Multinational companies increasingly recognise the need for an international benefits strategy, but this does not mean automatic centralisation.
A late 1980s review of investments and benefits at Norsk Hydro, the Norwegian-owned energy, metals and chemicals multinational, resulted in a corporate pensions function being set up. But the unit allows divisional and operating management in over 30 countries a large degree of autonomy.
Donald Watson, the vice president who heads the corporate staff for international pensions and risk benefits in Oslo, explains company thinking: The corporate pensions role - in line with Hydro's organisational policy of a decentralised management structure - is one of support rather than dictation."
Watson conducted a review of pension and insurance investments and liabilities when the company was listed on the New York Stock Exchange in 1986. This required the adoption of FAS87 and led to the set up of the unit he heads.
The company, which is 51% owned by the Norwegian government, has activities in over 60 countries, comprising oil and gas, energy, fertilisers, magnesium, aluminium, petrochemicals, industrial chemicals and fish farming. Slightly more than half the 35,000 employees are outside Norway.
Domestically, the company has a long history of pension fund provision, having started its own fund in Norway in 1915. In addition Hydro set up its own property and casualty captive insurance company in 1920.
The domestic pension fund has assets of Nkr10bn ($1.4bn) and employs two in-house actuaries along with its own administration staff. The assets are invested by Hydro's internal portfolio management group, which also takes care of the corporate investments and the investments of the captive insurance company. Only about 2% of the pension fund assets are invested internationally, mostly through pooled funds.
International expansion, driven by acquisitions in the 1980s, has brought in subsidiaries with a wide variety of approaches to employee benefits. Watson explains that previously, for new companies entering the group or for existing companies changing systems, policy was to be in line with typical practice. Today, his unit assumes a guiding role, encouraging divisions to establish a philosophy and think through their business strategy. "We may end up with local practice but we get managers to realise it is not a be-all and end-all solution. We do not dictate but support divisional and operating management. The policy is that any new pension plans or any major or significant changes to existing plans, come to my department for comment."
An adverse reaction from his unit should result in plans not being adopted but, Watson adds, because his unit acts as a consultancy this situation has never arisen. "We actually help to develop the plan through our support function so there haven't been any conflicts," he says.
Once a decision has been made locally about the benefits on offer, then, where appropriate, the delivery of those benefits is handed over to the corporate side, "allowing the purchasing power of the corporate to deliver these benefits in the most cost-efficient manner".
The company uses international insurance pooling. The captive insurer provides supplementary accident and workers' compensation cover in Norway. The company recently cut out one of its four international "life" pools, and could, Watson says, come down to two but no further. Hydro also has an international accident insurance pool for supplementary accident insurance outside Norway.
Watson outlines the policy: "The contract has to be written on a stand-alone basis and the underwriting has to be sound. We will not accept a local network insurer underpricing a contract to get the business with the pool absorbing the bad underwriting."
While allowing companies to go through their own local insurer, he points out that even where an independent local insurer offers savings of up to 5% on the up-front premium, it usually works out cheaper to use the network long term.Where contracts are large enough, cash flow rebates and reductions to technical premiums are negotiated with the networks.
At least 50% of pooling dividends will go back to the participating subsidiary with the remainder used to cover the corporate international pensions function cost. "If we have a very good result and don't need the 50% then the remainder also goes back to the participating units, so we are a cost centre not a profit centre," Watson adds. If 50% does not cover costs, the corporate absorbs the shortfall and costs are not carried forward.
On the issue of defined benefit versus defined contribution, the company is looking to develop guidelines. Watson personally believes that DB, in many situations, may have had its day. Once again, however, the hands-off approach prevails and Watson accepts that there are horses for courses. "We are trying to educate managers to think through the various implications but we don't have a policy saying we will have DB or DC." He often plays devil's advocate to challenge managers' support for a particular system. But there are other issues besides the method of delivery.
"We get our units to focus on the gap between social security provision and employees' retirement needs," he says, adding that they should consider the amount of second pillar provision and how much employees should cover themselves.
He continues: "I don't think it would be appropriate for Hydro with so many divisions - large fertiliser companies employing 1,000 to small aluminium extrusion plants with under 100 employees - to require all divisions to have a DB scheme with a target of 65% final salary."
Watson contrasts a unit with a high turnover that needs competent staff with a low-skill production area with long-serving employees. In the former DC may be more appropriate, but in the latter DB is probably best.
One area where Hydro's benefits must be competitive is for internationally mobile employees. Watson has set up an international fund restricted to such people. Out of 550 employees on overseas assignments only 11 have joined since its creation two years ago, though Watson expects that with further international expansion this will increase to as many as 50.
"The majority of our employees on overseas assignments are on one-off three- to five-year assignments, where retention in the home country is still best. Our principal aim is to keep our employees whole for pension purposes. No employees should lose out on pension rights, if we move them across borders," he adds.
Members of the international plan have either been employed to be internationally mobile and do not have a home scheme or are on their third or fourth consecutive assignment - when legally they may not be able to remain in the home scheme.
The scheme is DC and age- and service-related, with a target benefit of 50% and relatively conservative assumptions on contribution levels. Employees have a choice of 10 offshore funds. The company looks for tax deductions but accepts that with offshore funds they will often not be available.
"If you look at the total cost involved of having an expatriate and compare this with the lost tax deduction on the pension contribution, it forms a very small percentage of the total cost. We think it is more important for these highly mobile people to have a pension fund. It is prefunded, allowing us to charge the cost at the right time to the unit they are working in, which is not easy with DB plans."
Watson has a clear view of what role he should play in such a diverse conglomerate. "We cannot possibly be experts on what is going on in 35-40 countries with sizeable operations. But what we can say is that through our contacts in the major employee benefit consultants and international insurance networks, we only need to make one phone call to get information on a country. We are not experts but I like to think that we know the questions that need to be asked."