SCHWEINFURT, Germany - The German subsidiary of Swedish multinational SKF Group, Stockholm, has launched a pilot project to fund its pension liabilities and remove them from the corporate balance sheet.
The new funded pension trust covers e30 million ($26.3 million) in pension liabilities for former employees of a subsidiary the firm closed in 1998. Heinz Schonunger, chief financial officer of SKF GmbH, hopes to launch a similar pension trust arrangement within the next two to three years to cover the German company's total pension liabilities of e350 million if the pilot project is successful.
AXA will be responsible for a e10.2 million eurozone active equity mandate. SSgA was appointed to a passive European government bond mandate and a passive U.S. equity portfolio worth e13.2 million and e6.6 million, respectively.
Joins leading companies
SKF joins a small list of leading German companies such as DaimlerChrysler AG, Stuttgart; Siemens AG, Munich; and Volkswagen AG, Wolfsburg, that have set up funded pension vehicles in line with U.S. accounting standards.
Previously SKF's German pension liabilities were provided for in balance sheet reserves, as is common for German companies. But German group management last year made it clear they wanted to explore the alternatives for covering their pension liabilities, said Mr. Schonunger.
He said management had grown increasingly concerned that the proportion of its pension liabilities was growing rapidly in relation to the size of the company.
During the past two years, SKF's corporate finance team heard a number of presentations from German banks and money managers on the concept of the pension trust and the benefits it might have for a German company, he said.
Eventually, the group decided to appoint Siemens Financial Services Pension Advisory, which had had experience structuring a pension trust for its parent company Siemens AG, as consultant and investment adviser.
SKF had explored a number of options before deciding to set up a funded pension trust.
The company would have transferred its liability to a life insurance product, Mr. Schonunger said, but the costs would have worked out to be about 130% of the liabilities and would have involved getting permission from every member of the pension plan.
Mr. Schonunger also thought the new pension trust would get better investment returns from external money managers working to a plan-specific benchmark than from other forms of savings. The minimum return the plan requires is 6% a year, and he is confident the newly appointed money managers will be able to provide that.
"If we can achieve that, the pension plan would have no further impact on the profit-and-loss account of the company," he said. SKF also is more likely to approve a similar arrangement for all of its German employees if the new pension trust is able to meet the 6% target, he added.
Rather than having to be fully funded under German law, use of the pension trust means SKF can comply with U.S. accounting standards and will be able to maintain an optimal level of funding in line with its liabilities, said Thomas Bauerfeind, managing director of Siemens Financial Services Pension Advisory, which conducted an asset-liability study for the new trust and helped SKF select managers.
Siemens' study recommended the trust be set up to cover 70% of its liabilities, as any surplus investment returns could go toward fully funding the trust. "If not, we can put more money into the fund," added Mr. Schonunger.