2004, Unilever took a e61m charge from its operating profits for pensions, but this was down from e166m the year before, partly on the back of improved equity markets and higher employee contributions.
Unilever’s 2004 pension liabilities less plan assets, after allowing for deferred tax, was e4bn, up about e200m from the year before. Its pension plan assets were e13.6bn (up from e13bn in 2003 and e12.7bn in 2002) while liabilities were e17.6bn (2003: e16.8bn and 2002: e17bn). Lambert says the company “has had a relatively strong governance framework in place and we are continuing to strengthen this going forward. Greater focus on governance generally through Sarbanes-Oxley and the impact of IAS 19 and other external factors mean that it is likely that the focus on this aspect of risk management will grow.”
But Van Silfhout at Polaroid says the planned change to the Dutch legislation, expected to come into force next year, would mean less support for early retirement before 65, and so would mean a substantial change to the scheme’s design.
The Dutch rule change is not expected to affect ABN Amro’s global plans. Negotiations are due to start with the Dutch unions over potentially raising the early retirement age from 62 to 65 but the introduction of FTK and fair value reporting is already done under the International Accounting Standards.
Fair value reporting is a substantial shift. For one multinational a 1% shift in interest rates affects its liabilities by 20%, ie, by hundreds of millions of euros. The chief executive added that the Dutch rule changes could mean it had to more closely match its duration risk by buying bonds, although it would wait a few months in case interest rates rose in the meantime.
Dick van Doorn, partner at Watson Wyatt in the Netherlands, said the impact of the new pensions directive was still unclear. But multinationals were studying whether it might be worth moving their Dutch schemes abroad, for example to Ireland or Luxembourg, if payments could continue to be made from Holland and would be lower than current contributions.
As a result, Dutch multinationals are trying to work out how best to minimise the impact of rule changes and exploding pension liabilities on their balance sheet and are now paying closer attention to this area of risk management.