Many factors enter into the thinking when a multinational employer considers a retirement programme for its worldwide employees. Some of these factors include:

q The social programmes present in the various countries.

q The company philosophy regarding the place of retirement planning in the overall human resource policy.

q Developments in compensation planning and the use of incentives.

q The ability and willingness of the employer to finance that programme.

q Competitive considerations related to both geography and industry.

q Desirability of having a single worldwide framework for the design, financing, delivery and communication of the programme.

Once these factors, and perhaps others that might apply, have been considered, the history has been that the financial aspects of the chosen solution were governed by the local country actuarial and tax standards. Typically, these offered a reasonable degree of flexibility to the employer on the timing and amount of contributions, build-up of assets on a tax beneficial basis, etc. The availability of this potential flexibility has also been recognised as a primary or secondary advantage in the overall planning and evaluation process.

Beginning in the US and spreading throughout the world, there is a continuing movement among the accounting profession(s) to impose uniform financial evaluation and disclosure standards for pension plans. The principal reason for this is quite clear. Given the flexibility that is available from the actuarial viewpoint and the significant potential impact on the company financial statements of the underlying liabilities, it becomes increasingly important to have a uniform and standardised basis on which to quantify and present these results.

In a truly global business and securities marketplace, it becomes even more important to have such disclosures be as consistent and comparable as possible. That comparability relates to both the annual evaluation of the plans and the reporting in the company financial statements, but also to the year-by-year trends in those results on both country-specific and consolidated bases.

Many articles have been written discussing the details of the accounting standards and the actuarial and accounting methodologies that result from them. The goal of this article is not to reproduce that type of information. Rather, the intent here is to comment on the practical implications on the company strategic planning process, both in general and specific to retirement plans, of the existence of these requirements.

Certainly, there can be little doubt that there is a continuing trend for companies to move away from defined benefit retirement plan models and toward defined contribution as the structure of choice. There are many factors that are influencing that movement with the existence of the accounting standards being a major one. Financial executives must consider the impact on their reported financial results in a defined benefit scenario as compared to the neutral nature of those results under defined contribution. But what are some of the other issues?

In many employment settings, the development of retirement commitments and benefits to executives and highly-paid employees is an entirely difference exercise than the similar considerations for the rank and file employees. Often, these specific programmes are unfunded and not even quantified or disclosed. Now, this type of arrangement will come under the same reporting and disclosure standards as the more broadly-based plans raising the question of the continued value of defined benefit as the structure of choice for this purpose.

Many social systems have a retirement structure that is defined benefit oriented and it is quite common to integrate the private (occupational) defined benefit plan with the underlying social plan in that country. As more and more social systems, in the emerging privatised scenario, move to a defined contribution orientation, the ability to evaluate the (net) liabilities in the integrated private plan becomes more complicated. This raises the question of whether the private plan should be so integrated and, if so, how?

In this truly global business and securities environment, there would be consistency in standards like these across country lines. In reality, however, the pace of adoption and the exact details of the rules in any country will be different. For a multinational organisation, this reality raises issues such as:

q What standard should be used for the overall corporate cash flow management, financial statement preparation and reporting?

q With the increasing importance of performance-linked, incentive compensation, how will country-by-country consistency be achieved?

q What kind of planning should be done when the entry into a new country that has not yet accepted such standards is contemplated?

As indicated above, the foundation of historical decision making has been cash and tax based. Now accounting and financial disclosure have been added to the mix. Unfortunately, the cash contribution and/or tax rules have not always kept pace and been modified to present a unified pattern of regulation in the country-specific, much less, worldwide basis. How does the company prioritise the potentially conflicting considerations and implement the chosen strategy?

When will the proposed retirement flexibilities available under the European Union regulations be added to the planning process?

The end result of these developments is to bring the need for overall retirement planning from a strategic basis into sharper focus. It is not simply enough to say go to defined contribution" since in some countries, that structure is not authorised or is very difficult to implement and monitor. At the same time, the competitive employment landscape may not favour such a change! One emerging solution is to consider the use of hybrid defined contribution models as the answer. The emerging result requires careful strategic planning as well as attention to country-specific and business realities.

Erwin Janush is a senior vice president with Aon Consulting in Chicago"