National funding rules deter multinational derisking
GLOBAL - Aegon Global Pensions has warned local regulations on pension fund governance have added an extra layer of complexity for multinational companies who want to derisk pension schemes.
In a white paper on ‘Planning your way out of the financial crisis - a roadmap to derisking’, Jeroen Bogers, product development manager at Aegon Global Pensions, pointed out while many pension funds could have derisked more before the current financial crisis, they did not take the opportunity to do so.
Part of this is attributed to a “derisking dilemma” by the life insurer, as it was “not generally perceived to be desirable” when pension funds had the money to afford derisking because investments such as equities continued to rise. Now derisking is desirable but not affordable.
The paper claimed commitment by all stakeholders is “essential” when hedging risks because “if the moment is right but decision-makers cannot reach agreement the opportunity will pass”.
Having to balance the interests of trustees, members and the sponsoring company increases the difficulty of hedging at the right time, and Aegon warned the issue is even more difficult for multinational companies because of changes in accounting rules and the fact that pension fund governance varies between countries.
In the last stock market crash of this millennium, companies were not required to report pension scheme funding on the balance sheet, but since the introduction of new international accounting rules - such as IAS19 - a pension deficit is a recorded debt, and trustees can demand higher contributions or cash injections to fill the gap.
Aegon noted this could be an “unwelcome surprise” for some multinationals as they might “value their liabilities differently from its local pension funds”, and because where pension rules are set nationally it makes it “difficult to create a uniform account of the effects of the financial crisis on the combined pension funds of a multinational corporation”.
It showed the funding ratios of three similar pension funds from the US, the UK and the Netherlands, for exmaple, can deliver differing results under differing rules as the US fund would report a fully-funded position, while the Netherlands would be underfunded and the UK scheme would be almost funded.
These differences “creates a misalignment between perceived funding at the corporate level and the actual call for funding at a national level”, and adds extra complexity to decision-making, so it is “understandable that many sponsoring corporations have not derisked their pension funds, even if they had plans (or intentions) to do so”, according to Aegon.
That said, the insurer claimed “it is never too late to derisk” and set out a “roadmap” of six guidelines for companies to help determine the right moment and level to derisk including potentially targeting different areas for each country - to address differing rules - and to focus on separate risk segments such as inflation or longevity.
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