Ciba-Geigy Ltd. and Sandoz Ltd., probably will merge their U.S. defined benefit plans into one fund, and their Swiss funds into another, following the merger of the two giant Swiss pharmaceutical companies.
Combining the funds in each country would fit the companies' plan to become a single global giant known as Novartis.
But while such a pension merger is common in the United States, it could face serious obstacles in Switzerland, because of new pension legislation.
Experts warn Novartis' U.S. fund might look different from either predecessor fund. Novartis could take the opportunity to review allocations and managers before merging them.
And, the future of the U.S. pension chiefs at each company is unclear. Both men - William J. McHugh Jr., vice president-trust at Ciba, and Robert Hunkeler, associate director-funds management and financing at Sandoz - are well known and well respected in the pension investment management community.
In fact, Mr. Hunkeler used to work for Mr. McHugh at Ciba, before he joined Sandoz. (Although both are normally responsive to reporters' inquiries, neither would be interviewed for this story.)
U.S. consultants agreed the two staffs likely will be combined and some pension staffers laid off.
Will Sandoz fund dominate?
According to the 1996 Money Market Directory of Pension Funds and Their Investment Managers, Ciba-Geigy's U.S. plans are nearly twice as big as Sandoz's, but consultants noted the larger plan doesn't necessarily dominate in a merger. Too many other factors are at stake, including management expertise and the role each company will play in the resulting entity, said the experts.
Although the deal has been touted as a merger of equals, industry analysts consider Sandoz to be the stronger partner and the driving force in the merger.
Ciba-Geigy has a $990 million defined benefit plan and a $989 million 401(k) plan. All assets are managed externally, except a $135 million guaranteed investment contact portfolio in the savings plan.
Sandoz has a $459 million defined benefit plan and $482 million 401(k) plan, as well as a $24 million voluntary employees' beneficiary association.
Sandoz's defined benefit plan has more international assets - 21% in foreign stocks and bonds - than Ciba's (9% in international stocks). Sandoz's overall equity allocation is 60%, vs. 56% for Ciba. But Ciba has more in bonds.
While Sandoz's 401(k) plan has more than half of its assets invested in GICs and bank investment contacts, Ciba-Geigy has only 22% in investment contracts. Both defined contribution plans have similar amounts of indexed equities - 24% for Sandoz and 20% for Ciba-Geigy - but Sandoz has only 8% in bonds, while Ciba-Geigy has 36%. Both funds have small components of company stock: 1% for Ciba-Geigy and 2% for Sandoz.
According to MMD, Bankers Trust Co., State Street Bank & Trust Co. and J.P. Morgan Investment Management Co. are the only managers common to both plans. Bankers Trust also is Ciba-Geigy's master trustee. Executives at all three managers were not available for comment at presstime.
Complications in Switzerland
In Switzerland, meanwhile, pension experts believe Novartis eventually will merge the Swiss Ciba-Geigy and Sandoz funds into a single 13 billion Swiss franc ($10.9 billion) plan, but there might be obstacles.
Hans-Ruedi Mosberger, director of consulting for Frank Russell AG, Zollikon, said a pension law that took effect last year would force Novartis to value pension assets and liabilities at market value from the date of the merger if the funds are joined.
For the 9 billion franc ($7.5 billion) Ciba-Geigy fund, this could be especially problematic; the fund has about one-third of its assets invested in direct real estate as well as some mortgages. The 4 billion franc ($3.35 billion) Sandoz fund had 15% in real estate as of two years ago.
If the real estate had been acquired in the 1960s or 1970s, revaluation would cause the Ciba-Geigy fund to show substantial gains. On the other hand, if assets had been acquired in the late 1980s, the fund could take a 30% hit on the properties, Mr. Mosberger said.
The new law also requires plan participants to receive a fair shake in a restructuring or merger. If the two plans are funded at significantly different levels, the new law would force a distribution of surplus assets to participants in the better-funded plan.
Alternatively, the company could fund up the less well-funded plan to the same level, said Markus Nievergelt, a director at Prevista Vorsorge AG, a Zurich-based actuarial firm. No information was available on the respective plans' level of funding.
The two Swiss funds also are managed in very different ways.
The Ciba-Geigy fund is largely internally managed. According to sources, about 1.5 billion francs are invested abroad, with about 60% of that in international bonds and 40% in foreign stocks.
But it is the fund's 2 billion franc global equity portfolio that is highly controversial. According to sources, Ciba-Geigy's internal equity manager, Andre Ludin, invests 1.8 billion francs, 20% of total assets, in a global portfolio of about 25 multinational stocks - a much higher concentration than a typical pension fund portfolio.
It is believed Swiss Bank Corp. manages the remaining 200 million francs in equities.
The Sandoz pension fund is known as Switzerland's largest insured pension fund. The entire fund is in the hands of Swiss Life.
But that appellation is a bit misleading. In 1992, Sandoz officials decided to assume control of the assets themselves. Taking on the asset allocation function, Sandoz shifted a small portion of assets to an outside manager.
Sandoz's goal was to bring two-thirds of its 4 billion francs in-house over time. Of the one-third to be outsourced, about half would be in real estate.
The eventual goal was to leave Swiss Life solely with the actuarial and administrative tasks.
During the process, Sandoz boosted equity investments to 50% from 30%, while international holdings also increased sharply.
U.S fund merger inevitable?
In the United States, it appears to be a matter of when, not if, the pension merger will occur, said Alan Glickstein, principal of Kwasha Lipton, Fort Lee, N.J.
Having two separate pension plans detracts from the merger's message.
It also becomes a matter of employee relations, said William T. Cleary, national practice leader-retirement plan services at Sedgwick Noble Lowndes, Melville, N.Y. If two employee groups will be working together, management won't want one group to feel the other has better pension benefits.
Within the defined benefit plan, the companies can set up multitier structures so different employee groups can get different levels of benefits, said Mr. Glickstein. He added they also can "grandfather" employees closer to retirement so they collect the benefits they would have received from the predecessor company.
The probable first step is an asset and liability analysis and a comparison of the benefits, compensation scheme and total compensation package of the two organizations, said Mr. Cleary.
Transferring defined contribution assets is easy, but merging defined contribution plans also requires reconciling investment options of both plans, as well as such provisions as transfers, loans and employer matches.
If one plan has more attractive features - daily vs. monthly valuation, for example - the resulting plan often will adopt them, said Mr. Glickstein.
One exception is the level of matching; the higher level doesn't usually win out, he said.
The merger gives executives at both plans an opportunity to review manager rosters and asset allocation, said Mr. Cleary.
That could be good news for the three matching managers, according to observers. If both Sandoz and Ciba-Geigy employ those managers, it would mean both companies like the firms, so they would be in a good position to retain Novartis' business after the merger, said Mr. Cleary.
Swiss outcome less clear
In Switzerland, pension experts do not think it would be difficult for Sandoz to escape from its insurance contract, although they noted they did not know the terms of the contract. Ciba-Geigy and Sandoz officials in Switzerland declined to comment.
The question remains as well as to what kind of pension arrangements will be put in place going forward. One possibility, Mr. Mosberger suggested, would be to have all new employees join either the Ciba-Geigy or the Sandoz defined benefit plan, so there would be uniformity of benefits.
But the merger also could serve as a catalyst to switch to a defined contribution plan, a recent trend among major Swiss corporations and local governments, suggested Mike McShee, head of Watson Wyatt Worldwide's Geneva office.
The merger could also serve as the impetus for creating a new pension fund that would cover nearly one-fourth of the combined Novartis work force.
After the merger, Novartis plans to spin off its specialty chemicals businesses - operations with more than 31,000 employees around the world and based in Switzerland - into an independent publicly owned entity. Although the new company is not legally required by U.S. law to have a separate pension plan, it probably will set one up, said U.S. observers.
The new plan would have the same amount of assets accrued by the corresponding employees before the spinoff, said Mr. Cleary. A consultant familiar with one of the merger partners said Novartis could transfer portfolios or parts of portfolios to the spinoff, rather than liquidate securities to fund the plan.
The most common scenario would be for the spinoff company to start a pension fund with only the assets and liabilities of the employees it has, and leave the liabilities for the corresponding retirees or laid off employees of the predecessor units with Novartis' pension fund, said Mr. Glickstein. Eventually, the liabilities would be transferred to the spinoff company.
