Académique Documents
Professionnel Documents
Culture Documents
comes of age
A roadmap to pooling
assets for pensions
Introduction 1
1 Asset pooling benefits now available to international companies of all sizes 2
The need to simplify pensions management 2
Asset pooling in theory – decreasing complexity, improving control 2
Why the delay? 4
2 Diversity in pensions – a united Europe? 5
Managing your pension plans 6
3 Many ways to pool your pensions 8
Administrative and data pooling – interim solutions 9
Global custody – a partial solution for larger multinationals 9
Multi-client asset pooling 9
Bespoke asset pooling solutions 9
IORPs – under development 9
Asset pooling and IORPs 10
4 Multi-client asset pooling – the advantages of a readymade solution 11
Asset pooling in practice – one size fits all? 11
A first step towards pension pooling 13
5 Asset pooling comes of age 14
Improving international pension management 14
Five steps to implementing asset pooling 14
Acknowledgements 15
References and notes 16
Introduction
In the light of the economic crisis, pensions are now very much a boardroom issue, with CFOs looking
to reduce pension risks1 and to control costs. For companies with pension plans in multiple countries,
this is no easy undertaking. Due to the diversity of international pension regulations, companies have
to run separate pension plans for every country in which they operate. This makes it difficult for them
to gain a clear overview of their pension assets and liabilities (increasing risk) and to take advantage
of their international scale (increasing costs). In order to address these issues, a number of solutions
have been developed to help companies improve their international pensions management.
Over the past few years, as several large multinational companies set up tailor-made asset pooling
solutions, it looked as if asset pooling for pensions was about to break through as a must-have solution
for all companies with multiple pension plans in Europe. Then, as attention shifted to IORPs (Institutions
for Occupational Retirement Provision) – the new hope for European pension consolidation – and
the financial crisis forced companies to focus on more urgent problems, attention for asset pooling
waned. However, as it has become clear that IORPs are presently limited and difficult to implement
and multi-client asset-pooling has become available, asset pooling is now entering a new phase as it
opens up a range of benefits for companies of all sizes.
In this AEGON Global Pensions white paper, we examine the issues that multinational companies face
in managing their pensions and introduce asset pooling. Having discussed the diversity of pensions
and pensions systems in Europe today, we explore the different pooling solutions available and show
how multi-client asset pooling now offers a robust and future-ready solution for companies of all
sizes. Finally, we provide five brief guidelines on how companies can implement asset pooling.
1
1 Asset pooling benefits now available to
international companies of all sizes
The need to simplify pensions management
As companies grow over time, it is not unusual for them to gain additional pension plans through
mergers, acquisitions and the creation of new subsidiaries. Historically, many companies have allowed
their pension plans to proliferate with little thought for harmonisation. This in turn leads to increased
complexity in pensions management and increased risk. A combination of the economic crisis and
tightening international regulations (for example, IFRS) have led companies to look once more at their
pensions in a drive to manage risk, increase control and decrease costs.
When pension plans are managed individually, country by country, it is usual for the trustees of
individual pension plans to decide on their investment policies and to choose their own investment
managers. This can result in inefficiencies, hidden risks, inconsistent reporting and opaque costing
(that can amount to 15% of the risk premium). 2
Asset pooling offers multinational companies the possibility of optimising their pension management,
delivering benefits to all stakeholders. By pooling their pension assets from different countries,
multinational companies can improve their pension governance, better control their financial risk,
increase their operational efficiency and obtain access to better investment solutions. Asset pooling
enables companies to remove investment management inefficiencies, helping them to manage their
pensions better and more cost-effectively.
On the investment side, asset pooling provides savings in management and custody fees and makes
it easier for the plan managers (the trustees or sponsoring company) to design appropriate asset
allocation strategies. The overall cost and efficiency savings are highest when multiple smaller
pension plans combine their pension assets, as opposed to when a single large and already efficient
pension plan combines its assets with smaller plans. This fact means that, paradoxically, the potential
benefits and savings are highest for the smaller pension plans that have until now been unable to
afford asset pooling. With the development of multi-client asset pooling, these smaller pension plans
are now able to benefit not only from the cost savings that asset pooling offers but also from better
risk diversification, as asset pooling provides access to more asset classes and manager styles (which
previously would only have been available through expensive funds of funds).
2
Benefits of asset pooling for all stakeholders
Asset pooling offers companies benefits in three major areas: improving governance and
control (and reducing complexity), providing insight into risk (allowing companies to control
risk more effectively), and enabling companies to control their costs. Finally, asset pooling
provides benefits to all stakeholders – a key factor in successfully implementing any solution.
Head office
Loc
Ri
ts
a
sk
Cos
Trustees
l subsidiaries
Asset
pooling
C o n tr o l
Members
2 Managing risk
Knowing your risk is the first step to managing it. Conversely, not knowing what you have in
your pension funds or where you have it is a considerable risk for a sponsoring company. An
asset pooling platform provides a fast and consistent way to gain an overview of investment
risk on both a consolidated and plan basis. Asset pooling enables companies to take advantage
of a controlled investment manager selection process with ongoing monitoring, offering
complete transparency and reducing risk.
3 Reducing costs
For smaller companies, economies of scale mean that asset pooling provides them with
significant savings on their investment costs. As larger companies often possess larger, more
efficient pension plans, combining these large plans will not always result in such significant
savings on asset management fees. In addition to investment management savings, however,
asset pooling also offers savings on internal monitoring costs and consultancy.
3
Providing benefits for all stakeholders
Asset pooling not only provides the CFO with the means to gain better control over the
company’s pensions but it also delivers benefits to the other pension stakeholders. The
individuals responsible for the management of the individual pension funds can be assured
of a high quality and well managed investment solution for their particular pension plan.
Although local pension fund trustees may be hesitant to give up their freedom to choose their
own investment strategy, in return they gain access to the best investment managers and to
greater diversification at a lower cost. In addition, they are able to focus on achieving optimal
asset allocation for their local plan and on other important areas such as communication to the
members.
This figure demonstrates how asset pooling unifies investment management for the pensions
of a multinational company, catering for a wide variety of different pensions including, for
example, a Defined Benefit plan (DB) provided by a self-administered pension fund (Pension
Plan A), a trust-based Defined Contribution (DC) plan (Pension Plan B) and a unit-linked DC plan
as part of a life-cycle solution provided by an insurer (Pension Plan C).
Multinational Company
Pools Reporting
4
2 Diversity in pensions – a united Europe?
Within Europe, no single state pension system is the same as another. As a result, it is difficult for
multinational companies to provide a unified pension solution for all of their European subsidiaries.
When a company takes inventory of its pension plans in various countries across Europe, it becomes
rapidly clear that there is still a wide variety in pension systems and practices across Europe. The
differences apparent are the result of the different state pensions, different pension vehicles and
different pension promises made (notwithstanding the different terminology used in each country).
When looking at European pensions, the major differences between the various country systems lie
with the state pension (first pillar). Although all European countries provide a minimal state pension,
the importance of this provision varies substantially. For example, in France, Germany, Spain and Italy,
the state pension presently provides the majority of retirement income. In countries such as the UK,
Ireland, the Netherlands and Switzerland, occupational pensions (the second pillar) are much more
important.
The graph below includes all premiums paid to insurers, pension funds and banks for pension
savings and all contributions made by employers and employees into the social security
system.
100%
1st pillar
2nd and
40% 3rd pillar
20%
0%
l
ly
ai n
um
nd
a rk
ce
ga
nd
an
ke
lan
lan
de
Ita
do
n
rla
r tu
Sp
lgi
nm
r
rla
Fra
rm
e
Fin
Po
Tu
ing
Sw
tze
Be
Po
the
Ge
De
dK
i
Sw
Ne
ite
Un
5
Managing your pension plans
It is easier for companies to exercise control of their pension plans in countries where insurance and
book reserves dominate as opposed to countries where autonomous pension plans are the norm. In
the UK, Ireland and Switzerland, self-administered pension funds are the primary vehicle for providing
pensions to employees. In Denmark and Sweden, insurance contracts dominate the market, while in
Germany and Austria, book reserves (that is reserves held on the balance sheet of the company) are
the main vehicle used to provide occupational plans. Any solution that involves combining different
pension plans must therefore satisfy the independent pension fund trustees as well as the board of
the sponsoring company itself.
The graph below demonstrates the diversity of the various national pension systems,
showing the different vehicles employed for occupational pensions across Europe.
100%
90% Pension
insurance
contracts
80%
Book reserves
70% (non-autonomous)
ay
nd
ly
m
ai n
e
a rk
ga
nd
an
tr i
nc
lan
lan
Ita
do
ed
rw
rla
lgi
r tu
Sp
nm
s
rla
Fra
rm
Ire
Fin
ing
Au
Sw
No
tze
Be
Po
the
Ge
De
dK
i
Sw
Ne
ite
Un
6
Diversity of pension systems: different pension promises
Another element of the diversity of the pension systems in Europe that any unifying solution
has to be able to address is the different types of pension promises made to employees in each
country. This refers not only to the differences between DB and DC pension plans but also to
different interpretations of these systems in each country. For example, in Switzerland the DC
system (a cash balance system) allows employees no investment freedom and the employer/
occupational pension fund has to guarantee the paid-in premiums. This is very different from
contract-based DC plans in the UK, where the employee has complete investment freedom and
no guarantees.
The different types of pension promises within Europe were mapped out by Oxera in the figure
below, ranging from ‘pure’ DB via hybrid plans to ‘pure’ DC.
‘Pure’ DB Average Various DC with Outcome- ‘Pure’ DC
(final salary) salary DB hybrids guarantees oriented DC
(Source: Oxera) 4
Figure 6: An example of the various different pension plans a single multinational company
could have within Europe
7
3 Many ways to pool your pensions
Given the diversity of pensions and pension systems across Europe, it is unsurprising that different
methods have been developed to try to improve pensions management across Europe (and beyond).
If we look at the solutions presently on offer, there is a variety of ‘pooling’ solutions available, ranging
from administrative and data pooling through to IORPs. The chart below highlights the benefits of the
different solutions compared with how easily they can be implemented.
Although IORPS ultimately promise the greatest benefits, they are presently difficult to implement
and it will be some time before they can achieve their full potential. At the other end of the spectrum,
global custody, and administrative and data pooling offer more limited benefits but require less effort
to implement. Asset pooling, however, provides considerably more benefits, and, while bespoke asset
pooling is only feasible for the largest multinational companies, multi-client asset pooling offers
companies of all sizes the possibility to realise significant efficiency gains. In addition, it is easier to
implement and ‘future-ready’ for inclusion into an IORP solution, if required.
Figure 7: Comparison of added value and ease of implementation of different pooling solutions
Liabilities IORP
Assets Bespoke
Multi-client asset pooling
asset pooling
Global
custody
Information
Administrative
and data pooling
Difficulty of implementation
(Source: AEGON Global Pensions)
8
Administrative and data pooling – interim solutions
Several multinational companies, including Mars and Reckitt Benckiser, have implemented data
and administrative pooling solutions (also referred to as investment or portfolio accounting). This
involves centralising pension management, including the management of pension assets without
actually pooling the assets into a single investment vehicle. Administrative pooling requires internal
organisational changes, such as setting up asset management committees for hiring managers. The
pension assets remain invested within their present legal vehicles and pooling is only carried out at an
administrative level. Administrative pooling offers some – but not all – of the benefits of asset pooling
and can be used as a first step towards full asset pooling.
9
IORPs now exist) have concentrated on countries with similar pension structures, such as Ireland
and the UK. At present, such IORPs typically contain DC plans for expats or executives, as pension
plans within an IORP still have to adhere to local tax, social and labour laws. As a result, member
administration is still complex and efficiencies are not easily accomplished.
Asset pooling solutions can be used in IORPs and also for pooling non-European assets.
Multinational company
Pools Reporting
10
4 Multi-client asset pooling – the advantages of a
readymade solution
Asset pooling in practice – one size fits all?
Although the benefits of asset pooling may be clear, creating a cross-border asset pooling solution
for the first time is a difficult process requiring considerable international expertise. In order to be
able to cope with the immense diversity 5 of pensions across Europe, asset pooling solutions need to
be flexible and ready for change.
The variety of potential – and partial – solutions presently on offer may have made it difficult for
companies to decide which solution may be appropriate for them. With the development of multi-
client asset pooling, companies no longer need to design their own solutions and instead have access
to a ready-made solution at a fraction of the cost. As a result, asset pooling is now within the reach of
all sizes of companies. Multi-client asset pooling can be offered either as part of an insured pension
solution or as an asset-only solution. A separate solution naturally provides more flexibility, and may
facilitate companies wishing to implement asset pooling in phases.
Multi-client asset pooling platforms provide companies with access to a ready-made pooling platform,
removing the barrier of expensive start-up costs and enabling companies to benefit immediately from
economies of scale. When pooling pension assets, it is important that the investment vehicles used are
as efficient as possible from a taxation perspective. At present, tax efficient investment vehicles are
currently available from Luxembourg (FCP: Fonds Commune de Placement), Ireland (CCF: Common
Contractual Fund) and the Netherlands (FGR: Fonds voor Gemene Rekening).
In connection with this, it is very important that the asset pooling provider handles the tax rebate
issues on behalf of its clients. This in itself can provide considerable benefits, as many investors simply
do not apply for tax rebates as the procedures are particularly complicated. This was confirmed by
the EU Internal Markets Directorate General in a memo in October 2009 6 stating that many investors
do not reclaim their share of the EUR 5.47 billion in foregone withholding tax annually.
11
Tax efficient pooling
Figure 9: Additional returns gained from tax-transparent global equity fund compared with
tax-opaque global equity fund
4%
3%
2%
1%
0%
Nov ‘01 Nov ‘02 Nov ‘03 Nov ‘04 Nov ‘05 Nov ‘06 Nov ‘07 Nov ‘08 Oct ‘09
For example, if we were to take a closed Defined Benefit pension plan of EUR 50 million in 2001
(into which no further contributions are being made), by October 2008, the total assets of the
plan would be EUR 76 million, if all dividends were reinvested, as opposed to EUR 73 million if taxes
were paid over the dividends. Over 8 years, this would amount to a loss of almost EUR 3 million.
If instead we look at a new Defined Contribution plan set up in 2001 for 150 members with a
contribution rate of 6% on average salaries of EUR 30,000, after 8 years, if withholding tax
were paid (and if 100% of assets were allocated in equity), the total pension assets would be
approximately EUR 2,480,000. If a tax-transparent vehicle were used, the assets would instead
be about EUR 2,540,000 – a difference of approximately EUR 60,000 – or more than two and a
half months’ premium. Although these costs are more likely to be borne by the participants, the
cumulative effect over the course of an individual’s working and saving life would be significant –
and the worth of the benefit provided by the employer would be unnecessarily devalued.
12
A first step towards pension pooling
Multi-client asset pooling is a first step towards building a ‘shared service centre’ for pensions for
multinational companies. Given the changing pensions environment, it is very important that any
asset pooling solution should be flexible and ‘future-ready,’ as a company’s needs are likely to change
and develop.
Although it will be a long time before cross-border IORPs are commonly in use, IORPs do already
exist and their use will continue to grow. Asset pooling solutions need to be able to fit seamlessly
into an IORP, if and when necessary. In addition, unlike IORPs, asset pooling solutions extend beyond
the borders of Europe, enabling companies to manage their pensions through a single vehicle. For
example, in an advisory opinion on pensions in 2008 7, the US Department of Labor opened up the
possibility for US pension assets (ERISA) to be pooled, along with pension funds from the Middle East,
Asia, Africa and Europe.
A modular solution should be able to service the different types of asset management models required
by different pension systems. Although some companies will be able to reap benefits from more
customized solutions, it is important to find a balance between increased costs and the benefits to be
gained. A standardized, multi-client asset pooling solution can be easily and efficiently implemented.
Most importantly, an asset pooling solution must deliver value to all stakeholders, and not just the
CFO. A good asset pooling solution should offer improved governance and control for the CFO, a solid
investment solution fitting local requirements for the trustees and employees, and low costs and
reliable high quality for the local subsidiaries.
13
5 Asset pooling comes of age
With the advent of multi-client asset pooling, it is time for companies to reassess the available pooling
solutions. Multi-client asset pooling provides companies with a flexible, future-ready solution that
will help them to drive down costs and improve their risk control and pensions management. Asset
pooling is available and achievable now.
Asset pooling reduces complexity for the corporate headquarters, provides a high quality asset
management solution for the local subsidiaries (coupled with reduced operational and reporting
costs), and provides local trustees of the individual pension plans with good investment performance
and increased diversification at a low cost.
Step 1: Establish whether asset pooling (or other pooling solutions) will benefit your company. Does
centralisation fit within your company culture?
Step 2: Identify which pension plans you have, in which countries. Which assets do you hold and
in what kinds of investment vehicles? What types of plans do you have, with how many
participants?
Step 3: Perform a cost benefits analysis – establish the potential benefits of asset pooling in
terms of cost savings, improved control, risk management and reduced tax drag. Identify
which pension plans will benefit from asset pooling – not only in terms of potential savings
for the company headquarters but also in terms of quality of investment solutions available
for members, trustees and local subsidiaries.
Step 4: Secure executive sponsorship – involve all stakeholders, from board members to local
trustees in order to identify their requirements. Together with your consultant, identify the
appropriate asset pooling solution for your needs. Carefully balance the ‘need’ for your own
unique requirements (and the added complexity this may bring) against the benefits offered
by easy-to-implement, ready-made scalable solutions.
Step 5: Plan and execute. Make a detailed project plan of how and when to switch from the current
investment solution to the asset pooling solution, taking into account local requirements
and long running contracts.
14
Acknowledgements
I would like to thank the following people for providing their much valued input and insight.
Alexander van Ittersum
Jeroen Bogers
Product development manager, AEGON Global Pensions
Steve Chapman
International sales director, AEGON Global Pensions
Bernard Hanratty
Managing director head of investor services EMEA, Citi
Frans van der Horst
Managing director, AEGON Global Pensions
Anne Laning
Head operations, TKP Investments
Mischa Muntinga
Head tax and regulatory, AEGON Asset Management
Philip Pennings
Tax department, AEGON Asset Management
Frank Randall
Director, AEGON Global Pensions
Thurstan Robinson
Communications manager, AEGON Global Pensions
Martijn Tans
Director marketing, AEGON Global Pensions
Piet Vandenbossche
Consultant and project manager asset pooling, TKP Investments
Andrew Wood
Regional sales director, UK and Nordics, AEGON Global Pensions
Karen Zeeb
Director investor services Global Transaction Services, Citi
15
References and notes
1 Planning your way out of the financial crisis, a roadmap to derisking, Jeroen J.J. Bogers,
AEGON Global Pensions March 2009.
2 IPE 31 March 2010: Multinationals ‘unaware of overseas pensions cost’, Allianz.
3 Statistics N° 28, The role of insurance in the provision of pension revenue, September 2007.
Note: CH: 3rd pillar underestimated; DE: Data for 2nd pillar missing; DK: 1st pillar is
underestimated because it does not include contributions to the public scheme; FR, UK, DE, ES:
1st pillar estimated on the base of the benefits paid; IT: 2003 data; FR, UK: No split available
between the 2nd and the 3rd pillars.
4 Source: Defined contribution pension schemes, risks and advantages for occupational
retirement provision, Ofama – Oxera January 2008.
5 Christina Matos, Unreformed or Hybrid? Accounting for Pension Arrangements Diversity in the
EU, Springer, 7 April 2009.
6 Press announcement IP/09/1543, Brussels, 19 October 2009, Securities income: Commission
recommends simplified procedures for claiming cross-border withholding tax relief.
7 2008-04A ERISA SEC 404(b) U.S. Department of Labor advisory opinion concerning the
indicia of ownership requirements in section 404(b) of the Employee Retirement Income
Security Act of 1974 (ERISA), and the implementing regulations.
16
AEGON Global Pensions and asset pooling
In June 2009, AEGON and Citi launched the first multi-client cross-border asset pooling platform. The
groundbreaking asset pooling platform, developed by TKP Investments, Citi and AEGON Global Pensions,
was launched with total assets invested with a value of more than €9 billion. Through the use of tax
transparent investment funds under a European passport (UCITS), the unique platform will enable
the multinational clients of AEGON Global Pensions to consolidate the management, investment and
reporting of their pension assets, reducing both risk and costs.
Currently, the AEGON Global Pensions asset pooling platform is being used by Dutch pension funds and
a UK and French insurance company. The platform contains tax-transparent UCITS equity and bond
funds, but can also cater to alternative investments. The asset pooling platform provides companies with
a modular, flexible and scalable solution. In addition, it provides share classes at different fee levels in
order to cater for different distribution methods (for example, asset pooling is available through a DC
fund platform, via an insurer or directly to a self-administered pension fund).
17
Contact details
Disclaimer
This white paper contains general information only and does not constitute a solicitation or offer. No
rights can be derived from this white paper. AEGON Global Pensions, its partners and any of their
affiliates or employees do not guarantee, warrant or represent the accuracy or completeness of the
information contained in this white paper.
18