Nestlé Pension Funds moved to a system of pension asset pooling in 2001 as part of a long-standing policy of gradual centralisation. Today there are $10bn (E7.7bn) in pooled pension assets with 16 countries involved in the system. Total pension assets amount to CHF25bn (E16.2bn).
“We had been aware, like many, of the advantages of such pension pooling for quite some time, but there was a window of opportunity at that time so we pushed the idea and it was accepted,” says Jean-Pierre Steiner, corporate director, pension and risk services, and CEO of the Swiss pension fund.
The corporation is pursuing increasing control of its various pension funds, including the monitoring of the individual country benefit plans.
A number of the specialised functions at Nestlé Group head office in Vevey have been given group-wide responsibility for their respective areas – pensions is one of them. “As corporate pensions director, I have been made accountable for all the pension schemes in the group – for benefits as well as for asset management,” explains Steiner.
The thinking behind asset pooling often centres around control, synergies, economies of scale including low management fees. “Correct, the same for us,” says Steiner.
He adds: “Furthermore, if every local operation had to issue an RFP, the interviewing, selecting and monitoring of managers would take a lot of time and expertise, which all local trustees and boards don’t necessarily have. Local CFOs have a number of other tasks and are often quite happy to abandon that one.”
The impetus for pooling came from head office and the reception on a local level has been generally positive. “But obviously we cannot force this,” notes Steiner. “In the anglo-saxon countries in particular, the local trustee board is still legally responsible for their pension funds so they cannot choose our organisation just for the sake of it – it has to prove that it is at least as good as any alternative. So we have to convince more than anything else.”
But pooling has its drawbacks. Steiner explains that if he pools the assets in one series of funds, concentration risk becomes an issue. “If we have a manager that is performing very poorly it doesn’t only affect one single plan but many plans, because all the plan’s assets for that asset class are with that manager.”
To counter this, the fund has a policy of broad diversification by asset class and sub-asset class. There is also value and growth management diversification. “This is a good way to offset concentration risk,” he says.
Asset allocation varies by country. “We tend to have rather a low proportion in fixed income in spite of recent trends in other companies,” says Steiner.
On average across the group the allocation to fixed income is around 25%. This includes emerging market debt, corporate bonds and some high yield bonds. “But there will be more fixed income in Germany than there is in the UK because of local regulation,” says Steiner.
On average around 50% of pension assets are in equities. “We also recommend that all funds have 5% to 10% in hedge funds,” says Steiner. All in the name of diversification.
The pension assets are managed internally and are outsourced where the fund feels that it doesn’t have the requisite skills. Take the Swiss fund for example. Steiner explains: “At the moment slightly over 50% of the Swiss pension assets are managed in house,” Steiner notes.
Fixed income and equities of developed markets are managed in-house while the management of the more alpha-generating assets is outsourced. For example, hedge funds and private equity are only managed externally.
He adds: “We encourage the local trustee boards to use the pooled vehicles rather than other external fund managers.”
Asset management expertise is a key area. “In the group we don’t have that many pension specialists,” says Steiner. “So we are trying to concentrate internal pension asset management capabilities, currently spread mainly between Switzerland and the UK.”
An ALM is carried out for each country every three to five years and the asset allocation will depend on the staff demographics in the local country in question: age profile, salary structure and risk tolerance of the local fund. “Such an ALM determines the strategic asset allocation for that fund,” notes Steiner.
He adds: “from there, the local trustee board might give to us a global balanced mandate. My group would then be responsible for the implementation of the strategic asset allocation, the selection and performance of the asset managers – internal and external.”
While the pooling of assets is not yet four years old, head office has always had a significant influence on the local operations. And the relationship with the local pension operations is becoming closer. Steiner notes: “A number of my associates and I are on the local boards – either at a trustee level or on the investment committee. We issue pretty precise guidelines about how the pension funds should be managed from the ALM down to detailed implementation of investment strategy and benchmarks. We have regular conferences where we get all the people in charge of pensions together to get some common understanding.”
Centre representatives had been sitting on local boards well before the move to pooling. “But we were acting more as advisers than managers.,” says Steiner.
Steiner is satisfied with management of the pensions function at a local level, with certain exceptions. “Generally in markets where there are problems with the local pension fund the issue is local regulations. Sometimes it is not possible to invest outside their borders and investment opportunities locally are not that great. So you are stuck with assets in government bonds where the credit is sometimes not investment grade or with equities from a very narrow, illiquid stock market.”
But he notes: “Generally collaboration is good.”
Captive insurance companies – a wholly owned unit not involved in the insurance business that provides insurance cover for the group – is not an avenue that Nestlé Pension Fund has explored very deeply where pensions are concerned. “We have a captive for other benefits – life and other types of risk – but we haven’t found yet any great advantage for pensions.”
In terms of challenges, Nestlé Pension Fund aims to achieve further gains in efficiency by setting up a fund in the EU to cover some pension liabilities emanating from different countries. “We want to test the EU pensions directive starting this year with a small programme,” says Steiner. “In some countries the regulations are not getting any easier. So setting up a fund in another country may be more flexible. We also hope to achieve economies of scale with one central state-of-the-art administration.”
He adds: “In Europe the pensions directive should allow any company to set up a fund in any country of the EU to cover the employees of the other European countries. However, this is more theoretical than practical at the moment.”
What impact will IFRS have on the way the international benefits programme is manageed? Steiner explains: “For the time being none at all because we have applied IAS for a number of years already and adjusted our plans accordingly when needed.”
He adds: “But it has certainly focused top management attention on pension funds.”