Crossing new borders
Written by Christopher Andrews
May/June 2011
Christopher Andrews offers an update on the less than smooth road towards cross-border pensions utopia
Sometimes you have to feel bad for the European Commission. It goes to all the trouble of trying to smooth the road for cross-border pension provision, years of consultations, legislation and directives, and when it seems like they’ve cracked it, the engine stalls. All of its good intentions have so far resulted in fewer than 80 cross-border schemes, out of around 140,000 IORPs existing in the EU, and the Commission wants to know why.
Last month it initiated a review of the IORP directive, and the regulator EIOPA has until December to get to grips with where the system isn’t working, and hopefully get that engine running properly. The Commission has said that it intends to propose measures that simplify the legal, regulatory and administrative requirements for setting up cross-border schemes, which is arguably where the system is currently falling down.
Indeed, says Chris Verhaegen, secretary general of the European Federation of Retirement Provision (EFRP), it is uncertainty of legislation, and treatment by supervisors in individual member states, that represent major stumbling blocks to trans-European initiatives. “It requires too much preparation and management time and consulting time before you can really start,” she says. “And that is one of the reasons why this has not picked up.”
What does appear to be picking up is an alternative to the current perceived difficulties and uncertainties surrounding full pension pooling. There is growing talk, and action, around pooling only the assets of a company’s various pension schemes, leaving the liabilities with those various schemes in those various countries; and there are obvious advantages to doing this.
“Asset pooling gives you the most direct and immediate advantage of economies of scale, and the pooling of liabilities is much more difficult without so much immediate gain,” says Verhaegen. “This is probably one of the reasons why this isn’t as actively sought after as the asset pooling side of things.”
Beyond scale, there are other advantages as well. Better risk management, oversight, governance and efficiencies, as well as better bargaining positions to control management fees. Also, as Paul Kelly, consultant and actuary at Towers Watson points out, if you have €100 million in a fund in one country, and by moving it to another you can make 50 basis points, that more than pays for the cost of moving it in the first year alone. However, he says, irrespective of the advantages: “In my experience it is only a small percentage of the market who have looked at this seriously, despite the consultants’ best efforts.”
Most of that percentage is coming from very large multi-nationals with deep pockets and the expertise to put pooling arrangements in place. Unilever, Nestle and BP, for example, have all engaged in bespoke asset pooling, in conjunction with pension pooling, across some of their company schemes. For smaller firms, though, this may seem out of reach. However financial services companies are actively developing solutions which will allow them to pool their assets as well, albeit in a less bespoke manner.
Down off the shelf
“If you look below the top few hundred multinational companies in the world, then an offering from a financial provider could be a worthwhile alternative to investigate,” says Jacqueline Lommen, European pension consultant at Aon Hewitt. “Many of them are bundled, standardised solutions, but there are possibilities to look for tailor-made solutions as well. Providers are willing to think it through with you.”
There are a number of custodians, including Northern Trust and JP Morgan, as well as insurance companies, including AEGON, Swiss Life, AXA, and Allianz, that are providing these off-the-shelf solutions to smaller multi-nationals, and in Lommen’s opinion what they are offering is convenience. “So you pay that extra fee, and it’s convenient, mainly around governance issues, you don’t have to look after all this yourself,” she says. “You don’t have to solve all the practicalities that come up over time.
“On the other hand if you do it yourself then you are more in control, with tailor-made solutions you have a direct impact on strategy setting, you are the owner of the assets yourself legally. If you do it through a financial provider solution then often that is not the case.”
AEGON is one insurer that is very keen to see this gain momentum. It says that while asset pooling is by no means mutually exclusive to pension pooling, the former is readily possible now, while the latter still needs work. The firm offers bespoke services which are in line with the Unilever path, and for smaller multi-nationals, it provides an off-the-shelf, multi-employer solution. This, by its very nature, offers further increased economies of scale, and utilises managed investment pools which aim to offer alignment with a given company’s investment expectations.
Again, the nature of the solution, as with those offered by other financial services firms, means that a company does not need to be huge to participate. “It can be on quite a small scale,” says Alexander van Ittersum, who is responsible for asset pooling at AEGON Global Pensions. “So maybe 50 members here and 50 members there, or a two company multinational. That is possible. And that is the biggest advantage here. We have the pools, and the efficiency is taken care of. And what’s important is that you’re able to offer a tax efficient solution. Even on a local scale there is added value in tax transparency, and of course on a cross-border scale.”
Again, while AEGON and others offer those bespoke paths as well, one potentially perceived problem with many off-the-shelf solutions is that bundling element mentioned by Lommen. Much like a cable television contract where your broadband and telephone are included in the deal, many pool offerings may require you to lock in locally with the provider. “So you
can only do pooling if you are using the administration, investment arms and other services of that local insurer in country A, B and C,” says Kelly. “This is not as effective as using a Unilever type approach, and you are actually making a more complicated decision.”
Kelly points out that the concept is a good one, and may eventually prove useful to some multinationals, but he says: “We’re not convinced yet that there are sufficient players in the marketplace, or that the products have been developed to actually meet that need. It’s early in the day for this, and you are making connected decisions, you are buying bundles. And when you buy bundles there are some compromises.”
Of course, the perception is that those compromises are necessary for smaller companies who want to take advantage of pooling because they couldn’t do it on their own.
The process is onerous, individual member state’s social and labour laws and tax treatments make things tricky, particularly for full pension pooling, and it is generally a very complicated affair. But is it?
“It’s not that complicated,” says Lommen. “I think that’s one of the major misconceptions of IORPs and asset pooling, that it’s complicated and that there are many obstacles.”
Lommen says the trick is to not rush into things, taking it slowly, pooling assets between a couple of countries, or even regions within one country, and then building on that. “This is usually a stepwise process,” she says. “So you start off with something small, moving a small number of assets under management with asset pooling, with pension pooling you move in just one country, or a small group of local employees, and that’s the trigger to then have this structure in place. And from there you build the vehicle over time by adding additional assets or pension schemes from other countries. Because of that, initial transactions tend to be small, but total volume rises over time.”
Christoper Andrews is a freelance journalist
