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Special Report

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Seeking out security for employees

A very new fund, the Vodafone Pension Trust is a CTA that was only established in March 2003, sponsored by Vodafone Deutschland. Open to all 10,000 participating employees in Germany, it offers a defined benefit (DB) scheme plus an employee-financed defined contribution (DC) scheme for 1,500 active members, 800 retired members, and 150 participating employees in DC.
The aim of the fund is to provide security and funding for the existing E250 million of DB liabilities and also to provide a suitable vehicle for DC plans.
In effect the scheme was established not to create a funded plan that would reduce pension expenses for the company, but rather to increase the security of employee pensions, ensuring that funds were not invested within the company.
It was set up with the advice and consultanting services of Mercer Investment Consulting. Dresdner Bank and UBS Private Banking Deutschland are the custodians, providing accounting of the funds settlement of transactions and payments and the deposit of bonds and equities. All legal, human resources and accounting work is handled inhouse.
Currently there are two different types of plan covered by this CTA: a DB plan for senior management, which is employer-financed only and promises a payout of approximately 30% of last base salary after at least 25 years in service; a second DB plan is employee-financed and promises a lump sum, an annuity or up to 10 annual instalments with a fixed interest rate.
The plan is financed on a discretionary basis from the participating and sponsoring German Vodafone companies. The liabilities are calculated according to FRS 17, in order to provide an independent and conservative measure of the health of the scheme, which cannot be manipulated either by Vodafone or by the managing board.
As a company Vodafone has a policy of supporting defined contribution plans, although in some countries in which the company has a presence, particularly Germany and the UK, defined benefit plans still dominate, for historical reasons.

Asset liability modelling
The fund undertakes asset-liability modelling, but not in the traditional fashion. Instead it uses an innovative adaptation of asset-liability modelling and efficient frontier theory. The emphasis was not on minimising pension contributions, but rather on ensuring that the return would be consistent and sufficient to meet the FRS17 liabilities upon which funding is based. The fund began by establishing the least-risk asset classes, as well as the minimum return required. From this the least-risk asset distribution and associated tracing error were determined. Alternatives with differing tracking errors were considered using efficient frontier methodology. This method also identified the type of bonds to be used.

Investment strategy
Mercer Investment Consulting is providing investment advice for the fund. At the moment, the fund is 60% invested, and it is intended to fund over the next few years up to 100% of the liabilities. Currently approximately 70% of total assets of the fund are invested in Euro-zone bonds, using the Lehman Euro-Aggregate as a benchmark, and approximately 30% are in global equities, using as a benchmark the MSCI Equity (Free) Index. There is also a 1% cash margin. These benchmarks were only selected after extensive research and a Europe-wide search. Investment guidelines are issued by the the sponsoring company.

Risk management
Both Mercer Investment Consulting and an in-house investment committee review the performance of the asset managers on a quarterly and half-yearly basis. There are agreed outperformance targets and tracking error limits for both asset managers.

Highlights and achievements
The new fund fits with Vodafone’s multinational strategy for its pension fund provision. It shows the way the group pension function can work closely with local companies to deal with particularly local issues – this new German CTA externally finances pension liabilities. Over the past year, as well as formalising guidelines on benefit structures, Vodafone has drafted corporate governance and investment guidelines. The aim is to ensure consistency in the Euro-zone.
However, recognising that there is little point in having guidelines if there is no way of judging whether or not they are being followed, the company has been working on tightening its multinational structure. Using internal resources, it undertook an audit of all 57 pension arrangements in the 19 countries in which it operates directly. The audit details are also useful in dealing with the impact of the introduction of FRS 17 and the upcoming changes relating to international accounting standards. It also met with key executives in its local companies to deliver its new policies directly.
These internal initiatives play into a policy of investigating cross-border synergies that may be available to the DC plans, particularly in Europe. These may relate to web-enablement of DC plans and the investment manager selection processes. A successful multinational pool has been in place with Swiss Life for several years, and a further pool has been established in the past year with MIA to cover Hungary, Japan, the Netherlands and Spain. This second pool is expected to return dividends in excess of £250,000 annually, with dividends redistributed to the local companies.

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