Gabriele Buchs and Nigel Bateman outline Deutsche's Bank journey towards a co-ordinated approach to pension risk

When Deutsche Bank began reviewing its pension arrangements around the world in 2003, it operated in excess of 60 defined benefit plans in 20 countries. These included a mix of defined benefit pension plans, post-retirement medical and/or long-term benefit arrangements. At this point the benefit obligation amounted to approximately €7bn (approximately €8.5bn in 2007); the company's pension arrangements presented it with significant financial exposures globally.

 The bank recognised that, from a global governance perspective, local focus had led to inconsistent decision making. At the same time, local management started to seek input on Deutsche Bank's global perspectives/preferences on pensions and benefits in relation to a number of key challenges. It was becoming increasingly obvious that many similar challenges were faced in other key pension and benefit decisions. These included:

Design - Deutsche Bank had no explicit global principles about how to make design decisions, or overarching preferences (eg for defined contribution arrangements or defined benefit); Funding - Many differing local approaches resulted in different funding levels; Accounting - While there were no compliance failings, inconsistent interpretation of global requirements in some cases meant varying quality of financial information; Governance and approval procedure - The main questions arose over the organisation structure and key decision making process; Investment - Deutsche Bank's own pension funds were exposed to significantly different investment mixes in different countries.

 Deutsche Bank, with Towers Perrin's support, recognised that the challenges could be approached in a consistent manner. Developments in the regulatory and accounting standard environment underlined the imperative of clear and transparent governance and decision procedures as did Deutsche Bank's listing on the New York Stock Exchange and the Sarbanes Oxley Act.

Ultimately there was a realisation that, by improving global oversight of pension arrangements, the bank had the power to significantly improve its decision making and to mitigate pension risk.

Working with Towers Perrin, Deutsche Bank focused on four key areas: benefits, funding, accounting and investment.

The team recognised that, when making strategic decisions, each of these four areas required differing types of decisions, made by disparate parts of the organisation, potentially faced with conflicting interests, whilst using, at times, markedly different language and possessing contrasting perspectives.

Managing the process of change

It was agreed that, to achieve Deutsche Bank's global objectives, clear lines of responsibility would be required from the various internal stakeholders. A Deutsche Bank strategic committee formed of senior members from HR, finance, risk management, treasury and asset management was tasked with setting and monitoring global strategic objectives for benefit design investment policy, risk and funding. Towers Perrin acts as adviser to this committee.

 The framework serves as a reference for ongoing regular decision making, for example on funding, investment and accounting, and also covers scenarios when new benefit plans were to be introduced, current benefit plans were to be reviewed or during post acquisition integration projects. The framework also helped capture key documentation to help meet the bank's Sarbanes Oxley requirements. A ‘global benefits framework' was developed, defining an overall philosophy.

Creating global pensions oversight

To create an effective global apporach to pensions and benefits, Deutsche Bank and Towers Perrin developed an over-arching framework consisting of:

An overall global oversight committee; Global benefits philosophy and guiding principles, governance; Responsibilities, key metrics and risk tolerances; More detailed guidelines in certain key areas; Supporting controls and processes.

A key component of the controls and processes aspect of this global governance framework is effective forward-looking financial management, information, focused around key metrics. This can be divided into four components, which can be deployed in appropriate circumstances.

1. Measure - A quarterly ‘dashboard' provides regular snapshots of key inputs to the strategic senior management committee, highlighting which items need to be tested

2. Test - Sensitivity analysis and projections helped to test the inputs against Deutsche Bank's key metrics and are used to understand its global risk exposure as well as set and refine global tolerances

3. Dive deeper -More detailed analysis of priority issues - when identified through the first and second points above - based around key metrics and tolerances. This drives decisions on alternative strategies, for example when considering design, investment or funding/financing changes in different countries

4. Streamline - Powerful global tools streamline analysis to focus on highlighting key implications and priorities

Cutting through the noise

Many of the key lessons from the Deutsche Bank activity serve as useful pointers for other multinationals looking to make significant changes to how they manage pensions. For example, one important consideration is to find the right balance between overall corporate control and local flexibility, focusing on specific countries when needed within an overall global context. Another is to try to understand the perspectives of all stakeholders, including their issues, concerns, interests and indeed conflicts of interest.

With the UK as one of the key pension countries for Deutsche Bank, the framework has helped structure more clearly the interaction between the bank -at corporate and local levels - and the trustees, which has led to increased dialogue and better decision-making.

The preliminary completion of the process on Deutsche Bank's side was to build an electronic benefits inventory. The bank is now able to retrieve structured and current information on all benefits plans it offers to employees in more than 50 countries.

Deutsche Bank also realised that the process needs to continue beyond the official end of the initial project. Changes occur continuously, so the bank needs to make decisions about how to respond effectively. A strong internal sponsor is crucial, as is effective internal communication and transparency. Actions need to be followed up, and well coordinated across divisional geographical and hierarchical silos. Allowing a sufficient timeframe is also a must, as are seeking appropriate advice and challenging traditional thinking.

While Deutsche Bank certainly benefited from a number of key in-house capabilities, in areas such as asset management, global markets finance and risk management, the team was able to cut through the ‘background noise' and challenge all the stakeholders at Deutsche Bank to identify the real issues in response to internal and external business drivers. Rather than focus on individual stakeholder concerns, some of which were of a technical nature, discussions were raised to a more strategic level where Deutsche Bank could take a more holistic approach to its pension decision-making.

A key overall lesson is that it is important for organisations looking to effectively manage pensions on a global basis to define success criteria.

 Success means five key outcomes:

The ability to demonstrate robust global pensions and benefits accounting together with assessment/management of the underlying risks; Financial optimisation including cost savings, with risks being optimised in alignment to the organisation's overall business financing; Pensions and benefit designs around the world which are fully aligned to business needs and reward strategy, and that helps workforce effectiveness and engagement; Confidence that reputation, compliance and governance issues will not arise, and/or can be addressed without incident; Competitive advantage during acquisitions and divestures.

Sponsors need to keep these criteria in mind to help keep focused on success, even when faced with a wealth of technical and other distractions.

Where is Deutsche Bank now?

Deutsche Bank has taken a huge step forward in terms of its global pension governance. It is now able to bring together perspectives from different parts of the bank, making decisions rapidly which are aligned with the bank's strategic direction for both people and financing, while balancing local and global perspectives.

 A platform now exists to determine how to take advantage of new opportunities globally and locally, respond to changes such as legislation, market developments, acquisitions, divestitures and other corporate actions. The bank is now able to capitalise on the emerging range of retirement offerings, cross border plans, emerging ideas in risk mitigation and techniques to optimise rewards spend.

Some key decisions taken and implemented through the new governance framework have been:

Reduced risk in line with the global tolerances. Stress test parameters have been designed and plan assets are managed by adhering to a strict risk frame (concept: suplus value-at-risk); Improved funding position to provide security for employees and allay concerns of investors; Shifted design - to align with Deutsche Bank's reward philosophy.

In closing: a potential risk has been turned into an opportunity where there is now global oversight and governance of an important balance sheet issue and Deutsche Bank is in a position to make better informed decisions about pensions and benefits as a key element of rewards.

Gabriele Buchs is head of global benefits and reward, Germany, at Deutsche Bank and Nigel Bateman is a principal at Towers Perrin

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