PHILIPS OKS SHIFT TO DEFINED CONTRIBUTION
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Deborah Pederson and David J. Rothenberg
      Arena hires 3 to boost global marketing of private credit strategies
      BentallGreenOak agrees to acquire Metropolitan Real Estate Equity
      watch video
      0:45
      Private funds weathered 2020 turmoil
      Daniel McHugh
      Aviva Investors promotes from within for real assets CIO
    • Kieran Mistry
      Hymans Robertson picks head for new non-traditional risk transfer unit
      Troy Saharic
      NEPC brings on director of new business development
      Bill Foley
      Foley-backed SPAC agrees to $7.3 billion deal with Alight
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
    • A pharmacist administers a dose of the COVID-19 vaccine in Mountain Brook, Ala., on Feb. 21, 2021
      Business optimism grows as vaccinations spread – Fed
      watch video
      0:59
      Coronavirus and the S&P 500: February 2021
      Multiemployer pension measures cleared for relief bill vote
      The Charging Bull statue is covered in snow near the New York Stock Exchange on Feb. 11, 2021
      Bain: Private equity managers finish 2020 strong
    • Desktop with document showing pie chart with investment types along with a calculator
      OECD proposes revision of its DC ‘good design’ roadmap
      Dominic Scriven, director and portfolio manger of Dragon Capital, speaks during an interview in Ho Chi Minh City, Vietnam in 2006
      Vietnam gets its first private defined contribution plan
      DCALTA releases daily valuation tool for alts in DC plans
      PSCA: Employee participation in non-qualified deferred comp plans rising
    • Vapor rises from a petrochemical plant
      New York State Common reaches more corporate climate agreements
      Michael Herskovich
      BNP Paribas Asset Management names global head of stewardship
      TPT Retirement taps into low-carbon strategies
      Gary Gensler
      Nominee Gensler backs SEC climate risk disclosure
    • Spirit winners
      Prudential honors young people who are helping out
      2 U.K. pension execs take on ESG investing in new podcast
      Donation illustration
      Jefferies will use trading commissions to do good
      Michael Arougheti
      SPACs ride wave as latest investment darling
    • Robert 'Rob' Shafir listens during a Senate Permanent Subcommittee on Investigations hearing in Washington on Feb. 26, 2014
      Sculptor hedge fund hits sixth straight year of outflows
      The WallStreetBets forum on the Reddit Inc. website on a laptop computer and the GameStop logo on a smartphone in an arranged photo.
      GameStop frenzy has hedge fund managers rethinking next moves
      Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Shanghai skyline
      Global hedge funds struggle even in a more open China market
    • Vapor rises from a petrochemical plant
      New York State Common reaches more corporate climate agreements
      Pennsylvania State Employees launches search for fixed-income managers
      San Antonio fund terminates Lazard from emerging markets strategy
      Fresno County Employees moves $22 million between Eaton Vance funds
    • Manulife taps UBS veteran to oversee its China business
      Herman Bril
      Arabesque Asset Management chooses first CEO
      Railpen hires head trader in preparation for in-house trading
      Andy Moniz
      Acadian picks responsible investing director
    • District of Columbia Retirement Board executive director to retire
      San Antonio fund terminates Lazard from emerging markets strategy
      Fresno County Employees moves $22 million between Eaton Vance funds
      A Canadian flag flies outside a building in the financial district of Toronto
      Canadian pension plans boost allocations to alts – survey
    • District of Columbia Retirement Board executive director to retire
      Deborah Pederson and David J. Rothenberg
      Arena hires 3 to boost global marketing of private credit strategies
      Manulife taps UBS veteran to oversee its China business
      Herman Bril
      Arabesque Asset Management chooses first CEO
    • The Charging Bull statue is covered in snow near the New York Stock Exchange on Feb. 11, 2021
      Bain: Private equity managers finish 2020 strong
      Carlyle secures $4.1 billion ESG-related credit facility
      Hamilton Lane raises $3.9 billion for fifth secondary fund
      PSG closes first Europe-focused fund at $1.5 billion
    • AEW chooses head of fund operations and debt finance
      Sebastiano Ferrante and Jocelyn de Verdelon
      PGIM Real Estate turns to staff to fill new roles
      European managers key in on specialist strategies
      Ingrid Jacobs
      Jones Lang LaSalle brings on head of diversity and inclusion
    • Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
      P&I 1,000 largest retirement plans: 2021
      Retirement in emerging markets
      Outlook 2021
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Pennsylvania State Employees launches search for fixed-income managers
      San Bernardino County Employees seeks investment consultant
      University of Kentucky commits $15 million to 2 buyout funds
      CalSTRS allocates $5.7 billion in second half of 2020
    • Pennsylvania State Employees launches search for fixed-income managers
      San Bernardino County Employees seeks investment consultant
      University of Kentucky commits $15 million to 2 buyout funds
      CalSTRS allocates $5.7 billion in second half of 2020
    • Independent Investment Consulting Services
      Financial Auditing Services
      Actuarial Services
      Emerging Market Equity Manager Services
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Tesla cartoon
      Don’t confuse wealth creation with retirement saving
      Top 1000 cartoon
      Top 1,000 retirement plans weather storm just fine
      Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Investment Trends: Looking Ahead Across Equity Sectors
      Rethinking Market and Reference Data Management
      China is embarking on a new stage of growth
      Gold Outlook 2021
    • Sameer Shalaby
      Commentary: Why should investors care about treasury management?
      David Blitzstein
      Commentary: Without a national retirement policy, Americans face a future of pension crises
      Lawrence Cunningham
      Commentary: Gensler should keep Clayton’s pragmatic proxy adviser rules
      My-Linh Ngo
      Commentary: Pension funds and the role of the debt market in the fight against climate change
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      How will gold react?
      To people shaking hands
      P&I Content Solutions
      Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
      Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      0:45
      Private funds weathered 2020 turmoil
      watch video
      0:59
      Secure choice and other retirement plans at a state level
      watch video
      3:33
      P&I 1,000 by the numbers 2021
      watch video
      1:33
      A look at hiring activity in 2020
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      ESG Capabilities and Climate Impact Investing
      Technology is the New Oil: The Changing Nature of Emerging Markets
    • POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
      POLL: The Biden administration’s economic plans
      POLL: Retirement issues in 2021
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for February 2021
      Top Performing Managers of Global Balanced, 4th Quarter 2020
      Top Performing Managers of Global Real Estate, 4th Quarter 2020
      Top Performing Managers of Leveraged Net Long (SA Only), 4th Quarter 2020
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      ESG Capabilities and Climate Impact Investing
      Technology is the New Oil: The Changing Nature of Emerging Markets
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Print
March 18, 1996 12:00 AM

PHILIPS OKS SHIFT TO DEFINED CONTRIBUTION

Joel Chernoff
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    CROYDON, England - Philips Electronics U.K. Ltd. will adopt a defined contribution plan for new employees in April 1997, one of the few British companies to make the leap to money purchase schemes.

    Philips is the latest example of British companies and U.K. subsidiaries of multinational companies overhauling retirement income plans. The change has dramatic implications for corporate pension liabilities, investment managers, capital markets and plan participants.

    Officials at virtually every U.K. company are examining whether to adopt defined contribution plans. Few have made the switch. Among those that have: retailer W. H. Smith & Sons (Holdings) PLC, Abington; insurer Legal & General Group PLC; and brewer Whitbread PLC, Luton. Most cover new employees, not upsetting previous arrangements.

    For Philips, the impact on its retirement income and investment management arrangements are significant:

    New employees joining on or after April 1, 1997, will be covered by a defined contribution plan that probably would offer a small number of investment options plus lifestyle funds as a fallback option. Current employees can switch if they choose.

    Philips' internally managed 1.5 billion ($2.3 billion) final-pay defined benefit plan will be frozen. That will drive the plan's ratio of retirees and deferred vested employees to active workers as high as 90% by 2000, from 67% now, said David Fry, managing director of the Philips pension fund.

    The shift in maturity level likely will cause the defined benefit fund to boost its bond holdings substantially, possibly to 50% of assets from 15% last year. In fact, Philips trustees just authorized a boost in fixed-income holdings to 35% of assets, Mr. Fry said.

    The increasingly mature liability structure, combined with a shrinking asset base in real terms, might cause Philips trustees to seek external money management for part of the pension fund. Trustees are expected this month to review a study by William M. Mercer Ltd., London, as to whether investment management should be outsourced.

    If outsourcing is adopted, and subsequent study results in a specialist approach, Philips' internal managers might end up focusing solely on U.K. equities. But there's a good chance even U.K. stocks might be outsourced eventually, as total equities shrink to 500 million to 600 million in real terms by 2000 - from 1.1 billion now, Mr. Fry said.

    Curbing liability exposure

    Three factors prompted the move to defined contribution, said Mr. Fry, who took on the task of revamping the pension fund after serving as finance director of the U.K. operation. (Philips is a wholly owned subsidiary of Dutch electronics giant Philips N.V.).

    First, the company wants to limit its liability and exposure to volatility. Unlike some companies exploring the defined contribution route, cost savings are not expected to be significant.

    "Philips does not like the open-ended nature and unpredictable costs associated with final salary schemes," Mr. Fry said.

    Philips, whose stock is listed on the New York Stock Exchange, is obliged to report its consolidated pension fund obligations on a marked-to-market basis under Financial Accounting Standard 87. In contrast, U.K.-listed companies must report on SSAP 24, which smoothes out volatility from equity investments.

    Second, the increased mobility of Philips' workers makes a defined contribution plan more desirable. Benefits generally are better for employees leaving the company under a money-purchase scheme than under a traditional final-pay plan, thus making it more attractive to younger workers.

    Third, the switch enables Philips to include shift pay for blue-collar workers and commissions for sales staff in pensionable earnings. Now such earnings are not included in calculating employee pensions, although they comprise a significant chunk of regular pay for many.

    Including such pay in calculating pensions in the defined benefit plan would have been prohibitively expensive because of the past-service costs involved, Mr. Fry said. By contrast, building such pay into the defined contribution plan formula involves future accruals only, while still satisfying the concerns of Philips' unions and sales staff.

    Pension surplus used

    What will enable Philips to engineer the change, however, is that the surplus from Philips' overfunded defined benefit plan will cover the company's contributions to the money-purchase scheme until at least 2000.

    The problem for Philips in creating a defined contribution scheme, as for many U.K. companies, is that the company would have to make immediate payments to the new scheme. In contrast, Philips has enjoyed a contribution holiday to its defined benefit plan for six years.

    To avoid a drain on corporate cash flow, Philips will need to design the new defined contribution plan as part of the original 1954 trust deed, instead of as a completely separate fund. That way, it will be able to transfer assets to the defined contribution scheme.

    If all goes well, Philips will avoid making contributions to either plan until at least 2000. The defined benefit plan, last valued at 119% of liabilities a year ago, has seen funding levels decrease marginally because of benefit improvements.

    Going to defined contribution

    Creating a defined contribution scheme for Philips' largely blue-collar work force will be a challenge. The plan design process, which is being conducted with the help of Bacon & Woodrow, Epsom, won't be completed until June, and won't be announced formally until October. That gives Philips trustees six months until they "go live."

    While Bacon & Woodrow has been hired by the trustees, parent company Philips engaged KPMG Actuaries & Pension Consultants, London, to separately review any retirement plan changes, recognizing the potential conflict of interests between the plan and its sponsor.

    Mr. Fry expects the new plan will offer employees a number of different contribution levels, depending on their ability to save.

    Also, Philips probably will offer a limited number of investment options, such as a bond and a balanced income fund, from one or more service providers able to offer additional choices down the road.

    "We almost certainly will offer a default lifestyle" investment option, he said. Lifestyle funds, with differing risk profiles based on employees' ages, would enable workers who failed to make their own investment choices to be invested safely.

    British workers generally are unaccustomed to making investment decisions. Mr. Fry estimated 80% of Philips' workers initially might not pick their own asset mix, and instead resort to the lifestyle option. Philips trustees also might consider appointing an independent financial adviser to educate plan participants - and to assume any potential liability for offering investment advice.

    Investment management for the money-purchase scheme will be provided by outsiders - in marked contrast to fully internal staffing for Philips' defined benefit plan. Philips executives insisted on outside money management, Mr. Fry said. If assets were run internally and performed poorly, the company would have a moral obligation - if not a legal one - to put in more money, he said.

    Meanwhile, KPMG is reviewing Philips' internal back-office staff, which already handles the defined benefit plan, to determine whether it is capable of administering the defined-contribution scheme.

    Defined benefit changes

    Closing off the defined benefit plan also suggests major changes for its management.

    The growing maturity of the scheme already led Philips trustees to invest 15% of assets in index-linked gilts three years ago. In late February, trustees agreed to boost the bond component to 35% of assets, with a minimum of 25% invested in index-linked bonds. But closing the scheme will cause trustees to commission a new asset/liability study.

    Meanwhile, consultants at William M. Mercer are about to hand in a study on the fund's current investment management structure. Mr. Fry speculated the consultant might call for outsourcing large chunks of the internally managed fund, and concentrating the efforts of Philips seven-person in-house investment team solely on U.K. equities.

    Andrew McGaw oversees the investment team: two U.K. equity portfolio managers, one European manager, one North American manager, one Far Eastern manager and two traders.

    The eventual shrinkage of the U.K. equity portfolio, however, might lead to outsourcing that portion of the portfolio as well. For Mr. Fry, overhauling Philips' retirement income arrangements probably will be his last major project at the company. After revamping the program, Mr. Fry himself will be eligible for retirement in June 1997 - after 40 years' service at the company.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Targeting millennials: Author, niece put his latest book to music
    Targeting millennials: Author, niece put his latest book to music
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    How will gold react?
    Sponsored Content: How will gold react?
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Rethinking Market and Reference Data Management
    Investment Trends: Looking Ahead Across Equity Sectors
    China is embarking on a new stage of growth
    Gold Outlook 2021
    Shifting DC Times - Winter 2021
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center