STUTTGART, Germany -- DaimlerChrysler AG over the next few months will consider hiring external investment managers for European and possibly international equities for its recently launched E4 billion ($4 billion) pension trust.
The group announced earlier this month that it was in the process of transferring E4 billion from DaimlerChrysler AG to the DaimlerChrysler Pension Trust Eingetragener Verien in order to fund part of the group's E5.3 billion in pension liabilities.
The new trust will appoint an investment committee that is expected to meet and set initial asset allocations during the first few months of 2000. Hiring external managers is "an option" that would be considered by the investment committee, said Jurgen Zirn, an asset manager in DaimlerChrysler's treasury division. He said it was too early to talk about any details.
At this stage the group's German pension liabilities and assets are held on the balance sheet and managed in-house by eight asset managers, said Mr. Zirn.
The use of such trusts to take the pension liabilities and assets off the balance sheet is becoming increasingly popular among multinationals with branches in Germany as they face pressure from investors to bring their corporate reporting in line with international accounting standards.
Siemens AG, Munich, is considering launching a similar pension trust for its 21.1 billion deutsche mark ($10.8 billion) domestic pension liabilities in order to be compliant with U.S. generally accepted accounting principles, said Peter Scherkamp, managing director of Siemens Financial Services Investment Management in Munich. He would not say when the trust would be launched, but said management would remain in-house.
The launch of DaimlerChrysler Pension Trust EV is largely intended to improve the group's financial vital statistics by taking the pension liabilities off the balance sheet in line with U.S. GAAP and Financial Accounting Standard 87. But Mr. Zirn said he hoped the use of a pension trust also would help improve the return on assets and allow the group to invest in more equities.
Largest of its kind
The restructuring is believed to be the largest transfer of funds to such a trust by a German company.
In 1997 Deutsche Shell AG, Hamburg, moved 2 billion marks of its pension liabilities into a similar trust and appointed outside managers to run a portion of the assets through spezialfonds, which are non-discretionary mutual funds used by German institutions. The group appointed the asset management arms of Deutsche Bank AG, Frankfurt, and Dresdner Bank AG, Frankfurt, as well as Shell Pensions Management, London, and Shell Fonds Beheer, the Hague, Netherlands, to run the funds.
British-American Tobacco Co. Ltd., London, shelved plans to set up such a trust when it acquired Rothmans International earlier this year, said Jim Stephens, pensions manager. But the group might try again to restructure its German pension assets and liabilities once the acquisition is complete, he said.
An Eingetragener Verien trust is not commonly used in accounting or corporate finance, said Peter Koenig, executive director for Morgan Stanley Bank, Frankfurt, and executive director for Morgan Stanley Dean Witter's European pensions group. He expects the use of such trusts to trigger greater demand for spezialfonds offered by external money managers as German companies attempt to manage their pension liabilities in line with international trends.
"U.S. multinationals are interested in having segregated assets and don't feel comfortable with the German unfunded approach," said Andrew Payne, associate for consultants Woodrow Milliman, Bristol, England.
Improving vital stats
Most of the pension assets and liabilities for DaimlerChrysler's German staff now are in book reserve form, local consultants said.
By moving some of the liabilities off the balance sheet and into an asset-backed structure, return on net assets, net income and earnings per share are improved as well.
Under the book-reserve system, the group was reluctant to increase its exposure to equities as volatility in the value of the assets on the balance sheet would have translated directly into the group's profit and loss accounts. Most equity investments of the pension assets will be held in the trust in order to prevent volatility on the sheet, said Mr. Zirn.
"Normally German companies don't invest too heavily in equities. The long-term intention is to increase the ratio of equities we hold," he added.
He said most of the pension assets now are invested in bonds but would not give specific numbers.
Consultants said DaimlerChrysler already had a fairly high exposure to equities, believed to be around 30%, compared with other German companies' levels of 15% to 20%. Typical German funds invest up to 45% in bonds, with cash holdings accounting for the rest of the assets.
During the past year the group, like most European plan sponsors, had increased its exposure to euro-denominated equities and reduced some of its holdings of German stocks. Mr. Zirn agreed the group might need the assistance of external managers if it wanted to further diversify into international equities.
Good news for managers
Local money managers welcomed DaimlerChrysler's plans.
"The outsourcing of pension reserves is something that is necessary for our pension system to reform in the future. We are working very hard to convince other companies to outsource their pensions liabilities," said Hans-Dieter Bauernfeind, head of investment management at Dresdner Bank.
But one consultant said steps like this were largely cosmetic accounting tricks designed to improve the balance sheet rather than the management of the pension assets.
Morgan Stanley Dean Witter's Mr. Koenig said the German government should reform the tax system to allow German companies more freedom in funding their pension liabilities.
"This is not cosmetic, but it's not where we ultimately want to see the industry going. But you can't blame DaimlerChrysler for that. It's a question of the government's pension tax policies," he said.
