NEW BRUNSWICK, N.J. - Johnson & Johnson has boosted active equity exposure of many of its plans to 75% of assets to hedge against inflation and avoid making employer contributions.
The multinational's aggressive strategy, which includes coordination of worldwide plans, has allowed the company to enjoy a contribution holiday for its three largest pension funds - those in the United States, the United Kingdom and Belgium - for at least five years.
In all, the company has major funded pension plans in nine countries, from the United States to Brazil. Its worldwide pension assets total $5 billion, including $2 billion of defined benefit assets in the United States, said William E. Rauh, the company's director-pension funds.
J&J has been moving toward minimum 75% equities exposures for its worldwide pension assets since the late 1980s. Its funds in four countries - the United States, the United Kingdom, Australia and Belgium - meet or exceed that level, and now the health-care products company is focusing on plans in Canada and the Netherlands.
In Canada, the company is reviewing domestic asset allocation restrictions that limit pension funds to 20% (on a book-value basis) in foreign securities. While J&J's U.S.$100 million Canadian fund has 19% outside of Canada, the company wants to increase that exposure.
To do so, the company is exploring three different approaches, including the use of futures and options to gain foreign exposure. The company is reviewing futures and options managers for a possible new assignment.
Other possible strategies now being used in the local Canadian market to gain foreign exposure are swaps and a splitting of a trust into two parts, a domestic and a foreign-invested trust. Conceptually, the domestic trust still invests up to 20% abroad without having to count in that total the assets in the foreign-invested trust. This in turn results in the entire trust having a higher non-Canadian exposure, said Mr. Rauh.
In the Netherlands, the company expects this year to shift to a trust-like approach from the use of an insurance contract for its $40 million of retirement assets. An internal asset allocation study will follow the completion of this changeover.
Not only will J&J be looking to raise the fund's equity exposure - which now is only about 2% to 3% - but also to diversify some assets outside of Holland.
For its $45 million of Japanese pension assets, J&J last year moved from an insured arrangement to a trust approach (Pensions & Investments, July 22). The fund hired Mitsubishi Trust & Banking Corp. and J.P. Morgan Trust Bank Ltd. to manage the fund's assets. However, by law the tax-qualified pension plan must have at least 50% in safe assets.
In Switzerland, J&J's 1993 equity content climbed to 50% from 20%. Company officials now are in discussions with local canton officials about qualifying for the "special circumstances" regulation that would allow J&J to invest more heavily in equities for that $150 million fund.
J&J's pension activity is not confined to its large plans. About 18 months ago the company launched a defined benefit plan in Portugal. By the end of the year, the company also expects to have a new plan in Spain.
J&J's broad thrust of investing heavily in equities - only using active strategies - is possible because "we don't have many mature plans," said Mr. Rauh. The average age of participants is below 40, and credited service is typically between seven and eight years.
Among its goals, J&J is seeking top-quartile performance for its funds in their local country. For the past five years, J&J has enjoyed that performance with its U.S. funds; the company has been applying this standard, with some success, to its foreign funds since 1988. According to Mr. Rauh, J&J funds in the United Kingdom and Canada - the places where large, comparative universes exist - also are top-quartile performers. (Specific performance data was not available.)
Although such universes also exist in the Netherlands, they wouldn't be applicable to J&J's Dutch pension assets until that plan is converted to a trust approach, Mr. Rauh noted.
Keeping its eye on opportunities worldwide, the company is "watching with interest the new U.K. pronouncement on pooling" of pension assets, he added. But before the concept becomes useful, other European nations will have to adopt the U.K.'s approach, he said.
However, starting six years ago, J&J began employing a tactic that has been gaining popularity with multinationals: the sharing of some money managers for multiple assignments. J&J uses Capital International, Los Angeles, for one or more assignments for plans in five countries and J.P. Morgan Investment Management Co. Inc., New York, for plans in four. Mr. Rauh calls the sharing process a cost-effective strategy.
But for all of J&J's efforts to enhance returns, the company does not centralize its pension operations.
In fact, J&J only has two people - Mr. Rauh and pension fund manager Lori Blutfield - who spend 100% of their time on the company's retirement plans.
"Johnson & Johnson's culture is very much decentralized - encouraging its businesses to stay close to its customers," he said.
Instead, New Brunswick provides "centralized coordination" of pension assets, said Mr. Rauh.
"It would be impossible to achieve what we have achieved in funding holidays and investment results without local participation," Mr. Rauh said.
