More Multinationals take global view on pensions

GLOBAL- Market volatility and a tricky economic climate have led to a proliferation of multinationals taking a global approach to managing their retirement plan assets according to research by Mercer Investment consulting.

Mercer’s 2002 Financial Management of Multinational Retirement Assets Survey suggests that the percentage of multinationals taking a global approach has risen from 50% two year’s ago to a current figure of 84%.

“Despite corporate headquarters’ increased involvement with local retirement plans, multinationals have undergone a dramatic shift in how they approach plan management,” says Mercers.

Two years ago 20% of the one hundred or so firms surveyed employed a centralised, top-down approach by which headquarters originated and controlled local policy. Today 11% use a completely central approach and almost two thirds have established a collaborative framework that focuses on building relationships and incorporating local fiduciaries into the decision making process.

According to the survey, multinationals are paying closer attention to equity and bond strategy in countries where they have defined benefit exposures. In 2000, 73% of respondents conducted asset-liability studies across their plans, a figure that has since risen to 88% in 2002.

Similarly, setting and monitoring investment objectives has become more important. In 2002, 77% of respondents indicated they have common investment objectives for their plans worldwide, up from a figure of 60% in 2000. Common objectives focus primarily on outperforming customised benchmarks and controlling risk relative to liabilities.

Says Stacy Scapino, head of Mercer’s multinational investment consulting services: “from a global perspective, our survey findings demonstrate that cost and risk reduction are significant drivers in establishing global programmes. Notably, creating global value statements is an important component of developing support for a global plan management framework, but less critical once a programme is in place.”

The survey goes on to suggest that, despite more interaction on investment strategy and monitoring, more than half (55%) of investment manager hiring is decentralised, with 27% of respondents indicating they use a combination of centralised and decentralised processes to hire investment managers globally.

In addition, it found that while 72% of respondents gather investment performance data globally, it is often done on an ad hoc basis through informal channels.

Half of the multinationals surveyed take what Mercers calls a ‘corporate finance perspective’ in determining global funding. Such approaches include looking at risk management from a global corporate perspective rather than optimising each retirement programme separately. Most of the multinationals surveyed (93% and 83%, respectively) indicated that managing expense and cash flow volatility is either important or very important in their funding decisions.

Says Scapino: "in the current economic environment, quantifying benefits is particularly important. While hard costs can be reduced through economies of scale, it is also important to quantify risk reductions introduced through diversified investment manager structures and opportunity savings realised through optimised cash flows and tax-efficient funding."

On governance issues, most multinationals lack formal investment and funding policies which makes it difficult to review local activities consistently. Tim Gardener, global head of Mercer Investment Consulting, says more multinationals are expected to develop and articulate best practive guidelines as well as documenting formal governance policies.

“These are relatively efficient ways to establish a global framework and standards against which local activities and decisions can be monitored,” he says. The survey suggests that multinationals are underusing global custodians as a source of consistent and easily accessed information with which to monitor their plans.

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