Nestlé's Approach to Group Pension Fund Management
by Jean-Pierre Steiner, Corporate Pensions and Risk Director, Nestlé S.A.
As a global company with 265,000 employees in nearly every country, Nestlé has occupational pension schemes around the world with assets amounting to close to CHF 30bn (USD 25bn), mainly in defined benefit (DB) schemes. One of the problems of having schemes in many countries is the difficulty of ensuring visibility of the position of each scheme, including ensuring that the way that assets are managed and the quality of advice which is available to the trustees of each scheme is of a consistently high quality. In 2006, Nestlé set up a new wholly-owned subsidiary company, Nestlé Capital Advisers. This is a Swiss-based company which acts as an advisory function for all of the pension funds within the Nestlé Group, providing centrally the full range of pension services such as actuarial valuation and investment advice.
Nestlé is among the few companies to have adopted a worldwide shared services approach to pension fund advisory and management functions.
Nestlé Capital Advisers has a subsidiary company, Nestlé Capital Management, an FSA regulated company based in the UK, which provides asset management services to Nestlé pension schemes. This company manages portfolios across a number of asset classes, including commodities, money market, derivatives etc. but pension schemes are not obliged to use Nestlé Capital Management as their fund manager. Nestlé Capital Advisers evaluates the company in the same way as external fund managers, including key performance indicators, benchmarking and importantly, the quality of the investment process (arm’s length principle). As a result of benchmarking Nestlé Capital Management in the same way as any other fund managers, they are the preferred manager for some portfolios, whereas others are managed by external asset managers. While Nestlé Capital Advisers makes recommendations on the choice of asset managers and other external parties, the trustees of each individual scheme contract directly with the relevant company.
Centralizing the advisory function
Like Nestlé Capital Management, Nestlé Capital Advisers aims to be competitive with external firms in each of the areas on which it focuses, such as actuarial services, investment advisory, including risk budgeting and performance benchmarking. This expertise was available within the Nestlé Group before establishing Nestlé Capital Advisers as a separate company, but individuals were in different locations under different management. This made it difficult to ensure that the quality of advice given to pension schemes was consistent, a position which could be improved by centralizing the advisory function. Overall, it was found that Nestlé Capital Advisers could provide a higher quality, more cost-effective service, more specific to the needs of Nestlé’s pension schemes, than external advisors with whom some schemes were (and some are still) working. As a new company, however, Nestlé Capital Advisers needs to prove itself to the pension schemes and some schemes initially chose to validate the advice given as a way of gaining confidence. Performance is constantly reviewed and quality-to-cost ratio assessed. So long as the quality of service which Nestlé Capital Advisers is able to give to the pension schemes remains as good as or better than external alternatives, it will continue to provide these services, but if not, Nestlé may look to outsource. The reality is that even if outsourcing, some skills, such as in selecting and monitoring consultants, still need to be maintained internally and it is very difficult to insource again in the future.
As far as we are aware, Nestlé is among the few companies to have adopted a worldwide shared services approach to pension fund advisory and management functions. Although there are definite cost advantages, cost is not the primary consideration and trustees of the schemes would be prepared to pay higher costs if it means better performance. The ability to implement standardized controls and monitor the pension schemes globally is another important consideration. Nestlé now has a better visibility over the risks in each pension scheme than before centralization. There is also significant support for a centralized approach among key stakeholders: trustees, for example, receive better internal support and have access to expertise to help them make decisions more effectively. The audit committee and finance committees of Nestlé SA’s Board are also positive about the approach because of the increase in transparency and control. Finally, the local business managers can focus on Nestlé’s core business operations rather than having to spend time and resources on the pension fund.