Siemens’ move to obtain a US listing profoundly affected the way its pensions arm was organised at an international level, particularly with regard to its handling of its DM40bn (e20.5bn) pension liabilities.
Prior to March of this year, Siemens’ balance sheet showed assets of DM20bn, but the move to set up a pensions trust has resulted in siagnificant sums being removed from the balance sheet. “This was done on the same lines as Diamler Crysler,” says Wolfgang Lotze, head of pension advisors, at Siemens Financial Services in Munich. “This is a very difficult exercise to undertake in Germany, but we would not be surprised to see other companies take the same route.”
The political moves in Germany on pensions are likely to lead to more funding of assets because of the strains on state pension provision. “There are currently restrictions that put German companies in a very difficult position with regards to international competition,” he says.
About 50% of the group’s pensions assets relate to Germany, with the balance held overseas in subsidiaries. “We are trying to co-ordinate pensions asset management globally. This does not mean that we dictate the asset allocation and cause conflicts with our subsidiaries’ local regulations.” But it is sensible to co-ordinate policy and governance issues, and to optimise asset allocation while respecting the needs of local operations. He adds it is essential to set up reporting and performance measurement on a comparable basis that are followed across the group.
It was with this in mind that the pensions advisory group, which Lotze runs, was set up last year. “We also made contact with other multinational groups, such as ABB, KLM and IBM,” says Lotze. “That enabled us to refine our ideas, since they are dealing with the same issues.” The group has concentrated its attention on its 10 biggest plans, despite the fact Siemens operates in 190 countries.
Lotze believes that in a number of ways Siemens is operating differently to the other groups. “The co-ordination of pensions management requires a close combination of human resource and finance issues. So we do it together with HR.”
Most of the return on pensions assets is dominated by the asset allocation process. “In our view, asset allocation and risk management are the key issues for our approach. We have developed an asset liability modelling (ALM) tool,” says Lotze. “It is very modern, very sophisticated and includes the optimisation of assets and liabilities on a simultaneous basis.” The tool is dynamic and recognises that assets and liabilities are affected by economic developments such as wage inflation, economic growth and changes in interest rates. The product also incorporates multi-period modelling.
“We felt this was important for Siemens, not just in Germany but across the group, and we will be keen to sell this product to other multinationals,” says Lotze. The tool was developed internally because buying an ALM study and obtaining a report which gave a bottom line of 55%
equities and 45% bonds is no longer sufficient. “It needs to provide insight into the dynamics of your investment decisions,” he says. Currently, the tool is being applied on a scheme-by-scheme basis. It has not been implemented across the group because there are too many local issues to be resolved, says Lotze. “It is very plan specific.” But what it does mean is that the same methods are being used groupwide, so the results are comparable.
Around 35 external asset managers and 12 different custodian banks look after Siemens’ pensions assets worldwide. “So you can imagine how comparable these reporting figures are,” Lotze says. This is one reason why the group is considering a master ‘record-keeper’, which would work within the framework of the local plans with the local custody provider. “The idea is to provide a high degree of efficency and transparency, as well as consistent figures,” he says.
Because there is no question of trying to dictate from the centre, a pensions council has been set up where all the main pension plans meet on a regular basis. “It is essential to get the local plans to ‘buy-in’ to these common standards. And they are very positive and fast moving in their approach to these questions,” says Lotze. Currently under discussion are questions of co-operation and consoldation about the external asset managers, which includes the search and selection process. “By the end of the year, we will be issuing one standard of Siemens RFP form. Of course, we will take into account local needs, but there are many basics we could consolidate on.” In the past year the local funds have been meeting with positive results. He adds that funds no longer feel so isolated when taking decisions in these areas.
But, as Lotze points out, head office does not have a clear run any more. “For one project, we had to compete with two external consultants to handle the business. We now provide the services in conjunction with one of the consultants, as they have more local knowledge and expertise than us.” This co-operation has worked well and the relationship with the
consultant has expanded into other areas.
Within a group like Siemens, there are many specialist companies with little pensions expertise and here the advisory group has a key role to play. Lotze also points out that a number of group companies have a depth of pensions experience as they have been active much longer than those in Munich. “But they are interested in what we are doing, as they know that if you’re in the market negotiating with asset managers with DM40bn, you can leverage much more than with the DM2bn or DM3bn held in local funds.” It is not a one-way flow of information, he points out. “So if the Dutch pension plan is looking for a US manager, the US plan is likely to have good information on this. It is not a one-way street.”
Lotze claims that over 70% of US groups have gone the route of co-ordination in pensions management, and he expects more European multinationals to follow. “From a risk-management perspective, without transparency about the position and results of your pension plans across the world, you cannot effectively manage pensions assets,” he says.
Managerial backing for any changes is an “important precondition”, says Lotze. “Managers at Siemens in Germany and local Siemens companies are supporting what we are doing at the highest level,” he claims. This kind of support will be critical to any group introducing such initiatives.
Employers, like politicians, are having to re-examine pensions. “Your first step must be to optimise what you have,” says Lotze. The doubling of pension assets in the US over the past five years was due to favourable investment markets, while in Europe, Switzerland and the Netherlands made their pension changes at the right time. “In Germany we have to make our changes now,” he says. Elsewhere in Europe, in countries such as Spain and Portugal, the climate is favourable to pensions change and employers are restructuring their arrangements into properly separated pension schemes. “These moves are forcing the bigger countries like France, Germany and Italy into a corner,” says Lotze.