FELTHAM, England - IBM United Kingdom Ltd. has formed an in-house consulting unit to advise its small and medium-sized pension funds across Europe.
The four-person Pension Support Centre aids local IBM pension board members with asset/liability studies, manager selection and monitoring, and risk exposure assessment. By using common money managers where possible, IBM's local retirement funds are able to trim fees, explained R. Nevill Brooke, director, IBM Retirement Funds, Europe in Feltham, located just outside London.
Numerous multinational companies are trying to address investment policy at their subsidiaries' pension funds, seeking to create a consistent philosophy or obtain better value for money in buying outside services, explained Len Brennan, managing director for Frank Russell Co. for Europe, the Middle East and Africa.
Multinational pension executive "are not really reducing costs, but are coordinating and getting better bang for their buck from those suppliers," Mr. Brennan added.
The new IBM unit is not designed to impose its views on local pension funds. IBM's ambitious plans to pool its pension funds for investment purposes across Europe failed partly because of local opposition to giving control to central headquarters and partly because of regulatory hurdles (Pensions & Investments, March 21, 1994).
Development of the unit stemmed from IBM's overall organizational thrust to outsource non-core activities, pressed by Chief Executive Officer Louis Gerstner. But it also was affected by the loss of skilled people who have not been replaced, Mr. Brooke said. IBM has lost key pension executives in Great Britain, Switzerland, Belgium, Portugal, Denmark and Norway, partially because of corporate restructurings, sources said.
"The fundamental issue was to simplify" and "outsource wherever possible," Mr. Brooke told the European Federation for Retirement Provision and National Association of Pension Funds' biannual conference in Cascais, Portugal.
IBM's local European defined benefit plans are much smaller than their $28 billion U.S. cousin, and thus sometimes need advice. Mr. Brooke's unit advises IBM defined benefit plans in 11 countries with assets totaling some $14 billion.
Plus, there are numerous obstacles to running a pension fund in Europe, Mr. Brooke explained. Traditionally, state pensions predominate, legal investment restrictions limit overseas investments, and foreign custodians sometimes cannot be used. In addition, local bond cultures are strong, actuarial rules vary by country and pension funds often are overseen by insurance regulators, he noted.
Instead of working with the legally structured board of trustees or investment committees, which sometimes can be large, IBM has pulled together individual country teams, consisting of country general managers, chief financial officers and treasury managers, plus one or two IBM corporate representatives and possibly outside market experts. Mr. Brooke serves on each of those teams, while Tom Cadigan, assistant treasurer who oversees IBM's U.S. fund, also serves on the teams for the larger foreign funds.
Besides Mr. Brooke, the Pension Support Centre also includes specialists in asset/liability management, accounting and manager selection and monitoring. IBM funds still will use outside consultants for areas lacking in in-house expertise.
In meetings that occur at least twice a year, IBM officials focus on asset/liability management, strategic asset allocation, long-term rates of return, manager selection and risk management issues.
For example, the unit can bring to bear skills in performance attribution and risk management, including creation of proper benchmarks, evaluation of derivative and credit policies, and separation of responsibilities and controls over cash, he said.
The biggest risk, however, is that local funds will lack an understanding of the extent of corporate pension liabilities, Mr. Brooke said.
Creation of the unit also will help to build global relationships with IBM's money managers and global custodian, thus reducing fees. Mr. Brooke said progress has been slow on this front. He declined to say which managers are being used for multiple IBM funds, though Chase Manhattan Bank serves as global custodian for several IBM funds. He also declined to discuss fees.
For the future, IBM is moving toward adoption of defined contribution plans, particularly for new employees. While some IBM corporate executives would like European plans to mirror the U.S. model, European law and structures don't usually allow the same type of plans.