By Stephen Miller, September 2004
Despite the unique challenges they face in managing retirement plans across borders, many multinational corporations are moving strongly toward more centralized control and global management platforms -- trends that will likely continue, suggests the latest biennial survey of multinationals by Mercer Investment Consulting (Mercer IC).
Differences in local legislation, culture, reporting, operating environments, valuation methodologies and product availability can hinder the development and use of consistent approaches to managing retirement programs for employees in different countries, according to the 2004 Financial Management of Multinational Retirement Plans Survey.
Among the 130 multinational respondents, 52 percent are headquartered in the United States, 17 percent in Ireland/Continental Europe, 13 percent in the United Kingdom and 9 percent in Canada. The remaining 9 percent of respondents are headquartered in South Africa, Australia and Asia.
"Multinationals are rising to the challenge of managing retirement plans on a cross-border basis," says Stacy Scapino, head of Mercer IC's multinational investment consulting services. "The primary drivers toward implementing a cross-border management framework are governance and risk and cost control.
In reviewing each periodic survey, it is clear that senior-management support and corporate culture are the most important factors in establishing successful programs."
Most survey respondents already have shifted or are moving decisively toward a more global perspective. The desire to reduce cost and risk along with increased focus on plan governance at a global level are driving this trend.
The shift toward global influence is clearest with regard to funding decisions. Historically, few multinationals have had regional, let alone global, funding policies. The 2002 survey clearly demonstrated this fact, with 76 percent of the survey respondents indicating that they had no funding policies in place.
The movement toward global funding policies over the past two years has been swift and decisive. In 2004, 61 percent of respondents indicated that they have some form of global funding policy and just 11 percent of respondents have no funding policies.
There is a strong trend toward more global corporate oversight and implementation of global plan-governance principles. This shift is not surprising given events and changes in regulatory tenor, particularly in the U.S., where regulatory scrutiny has dramatically increased. Regulators' greater emphasis on accounting and reporting has global and local implications for many multinationals, regardless of headquarter location.
Fifty-five percent of respondents have global governance policies in place, with 77 percent expecting to implement them by 2006.
The underpinning of most cross-border plan governance programs is a series of committees divided according to function -- for example, benefits, funding, accounting, investments and governance. Very few multinationals create such committees at a global or pan-regional level.
"Governance has become the key issue for cross-border management of retirement plans, particularly among multinationals headquartered in the U.S.," says Barry McInerney, who leads Mercer IC's U.S. operations. "As an emerging best practice, we would advise U.S.-based multinationals to set up a global investment committee in addition to local committees. Effective decision-making from both a top-down and bottom-up perspective will increase the chances of long-term objectives being met, by reducing the risk of implementation shortfall -- a significant drag on pension fund performance over time."
Despite increasing in popularity since the 2000 survey, preferred providers are likely to be used by less than half of the respondents by 2006.
Preferred provider networks are lists of best-in-class providers from which local trustees and companies can select, generally including investment managers, consultants, custodians and actuaries. Preferred providers are expected to provide local services to local plans and also work to globally agreed fee arrangements and contracts.
"Some multinationals don't use preferred providers because of difficulty finding sufficient commonality across plans to generate an economy of scale, or because the global corporate headquarters prefers manager or vendor diversity," says Scapino. "In fact, the value added from leveraging global buying power, giving all plans access to best-in-class providers, consistency of management information and greater ability to identify and monitor risks, can far outweigh the benefits of provider diversification."
Despite a general global shift toward defined contribution (DC) plans, few multinationals have an explicitly stated preference for establishing only DC plans. Most prefer an approach that ensures benefits are locally competitive to attract and retain the right employees while controlling costs.
To this end, having no stated preference allows local operating companies to manage their business to meet local needs and achieve key global corporate strategic objectives. This approach also emphasizes balancing stakeholders', or employees', interests with shareholders' interests.
According to Mercer, multinationals that are beginning to think about establishing global programs can take a number of steps, including:
Stephen Miller is the manager of SHRM's Compensation & Benefits Forum.
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