Corporate Finance

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A Roadmap to Global Pension Fund Management Multinational companies with employees worldwide are often faced with the predicament of having occupational pension schemes in different locations, resulting in disparate pools of assets and liabilities across the world. While few new schemes are defined benefit (DB) schemes and many older schemes are now closed to new members, DB schemes create ongoing challenges as the value of assets versus schemesí liabilities fluctuates, creating new financial obligations for sponsor companies. There have been several high profile cases where controversy over a companyís occupational pension scheme has created significant problems during merger & acquisition negotiations and even caused these discussions to terminate. When the number of schemes which a company manages is multiplied, these issues become even more complex.

Introduction

Multinational companies with employees worldwide are often faced with the predicament of having occupational pension schemes in different locations, resulting in disparate pools of assets and liabilities across the world. While few new schemes are defined benefit (DB) schemes and many older schemes are now closed to new members, DB schemes create ongoing challenges as the value of assets versus schemes’ liabilities fluctuates, creating new financial obligations for sponsor companies. There have been several high profile cases where controversy over a company’s occupational pension scheme has created significant problems during merger & acquisition negotiations and even caused these discussions to terminate. When the number of schemes which a company manages is multiplied, these issues become even more complex.

With most asset valuations relatively high compared with levels of liability, and therefore less external scrutiny by shareholders and other stakeholders in the business, now is the time to consider ways of enhancing ways in which the group’s schemes are managed to position the company for the future. In this series of articles, Northern Trust Global Investments (NTGI) considers ways of establishing a centralised approach to pension scheme management to improve governance, risk management and create tax efficient economies of scale.

As new and active DB schemes are gradually disappearing, it is perhaps tempting to consider these schemes as a ‘legacy’ issue, primarily a series of financial risks and obligations as opposed to a core element of a progressive employee benefits strategy. While the trustees of each individual scheme will generally make decisions over the investment strategy, risk management, governance and choice of investment managers, the sponsor company is responsible for financing the scheme and may in some cases manage a scheme’s assets. Furthermore, the sponsor company often brings substantial treasury expertise in managing financial assets and financial risk which can be very valuable to pension scheme trustees. Where there are multiple schemes, however, it can be difficult to share this experience across all the group schemes, so that the smaller schemes in particular are forced to seek these skills externally, at a cost to the scheme and therefore ultimately to scheme members.

These are among the reasons that multinational firms are increasingly recognising the potential benefits of a centralised approach to pension scheme management. In some cases, this can mean quite simple changes, such as implementing a single custodian to provide a global view over the assets held in each group scheme; in others, companies are seeking a more integrated approach across their pension schemes such as cross-border asset pooling. In the articles which follow, we outline NTGI’s Roadmap to Global Investment Management which provides a pathway through the stages of centralisation. We envisage that different companies will adopt various approaches so that while some firms would benefit from implementing Step One, others may progress through Steps Three or Four - and in the future, beyond. By adopting some of these strategies, sponsor companies have the opportunity to create not only a more efficient platform for managing DB schemes but also for developing more efficient defined contribution (DC) schemes.

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