Nexans linked 'by principles'
Just over a century since the creation of the Société Française des Câbles Électriques (1897), a pioneer in the world of electric cables, the firm began the 21st century in a new incarnation as Nexans, following a spin off from the Alcatel group (where it was the Alcatel Cable arm) and a June 2001 IPO, which saw it listed independently on the Paris stock exchange.
Today, the group specialises in telecommunications, infrastructure, energy and copper and optical fibre provision and has an industrial presence in 30 countries, with commercial outlets in 65 different markets.
The geographical breakdown of the current 17,000 strong workforce is two-thirds European, albeit with a strong presence in North America (2,000 workers in Canada and US) and increasing numbers in Asia, South America, Eastern Europe and Africa.
The firm’s largest European markets are France, Germany, Norway, Switzerland and Belgium.
And as Elie Monchi, director of compensation and benefits at Nexans’ Paris HQ, notes, the creation of the new company led simultaneously to a re-evaluation of pensions and benefits commitments.
“While we don’t have an overall corporate model for pensions and tend to allow for country differences, we do have a number of principles today that we try to enforce wherever we can.
“The first is a preference for defined contribution (DC) pension plans, despite the fact that we manage a lot of legacy defined benefit (DB) plans, although these are either closed or very mature. We also seek to have funded pension plans as opposed to book reserve arrangements, which has been an issue for us in Germany.”
Another fundamental, he says, is a desire for employee as well as employer financial participation in any Nexans scheme: “We feel that employees tend to appreciate more the benefits when they have also made contributions themselves.” Similarly, Monchi says the firm believes in supporting governance by having pension plans managed by benefits committees including both employee and employer representation.
However, Monchi argues that the shift to a DC pensions outlook does not mean that Nexans ignores pension replacement ratios: “We try to take into account social security levels and former scheme provision, but the difference today is that we don’t wish to guarantee a replacement ratio – just to ‘target’ one. Roughly speaking this may range from 40% of salary for more senior executives to 70% for blue-collar employees and operators.”
The closure of former DB commitments, says Monchi, is ongoing, with some already closed and others being progressively shut – at least to new entrants. “The biggest historical DB plans are probably Germany, Norway, Canada and the US, which with regards to the last two are mostly union plans with flat benefit formulas based on years of service.
“Those would be very difficult to close! Aside from these plans, I think all others are being closed – either to new entrants or new accruals.”
Monchi explains that the company’s Spanish DB plan was fully converted to DC during 1999/2000, with the Swiss scheme undergoing the same restructure as early as 1995. The firm is actively now in the process of closing its DB plans in Germany and Norway. Norway is quite a challenge because the concept of DC plans is very new.
“In Germany where the pension scheme is on a book reserve basis we have a huge mature plan with a lot of retirees. We have recently introduced a DC plan for future accruals. Those people above 50 will still be grandfathered by the DB plan, while all other employees will be switched to the DC plan.”
Monchi says this overall change from paternalistic DB structures to more individualised DC schemes has been a greater challenge in recent years due to the market crash.
“Investments in general have had such negative publicity over the last three years, so tactically it has been very difficult.”
However, he points out that management employees have tended to be receptive to the changes and believes that employees can understand the company’s rationale.
“Business has been difficult in recent years, although it is starting to pick up and the cost of our pension liabilities is huge in comparison to our earnings. Our annual pension cost fluctuation could effectively wipe out an entire years earnings!”
To this end, he says the German DB/DC conversion went well, which was “encouraging”. “In Norway we had to restrict the DC plan to new entrants because existing employees would have been unlikely to understand the concept.”
In terms of how Nexans sets up its DC plans, Monchi explains that contribution levels tend to be looked at on a local market basis. In general, the plans have between one third and one half of employee contributions, he adds.
“I think that kind of level makes sense. In France we have mainly compulsory plans where the ratio is typically 40% contribution for employees, 60% for employers, so that would tend to be our benchmark. This could be considered a little culturally biased, but that’s how we look at it.”
Talking of the company’s home market of France, Nexans has no true funded scheme today – basing its pension on the French pay-as-you-go (repartition) structure, although the company is waiting for the new French law before it will likely add new retirement plans to existing five year PEE employee savings schemes.
In addition, Monchi points out that with DC structures there are often local restrictions on what can be offered.
“We prefer the concept of choice of different funds for employees, but this has to be commensurate with the amount of investment education employees have, which, of course, differs from country to country.
“In the US you have the 401k type funds with 20 or 30 options that you can switch between, which is one extreme, whereas in Norway this would be at the other end of the spectrum.
“In some countries the concept of life funds that switch allocations for members exists and we may have this as the default fund.”
A further point the company likes to push is the idea of matching contributions between employer and employee, so that the more an individual contributes the more the company puts into the fund.
In terms of investments, Monchi says Nexans tends to be a little conservative as continental Europeans compared to practice in Anglo Saxon countries. “This sometimes creates discussion particularly between us and North America in terms of investment policy.
“For DB plans we’ve been looking closely at investment and the make up of our assets and whereas we would find 30-35% or below in shares a reasonable percentage, particularly as many of our fund are quite mature, that would be deemed unreasonable by North American standards. We’d probably try to find some sort of middle ground where the North American funds might be invested to 50% in shares, which is at the lower end of market practice there, but which would be acceptable to us.”
On average, Monchi says Nexans funds would aim for 50% fixed income allocations with maybe 10-15% in other assets including cash. The firm doesn’t allocate to derivatives, but it does have some real estate investments, particularly in Switzerland.
The somewhat decentralised approach to pensions means that Nexans doesn’t pool its investments internationally. However, as Monchi points out, the firm does have a unified process and methodology for investment, including manager selection. “This is a basic rule that applies to all financial purchasing issues in the company.
“We like to have competition in the market between providers and there must be a formal RFP where all aspects have to be looked at – stability of investment provider, staff, fees, process, past performance, admin structure, etc.”
The firm is also currently considering the use of outside advisers regarding the switch to IAS accounting standards. “We’re fairly sure we know all our main liabilities, but with the switch to IAS we need to be 100% sure that we haven’t missed anything, so I think we’ll use a consultant for that.”
Ultimately though the job of overseeing the group’s approximately E400m in DB assets is shared between corporate finance and corporate HR where Monchi himself is located. “We work well together here and have a central database that we share between the corporate consolidation department, the risk manager and myself. “This database contains all the governance issues, investments and main provisions of our plans that we need to know, which is very useful to have.”