How does a multinational know whether its various subsidiary pension plans are delivering the required performance? How do they try to set a target measure which is consistent country by country?
The key focus in some countries seems to be that the fund must achieve top quartile performance against peer funds. Another route is maybe to look at the information at an asset class level versus appropriate indices. often because there is no independent survey of pension fund results. But I have always had a problem with the concept that the primary measurement of a pension fund should be against its peers, as it takes no account of funds' liability profiles nor the need, therefore, for them to adopt different asset strategies. It does not recognise that corporate-q have different cultures and different strategic objectives for their pension funds. Some may wish to maximize their surplus in order to eliminate long term funding (and be prepared to take a bumpy ride on the way!). Others may want more immediate consistency and less volatility in their funding patterns, while there are those who are more concerned at reaching, and then maintaining, local legal coverage levels. All these scenarios will not result in the same strategic asset strategy nor will they reflect the same levels of risk tolerance between funds. So what should the multinational do to measure the success of its separate country funds?
The first fundamental step is to look at the liability profile country by country by undertaking an asset/liability modeling exercise At this point local management must agree their strategic objectives for the fund and, following on from this, decide an asset strategy broken down by major asset class. These are crucial activities that should not be unduly rushed and which need sufficient local management time. It is the point when the local pension fund puts it's stake into the ground" in the performance measurement arena, as their rolling (minimum three years) performance objective will now be set to exceed a bottom line "Target" fund return, which is derived by weighting the asset class's index returns by the strategic asset allocation percentage.
The beauty of this method is that it recognises country specifics; gives local management the responsibility to set the strategic asset mix and then expects them to out perform via tactical asset allocation and active portfolio management.
Nevill Brooke is an adviser to international pension schemes"