DB, DC and all that
Wasserdicht’s Dutch pension fund is one of the few that has maintained a strong solvency ratio throughout the crisis of the past few years.
Wasserdicht is a strong sponsor, you see. Our company is a German and Dutch-owned multinational that specialises in water management equipment.
So, given our strong culture of risk management it’s not surprising that our fund is so healthy. We are also very happy that our regulator has not made us cut the benefits of our members and pensioners.
Because we have manufacturing bases all over the world, we also have pension funds in those places. And Wasserdicht has maintained the tradition of DB pensions in most of the countries it operates in.
Thanks to our culture of decentralised decision making, our US and UK plans have run independent investment strategies but they have not been as strong as our Dutch fund in terms of their funding levels. Now that they are close to full funding, our sponsor wants to plug the gap and has asked us to look at alternatives to traditional DB.
‘We are very committed to defined benefit pensions,’ our group CEO told a group of analysts on a conference call early this year. ‘But our commitment is not unwavering and, where appropriate, we will look to implement defined contribution plans to minimise the potential balance sheet volatility of DB pension plans.’
This all means work for us, and two people have been tasked with leading our global pensions review – Jim from our Boston office and Clive from London. We have an open mind.
It is a cold February morning in London and I am meeting Clive and Jim to discuss the work plan. Tina, one of the bright young analysts from the UK finance department is joining us.
‘We have two alternatives,’ I say. ‘The first is full-scale DC and the second is some form of hybrid, like cash balance.’
‘I have been looking at best practice in DC,’ says Jim, and it is quite clear that if we go that route we need to get the best-of-breed managers in a cost-effective framework.’
‘It’s all about the default fund,’ adds Jim. ‘Ninety per cent of the members don’t want to make an investment choice, so you have to get that right.’
We then discuss the options for hybrid schemes. ‘If we get that right we might have the best of both worlds,’ I say. ‘The sponsor gets less balance sheet volatility but the members retain some of the certainty of a DB promise.’
‘We need to look at the financials,’ says Tina. ‘We can get you a report in about two weeks but first we do need to understand more about how these hybrid schemes operate.’
‘I know the answer,’ says Clive with a smile. ‘Let’s get on the phone to our friends at Global Consulting and get them to write us a report!’
Pieter Mullen is investment director at Wasserdicht Pension Funds