Making the connection
Although British Telecom (BT), the UK’s incumbent telecoms operator, provides pension schemes in each of the 140 or so countries in which it operates, only a tiny proportion – around 0.3% – of the £34bn €49.5bn) of assets under management are accounted for by the company’s foreign subsidiaries.
“The UK pension scheme swamps everything,” says Kevin O’Boyle, head of pensions at BT Group, who was appointed to that position last autumn.
The BT pension scheme dates back to 1984 when the company was privatised; it was born out of the former Post Office pension scheme which itself dates back to 1969 when it was separated out from the old civil servants’ scheme. The fund had a deficit of £2.1bn in 2003; an update of the funding position will be available in May.
The final salary scheme, which closed to new members in 2001, has 75,000 active members as well as some 180,000 pensioners and 100,000 deferred pensioners. The defined contribution (DC) replaced the old defined benefit (DB) scheme and now has 11,000 members.
Since his appointment O’Boyle has been engaged in gathering data from all country schemes to make possible a full assessment of the international pension benefits programme.
BT’s overseas operations account for around 10,000 members of which 4,000 are in the US. The US schemes’ assets account for between $50-60m (€42-50m); the other foreign schemes represent no more than that figure between them, with individual country head-counts averaging between 30 and 50.
Recent acquisitions including Infanet, Radians and Albacom have added 1,500 to 2,000 new people to the international payroll over the last 18 months. “We know what we are inheriting due to the due diligence that has been carried out,” O’Boyle says. “We move zthe companies to standard terms and conditions to ensure that there is consistency in terms of benefits. But we also have to make sure that the changes we make are in accordance with local rules and regulations.”
He adds: “We look at local market norms and practices and the level of state pension provision. In France for example, where there is a very high level of state provision through sector-wide schemes, we do not provide any extra pension – we suggest that their benefit should be provided in the form of life insurance. In the Netherlands where the level of state provision is slightly lower than it is in France we just top up the state benefits. We reflect the social security system in the design of the local scheme. Members must contribute to the pension scheme.”
He adds: “We also stipulate that schemes should be funded rather than pay-as-you-go, except where book reserve is better from a tax perspective.”
Furthermore, any change that is made to the scheme has to be passed to head office in London for approval. “The local operations must obtain permission from head office for a change of insurer or insurance broker, a change of investment strategy or a change of benefit design,” says O’Boyle. “They will produce a shortlist of managers and/or consultants; provided the proposed service providers are reputable we do not have a problem.”
He points out that one of the roles of head office is to provide support to the local operations. “They don’t change supplier that often and pensions are a very technical and specialist subject.”
Some of the changes requested by local operations are so obviously beneficial that approval is a mere formality. For example, the Spanish operation has both a pension policy and a life insurance policy. They have requested approval from head office for the life insurance scheme to be incorporated into the pension scheme so that the contributions can be tax deductible. “That one is a no-brainer,” O’Boyle says.
He explains that in order for head office to be able to make an assessment the local operation must provide the following information: the current situation, what is proposed, what it will cost and how the change is justified in terms of the competitive environment. “This gives the local operations a discipline,” he explains; “sometimes they come back and say that they have thought things through and have decided to withdraw their proposal. A local operation has never not listened and done its own thing.”
He adds: “This also prevents cherry picking where a company that is new to the group will choose only those aspects of the BT system which are more favourable than its own.”
To provide additional control the business case has to be signed off by the head of the local business and the area manager. “So there are a number of supporting lines in place before the group is asked to give the okay.”
BT has a preference for DC; in addition to the introduction of a DC scheme for its new members in the UK most of the foreign subsidiaries operate DC as well. “DB is more appropriate for larger groups of employees,” O’Boyle explains. “So we have been able to negotiate DC schemes locally quite easily.”
As for the management of the pension assets, the BT pension fund owns Hermes which it employs to manage its UK pension assets. In the US the company operates 401k plans.
The UK fund has 20-25% invested in bonds, 12% in property, 55% in equities and the balance is in a mix of private equity, hedge funds and 3% in commodities. “The recent move to alternatives has been made at the expense of equities,” O’Boyle explains.
He adds: “We don’t set limits on asset allocation. But in most other territories the scheme is DC and there is a contract with a local insurer where the options for choosing asset classes are limited,” O’Boyle explains. “And we can’t get too sophisticated where such small numbers of employees are concerned; we would be adding costs and complexity to a small scheme if we allowed investment choice.”
The company is pursuing an increasingly centralised pensions policy. “In a predominantly DB environment, but even where DC is concerned, there are funding and cost risks and there is also an element of reputational risk.”
He adds: “We also have to respond to the increasing pressures of FRS17/IAS19 which we are fully implementing this year having begun preparations around 18 months ago; this makes quality of information flow important. However, the regulation only impacts on DB, and most schemes are DC.”
It seems that there is much willingness among local operations to comply with head office. “Our guidelines are clear and we provide a good support system, and the small offices which we have overseas of between 30 and 50 people are happy just to have that,” he says, and adds: “In my experience, larger country operations provide more resistance.”
The large number of small schemes might make asset pooling an option. But O’Boyle explains that this is not efficient. “In terms of international pooling my personal view is that the small size of the operations in terms of personnel and assets under management means that pooling is just not worth the extra administration,” he says. “At present there are no viable cost effective models.”
The pan-European scheme is a more likely direction. However, caution will be key. “Because our schemes are country specific there is the risk of levelling benefits because one country will want what another country has,” O’Boyle says. “Furthermore because of the size of the schemes the economies would not be there. But if a supplier comes up with a cost effective model we would seriously consider this option.”
As reflected in their ownership of Hermes, BT place much emphasis on good corporate governance. But O’Boyle notes that “in the case of the many small insured arrangements there is not much scope to influence the way things are done.”
As part of BT’s internal audit there is a big brief around pensions because of the recent spate of acquisitions and integration. “Some internal reviews are planned once we’ve completed our data gathering,” O’Boyle says.