IBM Corp.'s plan to integrate its worldwide pension funds into a series of investment pools was put on the back burner, even before the recently announced pension staff layoffs.
The plans were waylaid by a combination of tax and regulatory policies, internal politics and changing corporate priorities.
The coup de grace was the appointment of Louis V. Gerstner as chief executive officer and his subsequent hiring of Frederick W. Zuckerman as treasurer.
The fate of IBM's efforts reflect the difficulties of coordinating pension fund investing across subsidiaries in different countries. Its success might have encouraged other multinational corporations to follow suit, changing the way pension assets are managed in large corporations around the world.
With a larger pool of assets outside its home country than most multinationals have - $16.2 billion as of the end of 1993 - IBM was ideally suited to lead the pack.
An IBM spokesman said "shelved" was too strong a term for the project's status. Rather, he said, IBM officials "still think it's an idea worthy of consideration." Industry sources said the project had been put off indefinitely.
During the past several years, the Armonk, N.Y.-based computer company has attempted to develop a way to create a series of unit trusts in which IBM subsidiary pension fund assets could invest their assets. For example, assets might be spread among a North American pool, a European pool and a Pacific Basin pool. Pools might be either balanced or specialized.
Cost efficiencies would have been achieved by taking advantage of IBM's highly sophisticated U.S. staff for internally managed investments and its expertise at asset allocation and manager selection. Plus, hiring a single set of managers for each pool would avoid duplication and would lower management fees.
The theory was that better returns and lower costs from achieving economies of scales would have resulted. Annual savings of 50 to 100 basis points a year were envisioned.
In addition, IBM would have been able to avoid the disruption that occurs every time a senior investment person leaves one of its overseas subsidiaries. Staffed at between one and five people, these operations are much more vulnerable to dislocation from turnover than the Stamford, Conn.-based U.S. operation. Of course, IBM recently revealed the U.S. pension investment staff of 60 is being cut dramatically.
Industry experts declined to discuss IBM directly. But they would comment on the issues common to those trying to pool global pension assets.
The biggest hurdle, experts say, is avoiding taxation. While a U.S. pension fund can receive tax benefits on U.K. income under a double taxation treaty between the two countries, the same would not necessarily hold true if assets were commingled in an off-shore entity, explained John Watson, a partner in the London law firm of Ashurst Morris Crisp.
Finding a legal vehicle to pool assets that doesn't raise the hackles of international tax authorities is extremely hard. While a common investment trust or a Delaware limited partnership are favored by U.S. pension executives, they're not accepted in many countries. Similarly, the tax status of a Dutch or off-shore limited partnership is questionable in many jurisdictions.
"No single vehicle will solve all problems," explained Richard McIlwee, a partner with the law firm of Clifford Chance, London.
What's more, any vehicle would have to develop understandings with every country in whose securities the fund invested, said Jefferson Linder, vice president at Chase Manhattan Bank, Brooklyn, N.Y. With pension funds now investing in securities of dozens of nations, that task is daunting.
Regulatory issues also pose a problem. Many countries restrict the percentage of assets that can be invested in stocks or outside of the home country. Some, such as France, require money managers or custodians to be domiciled in the home country to facilitate regulation. And Japan has its own list of acceptable managers.
The eventual adoption of a European Union pension directive likely will lift some of these restrictions.
In addition, not all retirement pools are structured as pension funds. In Germany, for example, many are structured as insurance vehicles, forcing companies to contend with a different set of regulations.
Also, fiduciary concerns are a barrier. If pension assets of various countries are pooled, it's not clear which nation's law would apply and how the assets would be regulated. The prospect of dealing with differing standards from innumerable regulators is a nightmare most pension executives could live without.
Multinationals also have to overcome internal resistance to centralizing pension investments. In some instances, the corporate culture is skewed against centralization; violating that ethos for the sake of pooling pension assets might not be worth the political risk to the parent company.
And, local pension executives fear their jobs are at stake in any reorganization - as they might well be.
Sources close to IBM said the company ran into all of these problems, although ultimately a possible solution was crafted. But the changeover in top management last year shifted corporate priorities toward cost-cutting and paring personnel.
The decision to delay the global project came toward the end of last year, roughly coinciding with Joe Grills' retirement as assistant treasurer.
But some sources believe the decision would have been made even if Mr. Grills had stayed on. C.F. Wolfe, who succeeded Mr. Grills as assistant treasurer and is retiring May 1, and David MacKendrick, director of IBM Retirement Funds Europe, Feltham, England, were the other prime advocates.
Possibilities of change for other companies are in the offing. Sue Douse, a senior consultant at R. Watson & Sons, Reigate, England, said the consulting firm is hoping to receive governmental approvals this year to create a U.K.-based vehicle that would avoid the tax issues raised by other entities.
Others said many of the asset allocation issues raised in managing overseas pension funds might be handled with derivatives. "It's an excellent way to get the exposure" to different markets, Chase's Mr. Linder explained. Experts said no fund has used this method yet.