With operations in more than 60 countries worldwide and around 240,000 employees, Dutch firm Philips Electronics is one of the world’s biggest electronics companies and Europe’s largest.
The corporate pensions department has global responsibility in terms of pension arrangements for Philips employees working at the group’s subsidiaries around the world but, as far as pension management and administration is concerned, the different pension schemes within the company are managed on a local basis, taking into account national regulations and what is common practice in the countries involved.
Peter Boost, senior vice president at Philips Corporate Pensions in Amsterdam believes that local management of pensions is the best option for the good functioning of the schemes. “In terms of administration we believe that, as far as we know, it is better to keep everything run on a local basis. Usually we outsource these tasks to specialist groups that operate in the local markets and are very aware of local regulations and requirements.”
However, Philips has developed a worldwide pension policy for the group’s subsidiaries to achieve more consistency in the level of pension benefits and type of pension schemes at a corporate level. Among other recommendations, the corporate policy includes the use of defined contribution (DC) systems for the new plans being set up within the group and replacement of existing DB plans when possible. The aim of this policy is to set out global rules and control costs and cash flows in pension arrangements, but specific social security and asset allocation requirements in the different countries where the company operates make it necessary to rest pension management on local subsidiaries.
On the investment side there is also a move to co-ordinate investment strategies at a corporate level further, although it’s still at an early stage. “At the corporate pensions department we talk about how to view investments and how we can support investment decisions at a subsidiary level,” says Boost. “We take into consideration asset-liability studies and we discuss best investment diversification strategies and investment processes that should be considered for the different local schemes.” The group already has made an inventory of asset managers they are using around the world. For such selection they took into account both different types of asset classes and different types of mandates. “What we would want to do now is to come to a situation where we have a list of preferred asset managers for each asset class taking into account price and performance that could be used by the different schemes within the group.”
Although this is a new stage of the company’s approach to pension arrangements which still has not been finalised, the Philips group is internationally recognised as having long and valuable experience in pension management. The Philips Pensioenenfonds, the Dutch pension fund, is one of the oldest schemes in Europe and now has more than 140,000 members, including retired members and non-contributors with vested rights. During the past few years corporate restructuring has decreased the number of active members to around 43,000. In 1999 the fund achieved returns of 22.3%, outperforming its in-house benchmark by 0.4%. The equity portfolio, representing 50.5% of the fund’s total assets, had strong returns of 51.1%, outperforming its benchmark by 9.7%. The remaining assets were split into fixed income (37.5%) and real estate (11%).
The assets of the fund are managed by Schootse Poort, Philips Pensionfunds in-house investment management arm, which also offers asset management for third parties.
“The Dutch pension fund is essentially a defined benefit (DB) scheme but in other countries we run DC schemes or both,” Boost says. This is the case, for instance, in the UK, where the company offers its employees three different plans, a money purchase plan (DC), a final salary (DB) and an AVC plan. For those joining the money purchase or the AVC, Philips has two choices of investment, FundSelect and SelfSelect.
The FundSelect approach is a lifestyle matrix, which automatically switches members’ investments, which represent their benefits under the plan throughout their working lives. Members choosing FundSelect will not be involved in making investment decisions and the assets will be managed using four different investment funds. Essentially, until members reach the age of 50, all their contributions are invested in a global equity fund. After that, for five years the investments are gradually switched to a ‘protected’ equity fund and later to an annuity protection fund and by a cash fund. By the age of 63.75% of each individual pension account will be invested in an annuity protection fund and 25% in a cash fund.
Those choosing the SelfSelect option will be directly involved in making investment decisions by choosing investments in different funds.
This is only one example of a DC scheme offered to Philips employees but, taking into account that the trend towards setting up more DC schemes within the group is a reality, we could see similar plans being set up in other countries in the near future, although giving members of the same scheme different investment option is not allowed by some countries’ legal frameworks.
But, as happens with all multinationals trying to find the best solution in terms of pension arrangements, the issue of how to deal with mobile employees is a key one. Pensions are often seen as an obstacle or major concern by those employees who are offered international assignments and, for the time being, Philips and most multinational corporations operating in Europe, deals with this subject depending on individual circumstances. The group approach is that, generally , mobile employees are maintained in the home country pension plan but in some cases they may also join the host country schemes. “When the regulations of the home scheme permits to do so employees stay in that scheme but sometimes they are transferred into the host country’s plan. In the case of people coming to work to the Netherlands, for instance, transfers into the Ducth plan is often a solution during the time that these employees are working outside their country,” Boost says.
However, this situation is not ideal, since moving from scheme to scheme – some mobile employees move from one international assignment to another throughout their career – makes pension benefits a major concern for employees and employers. Regarding this issue, Boost says: “At this point in time, considering the current situation in Europe, a separate scheme for mobile employees would a better solution than moving them around schemes.” Boost says that the Philips corporate pensions department is now working on developing an international fund for mobile employees. “We are looking at the issue and we would like to have such fund running in the near future.” This fund will give employees more flexibility at a time when maintaining an international mobile workforce is crucial for most multinational corporations.