A recent global survey of multinationals’ management of employee benefits programmes conducted by Towers Perrin*, revealed two consistent motivations: a desire to control costs and a need to manage risk. If innate good practice was not driving companies in this direction, regulators have now wrenched the steering wheel and opened the throttle.
As a result, multinational organisations are increasingly trying to put in place clear and consistent ways to manage the liabilities of their main employee benefits programmes, particularly pensions/retirement benefits. When two-thirds of companies state that simply understanding the size and nature of their global pension liabilities is one of the main challenges they face, it is a sure sign that a tectonic shift is happening.
Several factors have led companies down the road to developing a global approach to cost and risk management. Defined benefit pension plans are a prime example, with huge financial and reporting pressures building up in recent years. Poor asset returns exacerbated by a growth in liabilities have exposed significant deficits for most multinational companies’ plans. The global move to market-based accounting standards (for instance, IAS 19, FAS 87 and FRS 17) translates deficits into sharp swerves on the balance sheet or profit and loss account. Liabilities and costs are climbing fast as members and their dependents live longer.
The survey shows that 10% of large multinational companies have pension liabilities between 50% and 100% of their market capitalisation, and for 3% they are over 100%. Little wonder, then, that external stakeholders such as financial analysts, credit rating agencies and investors - not to mention the press - are paying close attention.
Benefits, and pensions in particular, demand a holistic approach by multinationals. Two factors are vital to effective pension plan management for multinationals: a thorough grasp of the assets and obligations worldwide, and a structured approach to meeting those obligations through clearly stated policies in the following four areas:
qBenefits – type of plan, benefit levels, payment forms;
qAccounting – determining annual profit and loss expense and balance sheet charges;
qFunding – amount and timing of capital contributions to provide the promised benefits;
qInvestment – asset allocation, continuing management and monitoring performance.
As the effects of benefits programmes become more apparent to both internal managers and outside stakeholders, many organisations have responded by developing an equally clear explanation of their benefits management policies. Often this manifests itself in the form of a global statement of objectives designed to align all the corporate functions to a common aim around the world.
In the past, companies delegated wide areas of responsibility to other stakeholders, including trustees or their equivalent. High asset values produced large surpluses, allowing companies long, valuable contribution holidays; the regulatory burden and the call for transparency were low. However, companies now realise that their benefits liabilities can be a threat to their very existence. Nearly three-quarters of companies have set up a specific committee or management team responsible for pensions and other employee benefits. They are charged with ensuring that benefits programmes are run to support the interests of the sponsoring company.
Conflicts of interest can arise between them and trustees, so increasingly companies are turning to actuarial advisers - independent to those advising pension fund trustees and members - to act like corporate financial advisers, analysing and projecting benefit costs and liabilities from the standpoint of the effect and risk to the multinational company. Around a third of multinationals have already appointed a global co-ordinating actuary.
The main role of the central management team is to set up a credible working structure. It should begin by reviewing benefits governance, then develop a process for monitoring benefits programmes worldwide, setting out how and when to intervene. The purpose of the initial review is to gain a preliminary high-level view of the company’s pension position. Possessing a concise overview not only enables the management team to demonstrate its grasp of the challenges the company faces, it also clarifies where problems may lie, leading to a plan of action and a business case for further in-depth analysis. In short, the overview is both diagnostic and therapeutic.
A clear priority must be to focus on the countries in which the company has large operations and numerous employees. Often these are in the major economies around the world, but smaller markets can also represent significant liabilities for multinationals, especially when grouped together. Each multinational has a unique set of options for improving its benefits position, depending on the organisation’s managemen approach and philosophy on benefits. Experience indicates that there are almost always some comparatively easy ‘quick wins’ that help to win over internal stakeholders to the aims of the global initiative.
Vitally, a company hoping to develop a new and effective framework of governance for its benefits must first accept that the initiative demands more than building a better understanding of pensions. It is a change management process. The ‘old’ benefits set-up will have stakeholders in many countries and in various management functions. A company that fails to articulate its new process for benefits management will leave pockets of resistance, leading to inconsistency that can undermine the entire effort. As a change process, the initiative must be regarded as continual rather than a one-off event. Companies will find they have to invest considerable time and sustained effort to ensure success.
Even so, new governance structures can be supported with a range of tools, such as databases to hold and analyse benefits information from around the world. Multinationals must also ensure that their external advisers, both at national and global levels, are tightly co-ordinated and calibrated to the same set of policies, methods and assumptions. Other techniques that companies use are to enforce a consistent approach to benefits accounting, and using multinational pooling of insurance risks.
A noticeable effect has been the centralisation of control of employee benefits. In over half of multinationals, responsibility is now shared between local offices and the corporate centre, and most companies expect to see greater corporate control in the next few years. It would be too easy to dismiss this trend as a management impulse to centralise: it is the natural consequence of more stringent governance requirements.
Although there remain some aspects of benefits management best left at a local level (communications to employees is the most common), central control is increasingly important in one fundamental business activity – mergers and acquisitions (M&A). When the scale of pension liability can measure significantly against the capitalisation of the company, pension issues strike at the heart of an M&A transaction. Today’s business reality is that acquisitive companies almost always want to leave pensions and other benefit liabilities with the seller. This tack avoids taking on a legacy of costly, possibly damaging, past-service liabilities. Pensions can, therefore, have a material influence on the viability of an M&A transaction for both buyers and sellers.
Responsibility for managing worldwide benefits is increasingly shared between the traditional guardians in HR and new ‘minders’ from the finance department. Although HR specialists still play a leading role in setting benefits objectives and policies, approaching half of companies report that their finance function has gained most influence over the last two years. Managing pension plans effectively needs concerted management attention together with a deep understanding of the variables that drive costs, as well as continuous information to allow measuring, monitoring and decision-making.
Nigel Bateman is head of the global consulting group at Towers Perrin in London
*Worldwide Benefits Management
Survey published in December 2004
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