Multinational companies are looking to pool or coordinate investments of billions of dollars in their overseas subsidiaries' pension funds as a way to boost returns, improve management controls and cut costs.
Ultimately, such efforts also will pay dividends for money managers able to service clients in multiple markets around the world, and for global custodians that provide consolidated record keeping and negotiate complex tax issues in dozens of securities markets.
While industry leader IBM Corp. has delayed its ambitious plans to integrate its worldwide pension assets, other companies are pursuing more modest plans to improve returns and achieve economies of scale. (See related story on page 53.)
The companies include: Monsanto Co., St. Louis; Nestle S.A., Vevey, Switzerland; Ciba-Geigy International AG, Basle, Switzerland; Halliburton Co., Dallas; Imperial Chemicals Industries PLC, Welwyn Garden City, England; and Alcatel N.V., Paris.
"The way we operate today is just light years away from the way we operated five years ago," said Nat Duffield, director-trust investments at Halliburton.
Some companies want to take more of a hands-off approach. For example, London-based Shell Pensions Investments acts as a pension consultant to the Anglo-Dutch oil giant's smaller subsidiaries but does not dictate investment strategy.
For pension funds seeking to harmonize investment policies, the potential rewards are substantial. Experts estimate a one percentage point increase in investment performance can justify a 15% cut in contributions. As these foreign pots of money keep growing and more countries loosen investment restrictions and allow for funded schemes, their impact on the corporate bottom line will increase.
By using one roster of money managers and coordinating investment policy, a pension fund's annual cost savings "could be 50 to 100 basis points," said Robert Ross, director of consulting at Frank Russell International, London. "It doesn't make sense to have a Swiss plan, a Dutch plan and a U.K. plan all choosing equity managers and then trading against each other," he said.
But there are innumerable obstacles to achieving genuine pooling of assets - particularly tax and regulatory hurdles and local company resistance.
The number of multinationals able to reap significant savings from the exercise is quite limited, perhaps fewer than 50 on a worldwide basis, said Patric Foley-Brickley, vice president and U.K. sales manager for Citibank N.A., London. "You have to be looking at an asset size (big enough) to make it worthwhile, given the current environment."
IBM executives, for instance, devoted years of work and study to creating a series of unit trusts that might invest in different types of portfolios, such as on a regional basis. IBM's Belgian pension fund might have invested in a U.S. or Pacific Basin stock pool overseen by IBM staffers with the greatest expertise in those areas.
While an IBM spokesman denied the project had been shelved, industry sources said the practical constraints proved to be enormous, and a change in top management put the project on ice indefinitely.
Other companies have encountered similar obstacles.
"It's not something we are pushing quite hard because we have other (corporate) priorities," explained Rob McMicking, investment manager for Digital Equipment Co. Ltd., Twyford, England, who oversees Digital's U.K. and continental European pension assets. Adopting a common investment strategy requires a significant time commitment from senior management, he noted.
Others are pressing ahead, although their efforts are less aggressive than IBM's. Multinationals are shifting their focus toward finding a centralized investment approach "without going all the way to a legal structure," said Robert Baker, a senior consultant with William M. Mercer Ltd., London.
In some cases, these approaches resemble a master trust. Assets are pooled for investment purposes and centralized record keeping is provided, but investments are kept legally separate for each participating pension fund. Economies of scale are achieved by having fewer money managers and other service providers at lower fees.
Monsanto is developing a pooled investment approach for cross-border investments, primarily for Monsanto's European pension funds. The plan, involving about $400 million in pension assets from non-U.S. based subsidiaries, should be in place in the second half of this year.
"We would like to have one global equity manager who holds assets for different funds," explained Al Wolfarth, assistant treasurer. If the manager were to buy 1,000 shares of a Japanese company, for example, those shares would be allocated proportionately to each participating fund.
Monsanto also wants to have one global custodian and one global fixed-income manager to service the approach.
Mr. Wolfarth said Monsanto has yet to address the sticky question of altering asset allocations of its subsidiaries' pension funds. "That's the important question," he said. "Somewhere down the road we will have to find a tactical allocator."
Nestle is discussing with two major banks ways in which it could create a series of pools for international investments of its various pension funds. For example, it might create separate pools for North American, European and Asian stocks, and perhaps the same for bonds, explained Jean-Pierre Steiner, pension fund managing director. Nestle likely would hire external managers to run the assets, he said.
The hardest part of the process would be tracking securities from purchase to sales and knowing to which fund they belong, he said.
Mr. Steiner said he hopes the draw of higher returns will lure Nestle pension funds to participate.
Corporations must be sensitive to issues of local autonomy and cultural norms, rather than ramming solutions down subsidiaries' throats, experts said.
Some executives from corporate headquarters increasingly are saying subsidiaries' pension funds are not being invested in the most effective way, said Marc Hommel, a principal in Towers Perrin's Frankfurt office.
In some cases, the parent company is asking subsidiaries to improve returns by, say, one percentage point, which forces a stronger move into stocks, he said. Headquarters also might provide acceptable target ranges for each asset class, stopping short of mandating investment policy, he said.
For most pension executives, the issue of coordinating investment policy still is in its infancy. Pension executives at Imperial Chemicals and Alcatel confirmed they are studying the issue but have not developed any concrete plans.
William McHugh, director-trust funds for Ciba-Geigy's U.S. subsidiary, said the company's Swiss parent and its foreign subsidiaries have started holding meetings to learn how each company is handling its pension assets and to share information on money managers and custodians.
The meetings have "led to better understanding and forced us to step back and look at how each company is running its pension operation," Mr. McHugh said. "Down the road, it will make sense to coordinate" investment policy, he added.
Some multinationals have saved money by consolidating their foreign plans into master trust-type operations.
In 1991, Halliburton commingled assets from seven different U.K. pension funds, each with its own balanced manager. Using a common investment fund structure, Halliburton hired a core manager, a U.K. equities manager and an overseas equities manager. State Street Bank & Trust Co.'s London office was named custodian, and provided consolidated record keeping.
Before then, "it was hard to tell what was going on from the reports," explained Mr. Duffield. The new structure "allows us to keep up with what's going on, know what our exposures are, what our costs are," he said.
Halliburton adopted similar strategies for its Canadian and offshore plans, so Mr. Duffield can tap into State Street's computer to monitor Halliburton's $400 million in foreign pension funds at one time.
Other multinationals have rejected pooling arrangements.
John Martin, head of investments for The British Petroleum Co. Ltd., London, said he doesn't want to interfere with local habits and standards.
Said Colin M. Price, investment services manager for Shell Pensions Investments: "We have realized we don't have the resources to do that. We'd have to take on more staff."
Instead, "the best use of my resources is to help those overseas companies to select their external managers," he said. Mr. Price spends two-thirds of his time advising Shell's 40-odd worldwide subsidiaries with funded pension plans on investing their $5 billion to $6 billion in pension assets. (The three major funds in England, the Netherlands and the United States, however, remain essentially autonomous although they do exchange some information.)
This way, the 6.5 billion ($9.75 billion) internally managed U.K. Shell fund acts as a consultant on issues of investment policy, asset allocation and manager and other service provider selection.
The U.K. fund staff also manages virtually all of Shell's 110 million pound Irish pension fund and about one-third of the 180 million pound Belgian fund invested in non-Belgian stocks.
The major issue for Shell is not cost savings from lower money management fees but improved investment results. "At the end of the day, you want performance, and you pay for good performance," Mr. Price said.