LONDON -- The night of the Euro Ball is fast approaching, and Unilever PLC pension executives are shopping for solutions for their various pension funds. The problem: Every one of Unilever's pension funds is different, and each solution must be tailor made.
"There isn't an off-the-shelf answer," said Angela Docherty, senior corporate investment consultant, who advises Unilever's pension funds around the world.
And that's the dilemma for every pension fund examining the asset allocation implications of the euro, which officially debuts Jan. 1.
For multinational companies such as Anglo-Dutch giant Unilever, pension funds must be reviewed on a country-by-country basis -- regardless of whether the fund is based in one of the 11 countries participating in the new single currency, said Philip Lambert, Unilever's head of the corporate pensions division.
Such factors as the size of the fund, its level of equity exposure, national investment restrictions and levels of surplus funding have a great impact on how the euro's introduction will be handled.
In Europe, the consumer-products company has a total of $13.5 billion in pension assets, including funded plans in seven of the 11 euroland countries, based on Dec. 31, 1997, data (the latest available).
Nearly 78% of the assets come from two funds: the L4 billion ($6.5 billion) U.K. fund and the 8 billion guilder ($4 billion) Dutch fund.
Officials at Unilever pension funds in most countries still are examining how the euro will affect their investment strategies. But here's how some are tackling the issues:
BELGIUM. Unilever's 16 billion Belgian franc ($433 million) Brussels-based fund is expected to reduce its domestic bond exposure from 15%, as regulations requiring Belgian funds to invest at least 15% of assets in Belgian government bonds are lifted. At the same time, it will boost investments to U.S. equities to gain greater diversification.
IRELAND. Its 152 million Irish punt ($216 million) fund may lower its domestic equity allocation to 10% from 30%, shifting assets to euroland equities.
Fast-growing peripheral euroland countries, including Ireland and Portugal, are expected to experience higher inflation rates than most other euroland countries, as interest rates converge at 3.3% or lower.
What's more, the Irish equity market is highly concentrated in six or seven stocks, and net flows of money out of the domestic market are expected to be substantial.
And future U.K. equity exposure -- now at 10% -- is an unknown. The traditionally high correlation between U.K. and Irish stocks is expected to fall, since Ireland will be in the euro while Great Britain stays out.
An asset/liability study is in the works.
THE NETHERLANDS. Unilever's Rotterdam-based fund might lower its exposure to domestic bonds, now at 27%, shifting the money to Eurobonds. Meanwhile, the internally managed fund is introducing a sectoral approach to stock investments, although country factors are still significant.
But change will be gradual, Mr. Lambert said. Shifts likely will stem from reinvesting proceeds -- not selling existing positions.
DANISH FUND TO CHANGE
Some European funds not participating in the first round of the euro also will be affected -- including the 826 million Danish kroner ($121 million) Danish fund.
That's because the Danish kroner will track the euro within a 2.5% range, thus tying it fairly closely to euroland. Plus, new legislation will permit Danish funds to increase their nondomestic exposure, especially in euroland; currently, only 20% of liabilities can be matched in other currencies.
Despite the advent of the euro, pension executives hands' still might be tied by local legislation that impose maximum or minimum investment requirements in domestic or foreign assets.
"We can't too lightly assume that will be in the past," said Mr. Lambert, a former chairman of the European Federation for Retirement Provision, a Brussels-based lobby for European pension funds.
Local limits might merely be replaced by pan-European restrictions, he warned, instead of shifting to a prudent-man standard, as urged by EFRP and other European pension officials. "The big question: Will they write them in a liberal way or a restrictive way?" he said.
Nevertheless, the key transitional issue, Mr. Lambert said, is that pension funds across Europe now will have to shift from domestic vs. international as their major categories to euroland or Europe vs. non-Europe.
MARKET OUTLOOK
The opportunities are substantial. European bond markets will be integrated on Jan. 1, and eventually should evolve to have the depth, liquidity and instruments available elsewhere, Mr. Lambert said. New U.S.-style instruments, such as asset-backed securities and mortgage bonds, will become available.
The outlook for European equity markets is less clear. Some stocks will remain essentially local, Ms. Docherty said. "The advent of the currency will not change some of the underlying fundamentals," she said.
"There will be winners and losers," Mr. Lambert added.
Greater transparency -- made available through pricing in a single currency -- will create more competition, he said. That will encourage multinationals to rationalize manufacturing and distribution further across Europe, he added.
In addition, larger European stocks likely will be listed on a pan-European exchange, focusing liquidity, while local exchanges will continue to cover more localized stocks, he said. It's "very difficult to establish now the impact on stock markets," he said.
Some studies project massive outflows as domestic pension funds switch their home currencies to the euro -- and thus rebalance across euroland or Europe. Ireland and the Netherlands are particularly affected.
COUNTERVAILING FORCES
But the pace at which the changeover is made is important for stock prices. And there may be countervailing forces, Mr. Lambert said. In Holland, for example, Dutch pension funds are increasing their overall equity exposure, and thus may continue to pour money into domestic stocks.
External forces also might buoy European markets. Japanese investors are looking favorably on Europe now that it is becoming a more integrated market.
Nor is it certain how to set the domestic equity benchmark. While some European pension executives are opting for pan-European equity approaches because they don't want to exclude Switzerland, most of Scandinavia and Great Britain, Mr. Lambert thinks that might take on too much currency risk.
That's why some Unilever funds -- including its Finnish one -- are exploring whether to use a pan-European, euroland or continental European benchmark for domestic stocks. With the latter approach, the important Swiss stock market -- including its major pharmaceutical stocks -- is included.
The broadening of the "domestic" equity market also is fostering creation of subasset classes, such as European small-cap stocks. Unilever's Dutch and Belgian funds are contemplating those areas.
"A lot depends on how equity-focused" a particular fund is, Ms. Docherty said. If a fund has only 20% to 30% of assets invested in stocks, small-cap stocks probably aren't an issue, she explained.
MANAGER SCRUTINY
While Unilever pension officials declined to discuss specific money managers, there's no question that managers will be scrutinized to see if they have adequate resources to manage in a broader environment. Some managers who traditionally have been tied to a single country will have to expand or fold, she said.
That doesn't mean small managers are ruled out. For example, Danish managers, with their expertise in investing in domestic mortgage bonds, might have the necessary skills to invest in new types of European bonds, she said.
Eventually, there will be significant changes from traditional bond mandates, which were largely invested in government bonds. "I do expect more leeway is given to bond managers," allowing greater nongovernmental exposure, Mr. Lambert said.
But that will depend on the available supply of corporate and asset-backed debt. "The next year or two is going to be interesting, to see what becomes available," and will require an "active dialogue" between pension executives and money managers, Ms. Docherty said.
In short, it may take some time for things to shake out. Pension funds may have to take interim steps in their asset mixes, and return to them later, she suggested.
"Once things settle down in euroland, you will have to revisit (investment strategies)," Ms. Docherty said.
