Setting up in-house advisory services is common practice in the US but it is difficult to say up to which extent are European corporations following this trend.
However, it’s true that more Europe-based multinational are considering co-ordination as a key factor for the success of the groups’ overall strategies.
Pension advisory or corporate pensions divisions are now playing a more important role within multinational pension arrangements than never before and although local trustee still have the last word when it comes to making decisions, company-wide recommendations in the form of investment guidelines, asset allocation frameworks and advise on investment managers and custodians are gaining weight.
A good example of this can be found German multinational Siemens. In 1998 the group launched its ‘top program’ with the aim of obtaining sustained growth in the company’s overall profitability, improving gains and performance in all their business fields. This new approach, which included setting up clear policies and corporate goals and developing concrete activities and measures to determine efficient control and reporting frameworks, also affected the Siemens pension management. As a consequence of this a pension advisory group was established and new mandatory pension guidelines drafted.
“The pension advisory team performs its duties as an in-house consultant for Siemens AG’s corporate finance and for the local plans,” says Wolfgang Lotze, head of pensions advisory at Siemens Financial Services in Munich. Apart from their in-house consulting activities, they also support a selected number of other big multinational corporations in all key areas of pension finance management.
While in the past the fiduciary responsibility within pension management was delegated to local plans, who were or were not sufficiently staffed locally, the new ‘global perspective in pension finance management’ and the mandatory pension guidelines request Siemens companies around the world to harmonise pension management perspectives, policies and asset management principles, and to adopt standardised investment management programs, risk management strategies and reporting and controlling tools.
“Pension advisory was established to develop these tools and to provide the toolbox for our approach to pension finance management”, says Lotze. Together with other interdepartamental business units, such as corporate finance and human resources, pension advisory advises group’s pension plans on all the key areas of pensions finance and asset management, trying to find the best solution for each plan.
“Our integrated services range from the determination of the liability and design of pension arrangements to answering the question of which finance vehicle best fits the needs of local pension plans,” Lotze says.
The pension advisory team at Siemens provides consulting in areas such as governance and policy design, strategic asset allocation and ALM, investment strategies and processes - including manager selection and monitoring, risk management and control and reporting frameworks.
However, the final decisions regarding new strategies for local plans are made locally. “The local decision-making process is performed by the local board of trustees and the members of the local investment committees,” says Lotze . “Our role is to provide support to local decision makers and foster local plans to follow Siemens’ global perspectives in pension management.”
By editing a set of pensions guidelines, the group set up policies in co-operation with local plans. “Subsequently we expect our local plans to strictly adhere to these guidelines,” he says. In addition pension advisory performs reviews of the local plans on behalf of the company’s central finance department.
Most of the European multinationals with similar advisory groups in place believe that, although local subsidiaries remain independent in certain aspect of pension management linked to specific country regulations, the recommendations coming from corporations headquarters are becoming stronger.
“There is a trend toward stronger recommendations for our local plans following the group’s general management requirements,” says Stephan Chauderna, pension fund adviser at multinational group Nestlé in Vevey. The corporate pension department at Nestlé covers both the investment and benefits areas related to the company’s different pension plans worldwide.
“In terms of investment at present we are recommending an increasing allocation towards alternative investment and also we advise local pension funds to choose among three global custodian banks,” Chauderna says.
This kind of advise regarding which asset manager, custodian or investment strategy should be take into consideration, is becoming common practice among multinational groups with operations in Europe.
At Anglo-Dutch group Unilever this type of recommendations and co-ordination between local plan are also in place. “Each multinational has different state of co-ordination and in some aspects Unilever is at the forefront of these issues,” says Angela Docherty, internal investment consultant at Unilever in London. “We have preferred providers of investment management, preferred providers of custody services and we have a asset allocation framework,” she says. “This is something that some multinationals haven’t done as yet.”
“The role of our corporate pensions division to make recommendations on which fund managers and custodians should they use and interact with the funds when they are making changes,” she says. “ We have a framework which mandatory parts and others which are not mandatory depending on different circumstances,” she says. “But at the end of the day trustees own their local plans and our role is talk to the pension managers so they can communicate trustees about this issues. Ultimately, local plans depend on the regulations in place in the different countries.”
In terms of the future and the need for further co-ordination all agree on the fact that further developments should be achieved. “Corporations want to co-ordinate more about what is happening with their worldwide plans because they realise ultimately that all these funds have a very important impact on the financial bottom line of any quoted company,” says Unilever’s Docherty.
Chauderna at Nestlé also sees more thought being given to the subject on a strategic level.
“Our corporate goals in pension management - transparency, efficiency, profitability and ‘best practice sharing’ - require enhanced co-ordination at all levels of pension management,” says Lotze at Siemens. “Co-ordination and the use of integrated services are the key success factors.of our new approach to pension management.
“Up to what extent European corporations are following this will be interesting to see,” Lotze says. “If US corporations are trying to co-ordinate this further, why shouldn’t European multinationals try to establish common corporate perspectives in pension management while they are competing with US corporations on the world markets?,” he says.
In addition, some expect the future European legislation will put more weight on those with fiduciary responsibility in pension management.
European corporations may have to build up knowledge and expertise in pension and investment management in each of their local plans around the globe to the same degree as they have established in their headquarters in London, Paris or Frankfurt,” says Lotze.
Indeed, it makes a lot of sense for those companies which have developed a significant expertise in pension management and compensation and benefits policies at headquarters level to share this with those subsidiaries that due to their size, limited staff and many other circumstances couldn’t otherwise achieve the level of sophistication needed to make the most of their investment portfolios.