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Wouldn’t it be bizarre if Coca-Cola or Levi Strauss were branded differently in each country? Or if staff working for Sony in Japan called it a different name from their colleagues in Australia?
One global company usually equals one global brand, but in most cases they operate separate pension funds. As globalization continues apace, it is time for multinational companies to see the dangers of ignoring not just the liabilities sitting on the parent company balance sheet, but the perilous synergies between the asset pools as well. Globalization through organic growth or M&A has led to behemoth companies spanning all continents across the globe—but although manufacturers are keen to hunt out the lowest labor costs and marketers keep consumers eagerly awaiting their next product, pensions have continually been overlooked.
“A lot of companies have only just started looking at their retirement provision,” says Julien Halfon, principal at Mercer Investment Consulting and head of its multinational client team. “The magnitude of the problem is larger than they thought.” Mercer estimates there to be around €5 trillion (US$6.1 trillion) in net debt held by multinational companies in Europe—and approximately 6% of this is in pension fund liabilities.
However, it is not just the liabilities that are the problem, so let’s set those aside for a moment. The assets themselves pose a problem if they sit unchecked. Without coordination across the pension funds, each separate fund could decide to make a 30% allocation to European equities and give a 20% chunk of assets to a private equity firm raising capital for a new project in Asia. Even if they chose different managers, it doesn’t sound like “risk diversification” does it? And if there were another Lehman Brothers/Bear Stearns/State of California? “It is an important governance factor,” says Aaron Overy, head of asset pooling business development at Northern Trust. “Pooling assets means that in the event of a market incident, a multinational firm can see the extent of its exposure to the affected company (not just in terms of its equities, but bonds and other counterparty risks) much more quickly and efficiently than having separate funds call around their own disparate suppliers.”
Pooling assets means a company can assess its entire risk exposure comprehensively rather than in separate pockets that use different currencies, and have different ideas about investment and risk tolerance. Pooling all assets, and therefore investment risk, gives the company a tighter grip on the reins to control allocations in times of booms and bust. Dawid Konotey-Ahulu, co-founder of Redington, investment consultant and actuary, asserts that “having a number of separate pension funds is like having several planes in the air, all traveling at different speeds and in different conditions, but aiming for the same runway at the same time. They all need the same flight path, the same ETA and to speak the same language—so not a mix of MPH and KPH, for example.”
And then there is the cost side to consider. “Even if you only have four pension funds, it’s likely each will work with an average of 10 fund managers,” Halfon at Mercer says. It is also likely that few have negotiated a discount in the case of any one manager being used by these funds. If there are no “mates rates” occurring, it is even less likely that feedback—good or bad—is filtering across these divides.
So why has it taken so long to catch on? Nestle and Unilever were ahead of this curve and even set up their own fund management companies to oversee their asset pools, but few have joined in. Konotey-Ahulu says, “In days gone by it didn’t matter to companies if they had eight or so pension funds as they were a long-term problem and ‘it would come alright in the end.’” He lists the main hurdles that stood in the way for multinationals: Each fund and trustee board had its own agenda; funding target, inflation-linked or not; investment strategy; and workforce demographic. Each country also had its own pension regulation, accounting rules, and (often) currency.
However, since the financial crisis, there has been a shift and the upside to asset pooling is more visible for CEOs and their finance directors. “Most pension funds now have shortfalls. Assets have not performed as they were meant to and companies are being relied on for financial support; CEOs and CFOs are fighting internal battles for cash to bail out a range of pension funds,” says Konotey-Ahulu. “They want to get back to the day job and get the pensions under central command.”
But like all worthwhile things it is not easy.
“It all looks very difficult to start harmonizing,” says Konotey-Ahulu. “It’s a huge job.” It’s one that costs too—and remember, we are not even looking at pooling the liabilities yet.
Just to look into how multiple pension pots could be brought together would incur a hefty price tag, according to Halfon. Lawyers, asset managers, custodians, and any other service providers have to be consulted and contracts either altered or cancelled—and that is after consultations with the trustees to win them over. “Once it is done, and assets are pooled, it is a huge step toward monitoring and managing risk,” Halfon says. Overy at Northern Trust says most clients would see the cost of the exercise “net out” any benefits in the first year, but afterwards there would be plenty of rewards.
Remember: General Motors bought and retained different brands around the world. Exactly.