The practice of pooling allows multinationals to boost purchasing power in the form of lower supplier costs and it can also mean more detailed reports covering benefits claims, says Jenny Keefe
Case Study: Unilever
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If you’re a member of your office’s National Lottery syndicate, chances are you already know the basics of multinational pooling. The aim is to bank millions by clubbing together, hopefully keeping things amicable along the way. You’ll also need a lot of balls.
Multinational pooling might sound like plain, common sense. Rather than running six schemes for six different subsidiaries, firms bundle together benefits such as insurance, cars and pensions, consolidating them into a single global vehicle.
Grouping benefits together to share the cost is not a new idea and organisations have been pooling insurance contracts for 40 years. Yet recently, the practice has attracted renewed interest. Jeremy Hill, principal, international consulting at Mercer HR Consulting, says: "Firms are giving more attention to this area as part of the overall drive for better governance of benefits and pay."
Another reason why pooling is undergoing a renaissance is that firms are breaking new ground by pulling together assets from international pension schemes. Consumer-products group Unilever grabbed headlines last December when it became the first company to launch a pooling vehicle combining equity investments from pension schemes globally.
While there is a raft of benefits to be had from pooling, in the end, it all boils down to the same thing: cost. "Savings of 5%-10% are typical in well-managed pools, where attention is paid to the contracts selected for inclusion," says Hill. This holds for all pools, from insurance to pensions.
So, where does this cash come from? In respect of insurance, organisations can offset risk by linking international contracts, mainly for life, disability and healthcare benefits. And, simply, the more you buy the more you are able to save.
Francis Coleman, senior international consultant at Watson Wyatt, says: "Pooling allows multinationals to leverage their global purchasing power." Rewards include lower charges from providers (or networks of providers) and more detailed reports covering benefits claims and covered employees. Firms can create a sense of uniformity by harmonising benefits across the globe.
Underwriting firms are likely to be more flexible. "Use one insurer internationally and they will be more willing to remove local contract exclusions, for instance clauses on HIV and Aids," she adds.
The drivers behind pooling assets from international pension schemes are rather similar. Why shell out for things twice when you can kill two, three, or four birds with one stone? In the case of pensions, individual countries keep their liabilities, so if you are a UK employee, the UK scheme will still be responsible for paying your pension.
Gavin Bullock, head of pensions pooling at Deloitte, says: "It’s simply that on the investment side, instead of each country all deciding which manager to hire, which custodian to use, which strategies to follow and paying a lot more for that because they are doing it separately, they put all their assets together and get big economies of scale, which means they can hire better managers." Non-financial perks include improved risk management and governance.
So if you like the sound of pooling, where should you start? Novices should take gradual, baby steps. "The first step is to do a feasibility study to work out whether pooling’s for you. Although multinational pooling is suitable for the majority of multinationals, there may be instances where a multinational has particular characteristics and it’s not the most sensible option. For example, if you had just one major pension plan and one much smaller plan, it’s less likely to be suitable for you than if you had, say, five plans because the benefits are largely to do with economies of scale. Whereas it’s very clear that if you had five plans, then there are significant benefits to be gained," says Bullock.
Mercer’s Hill confirms that a feasibility study is also a good starting point when pooling risk benefits. "First, gather information on the existing contracts by country to identify the scope for savings. Look at the type of risk being covered, number of employees covered, premiums paid, current insurers and renewal dates to identify the scope for savings." Next obtain quotes from providers with international networks.
It pays to be aware of pitfalls however. Whether you are pooling cars, insurance or pension assets the same issues crop up. You must first make sure that there is buy-in from local HR departments. "The local operating company or HR contact may resist changes to their contracts," says Hill.
This is a common problem. "Local subsidiaries may feel they lose autonomy in choice of insurer since with the implementation of a global pooling network their corporate head office may take over or direct the choice of insurers in local countries," says Watson Wyatt’s Coleman.
There is also the issue of local compliance. "To set up pooled contracts that are still compliant with local legislation while still maximising local tax efficiency, then the pooled coverage must be insured with a local licensed insurance carrier. The pooling agreement operates on a head office level between the multinational company and the pooling network," adds Coleman.
Setting up pension pooling vehicles throws up numerous tax problems. Unilever, for example, took years to persuade international tax authorities to let the vehicle benefit from double taxation treaties. Once you’ve overcome these technical issues, you should then get everyone on board. Jaap F. Maassen, chairman of the European Federation for Retirement Provision, says you need to get buy in from different trustees as well as countries because internal politics can overshadow the new venture. There was bitterness at one firm, for example, when one country was chosen to host the pension scheme over another. Overcome these obstacles, however, and you can hit the jackpot.
Case study: Unilever
Consumer products group Unilever hit the headlines when it became the first firm to go public with a pensions pooling vehicle.
Angela Docherty, senior corporate investment consultant and one of the architects of the initiative, says: "The chief benefit for Unilever will be improved efficiency in terms of risk management and enhanced returns." The pool already includes assets from Unilever’s two largest pension funds, the UK and the Netherlands. In the next few years, the firm plans to group together pension assets from other subsidiaries. Unilever has funds in 42 countries with more than Eu15 billion under management.
The project was years in the making. The pool, known as Univest, is the first cross-border pooling vehicle launched by a multinational in the form of a Luxembourg-based Fonds Commun de Placement (FCP) which is a tax transparent collective investment fund. "We wanted to do what’s right for Unilever at the right time to make sure we got maximum benefit. Unilever has been investigating the available pooled fund options for a number of years. In late 2002, we concluded that FCPs would be recognised as transparent in the key tax jurisdictions, but it has been a relatively complex process, involving a number of different stakeholders, all of whom had a significant contribution to make.
"We put forward a case to the individual pension funds, starting with the two biggest – the UK and Dutch funds. The support of these funds was key," explains Docherty. The company has creamed off the best managers from its top schemes, and hopes to see better returns as a result.
"Utilising investment expertise from across Unilever and the participating pension funds will enable the trustees to continue to focus on strategic decision making. We have pooled specific assets from the majority of our pension funds which invest in global equities in one vehicle, with access to a series of regional sub-funds. This will allow all access to best-in-class managers in different regions, while enabling them to maintain control over their individual geographic investment strategies."
Finally, Docherty adds that the move fits in with the company’s "one Unilever" philosophy which seeks to generate ongoing savings of Eu700m per year from 2006.
Pension pooling facts
Some four-out-of-five multinationals are considering pension pooling.
Of those planning to pool pensions, one-out-of-five is planning to do so within the next year.
80% of multinationals considering pension pooling have schemes in over 10 countries.
Improved risk management was the driver cited by most companies (100%) followed by cost reduction (82%) and easier administration (65%).
Source: Deloitte’s Pension pooling survey for multinationals 2005