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Repsol treads cautious path on investment

With the recent acquisition of YPF, the largest private oil and gas company in Latin America, Spanish multinational Repsol has expanded its international presence once again. Focused on four business sectors – exploration and production, refining and marketing, gas and electricity and chemicals – Repsol YPF group has almost 35,000 employees and operates in more than 30 countries worldwide, with particular strength in Europe and Latin America where they are planning further developments and new acquisitions.
When in 1989 pension plans where first regulated by Spanish law, Repsol was a public company with 66.5% state participation. At that time, the group was allowed to transform its internal complementary social provision plans into defined contribution (DC) pension plans.
“This is one of the big differences with other groups which use DB schemes,” says Benedicto Gutiérrez, manager of industrial relations at Repsol Química, the chemical division of the group. “Providing DC plans allows us to know the exact cost of the contributions made to the pension plans.
“Our pension funds were externalised in 1989. Many other companies have internal pension plans which could be at risk if things go wrong for the company,” Gutiérrez says. “DC plans do not guarantee a certain amount of cash at retirement but allow employees to know the amount of assets they have individually.”
The total assets under management for the group’s pension funds represent Ptas140.8bn (e846m). Each company within the group has its own pension scheme, which is run locally in accordance with common practice in that country but supervised Repsol’s headquarters in Madrid.
In most cases, all employees working in the group for more than two years become members of a pension scheme. But not all the companies have a pension fund: “There are companies within the group which are operating with a very small margin in the market and they don’t have a pension plan,” he says. “But all the largest companies have their pension plan funds, all of them following a DC model.”
The different companies make monthly contributions of a percentage of active employees’ salaries to the pension fund which covers retirement benefits, disability and life cover.
However, a small number of employees are still covered under DB plans, in particular those working for companies or affiliates acquired by the group which were already running a DB scheme before acquisition.
As all multinationals, Repsol YPF has its own policy regarding internationally mobile employees. “Mobile employees always stay in the origin country’s pension scheme. We do this to avoid taxation when the employee returns to his country,” Gutiérrez says. “Taxation is a huge limitation to the mobility of workers, even within the EU and I can’t see a solution in the short term.”
The group considers its internationally mobile workers as expatriates, providing benefits such as housing and education. “These benefits apply not only to overseas assignments but also to relocation within the European Union,” Gutiérrez comments. “When we send people abroad, and usually we are talking about executives with senior responsibilities, we try to compensate them in same way, taking into account the differences in the cost of living in other countries which, in most cases, is higher than in Spain. Our international assignments have also a minimum duration of three or four years so the employee can enjoy certain level of stability.”
The pension funds are managed by management boards. “For example, in Repsol Química this management board has four representatives of the scheme members, two representatives of the company and one representative of the beneficiaries, getting together every two months, unless otherwise is required,” he says.
Spanish law states that pension funds management boards must have a majority of workers, “but all the important modifications to the pension fund require an absolute majority in order to come into force, so the company has to agree with all the new proposals. All big changes need a collective agreement,” says Gutiérrez.
On the investment side, the management board intervenes in cases involving major changes in strategy to evaluate the situation, but all the work is done by external asset managers. “We are quite satisfied with the work done by the external gestoras and the returns have been good.
“This model is pretty much followed by all the pension schemes in the group, with the same management system and similar investment strategies,” he says.
“In the last few years there has been an important increase in our equity exposure, from 10% in 1990 to around 30% today,” Gutiérrez says. “One of the reasons has been our commitment to maintain the good returns of the pension fund taking into account the low interest rate environment.”
Although there have been years of poor returns, in particular in 1994, the average performance of the group’s pension funds has been around 13–14%. The asset allocation strategy for nearly all the plans is 70% in bonds and 30% in equities. The exposure to European equity has increased considerable as Euro-zone is seen as a domestic market.
“We have a very diversified portfolio. We are increasing a sector approach, investing in technology and telecommunications. But when you run a pension fund you have to be very careful . You can’t take big risks. In that sense you have to be quite conservative when planning your investment strategy.”
According to the group’s annual report the cost of the foregoing pension plans and other similar obligation amounted to Ptas4,680m in 1998. An extra expense of Ptas2,867m had to be added during the same period as a result of the update of the discount rates of the pension plans to the current market conditions.
As future plans include further international expansion and acquisitions, the aim of the company is to achieve a greater level of harmonisation. However, “we always try to adapt our policies to each country’s idiosyncrasy, because we believe that at present drastic changes are not the most advisable”.

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