Written by Edmund Tirbutt
Edmund Tirbutt examines the pros and cons of cross-border asset pooling and what to consider before implementation
The range of headline benefits that can be achieved by multinationals that indulge in cross-border pension asset pooling certainly sounds enticing enough. They can improve their governance, obtain better control of their financial risk, cut costs, increase their operational efficiency and gain access to better investment solutions.
The basic concept behind the approach is also splendidly simple. An employer takes the assets from various pension funds in different countries and puts them together in a single transparent vehicle that benefits from economies of scale and from tax advantages. But the field, which dates back only to 2006 when Unilever was the first to take the plunge, is still relatively new and there is a considerable way to go before it can be acclaimed a universal panacea.
Although employee benefit consultants report growing interest in the approach for both DC and DB schemes, it is still only used by a minority of multinationals and, significantly, even its most ardent supporters differ noticeably in what they consider to be the principal attraction.
Some see cross-border asset pooling as being primarily about cost saving through economies of scale – which can reduce fees for investment management, custody administration and audit work.
Partner in Aon Hewitt’s global investment practice Zuhair Mohammed says: “The more money you place with underlying managers, the lower the fees charged, whether it’s with a DB or a DC scheme. One could easily see a 10 basis point reduction by pooling across the European states.”
But Cardano head of innovation Stefan Lundbergh doesn’t tend to recommend the approach on the grounds that having really good governance is a more important performance driver than size.
He says: “With pension funds the strength of balance sheets is more important than asset allocation because if there’s not enough strength in the balance sheet it results in lower pension payments. The Netherlands has tough regulations requiring pension funds that aren’t adequately funded to cut payments, and exactly who has ended up cutting and not cutting has had nothing to do with size. It was funds who managed risk in a prudent and resilient way who were most able to ride this storm.”
Conversely, however, Mercer Investment Consulting global leader, multinational consulting, Stacy Scapino believes that the governance play is cross-border asset allocation’s central advantage.
She says: “Putting all assets globally into one pool or series of pools means that everything is clear and from one source, and a lot of companies who don’t pool spend an inordinate amount of time on the governance of small plans. It also makes it easier to hire and fire fund managers and cut legal costs. The larger the number of small plans pooled relative to assets the bigger the savings.”
Meanwhile, others are equally adamant that tax efficiency is the most important attribute. The pooling schemes are based in Ireland, Luxembourg, Belgium and the Netherlands, which have set up tax-transparent vehicles (the UK is due to follow this year). Pension schemes can therefore take advantage of bilateral tax agreements, which all the major developed markets have.
Northern Trust asset pooling solutions manager Gwyn Koepke says: “A UK fund manager with a tax-inefficient fund could deprive investors of 30 per cent of their equity dividend income which, working out at around 60 basis points, is a lot of return to give up. Although many emerging markets don’t yet have bilateral tax agreements, if they start to mature and put bilaterals in place those already in the scheme are automatically future-proofed to take advantage.”
Such diversity of opinion can be explained at least in part by the fact that there are a number of different structures available to multinationals wishing to become involved with cross-border pooling.
At one extreme, a small number of very large organisations actually own asset management companies, but it is more common to have an arrangement bespoked by one of the major international employee benefit consultants. Additionally, there is now the option of using an off-the-shelf multi-employer platform offered by the likes of Allianz and Aegon.
LCP partner, corporate and international consulting Phil Cuddeford says: “The off-the-shelf approach is much easier, cheaper and quicker to set up and may benefit the majority of small to medium-sized multi-nationals. It ought to have international tax approvals in place for the most commonly used countries, but I’m aware of one bespoke scheme where the employer had to pay over €1 million in fees just to obtain the relevant tax approvals. It also saves on set-up costs as the platforms are already there.
“Companies should not under-estimate the time, cost and resources needed to set up and run pools, so it’s key to clearly define the corporate’s objectives and perform a feasibility study to decide whether they are worth it. It’s a question of seeing which of the often-quoted reasons for taking the approach is relevant to any particular company and working out whether it warrants an enormous amount of time and cost, because it will involve engaging tax advisers and legal advisers as well as employee benefit consultants.”
Cuddeford emphasises that one important early decision for clients to consider is whether or not the asset pooling is a preliminary stepping stone towards setting up a pan-European plan compliant with the Institutions for Occupational Retirement Provision (IORP) Directive 2003, as this may affect some of the key design decisions, including the jurisdiction of the pooling vehicle.
He continues: “One of the main benefits of moving from asset pooling to an IORP is that it provides the opportunity to use a less strict funding regime as well as the flexibility to manage surpluses and deficits on a holistic basis. So if you have three plans with a deficit of 10, a deficit of 20 and surplus of 30 respectively, you only need to count the total, which is a nil overall deficit. So there would be no need to pay any deficit contributions.”
Companies also need to consider whether their needs might not be better suited to a ‘virtual pooling’ half-way-house, which operates at an accounting level only. A central committee selects and monitors investment managers and a single global custodian takes all the local plans’ investment orders and uses its end-to-end technology to implement them and to provide consolidated reporting. This may be sufficient if enhanced information and governance is the key driver as it gets some of the governance and efficiency benefits at significantly less cost and set-up difficulty than physical pooling.
Global custody, via which multi-nationals can use their global purchasing power to leverage cost savings by appointing a global custodian, provides another option. But it may not go far enough for many companies.
Punter Southall International senior consultant Steve Chapman says: “Whilst the headline management costs may go down with global custody, typically the assets will still be in separate funds on separate platforms. This is unlikely to provide efficiencies for global reporting or other benefits that would otherwise be obtained from bringing assets together.”
But cross-border asset pooling itself has its fair share of perceived downsides. Lundbergh highlights that trustees may prefer to have their funds in home markets – rather than use pooling – for psychological as opposed to economic reasons. Other experts point to problems that can arise at a local level.
Chapman says: “The main barrier to asset pooling is local buy-in when it comes to implementation, usually down to lack of understanding. But effective communication from the outset goes a long way towards mitigating this.”
Scapino says: “It’s early days and it’s not a cure all. You still need local solutions and to engage in dialogue with local fiduciaries. There are a few issues that need to be worked on like local record keeping but it’s a potentially exciting future trend if we can get it right.”
Edmund Tirbutt is a freelance journalist