As much as 400 basis points in pension scheme costs could become available to multinationals reorganising the assets side of their arrangements, according to Mark Scott of Watson Wyatt.
We find many arrangements are inefficiently structured," he told a gathering of plan sponsors and investment managers, organised by the consultants in Amsterdam. As much as 150bp could come from looking at the appropriate time horizon for plan portfolios. "This has to do with matching the asset allocation to the liability structure. In quite a number of plans, there is a mismatch between the two," said Scott, who is a senior consultant based at the firm's Reigate HQ in the UK.
The portfolio selected must be efficiently diversified, by making sure that it lands on the efficient frontier. "Clients often do not have the optimal portfolio. It is essential that for a given risk level you are achieving the absolute highest returns you can." Scott reckoned getting that right could be worth 25bp.
The other points saved came from what he called "manager structure". "You can gain 25bp from an efficient structure of your managers, which is akin to the efficient frontier. It is a matter of making sure you are allocating the right amount of assets to the right managers."
But as much as 100bp could be saved by selecting the best managers. "Additional basis point savings could be picked up from an overall review of the appropriate costs for running plans. This includes not only manager fees, but also custodial fees, transactions costs, tax reclaims and so on." He added that the consultancy had seen all these savings made by different multinationals.
Scott set out five stages multinational groups could go through in developing a total strategy for pensions and assets:
q collect and monitor data about the plans. "This requires diligence, but it also prompts improvements." Multinational headquarters were often not aware of what they had in terms of benefit plans or assets throughout the organisation.
q centralise resources. "This is using some of the expertise within the organisation across borders." Where pension plan managers were knowledgeable about, say, investment, that knowledge can be transferred to other countries' pension plans. "It is raising the standards of investment policy and addressing culutural impediments to changes in this."
q introduce "communalities". "This is a matter of sharing the same custodians, managers, asset/liability software, reporting structures. All these things are designed to introduce economies of scale and to limit costs."
q establish one pool of assets that encompasses multiple pension plans. "This is being done but is very rare."
q establish a total global strategy, "where every local strategy is consistent with global investment optimisation". No one has reached this fifth level, he said, "though many are pursuing it". Fennell Betson"