BREAKING DOWN BORDERS. Is now the time for multinational plans to consider cross-border consolidation?

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1 BREAKING DOWN BORDERS Is now the time for multinational plans to consider cross-border consolidation? BY GUEST CONTRIBUTOR, PAUL BONSER FIA, SENIOR PARTNER AT AON HEWITT 18 Contribute Autumn 2017 State Street Global Advisors

2 With more than $15 trillion in total assets, DC pensions are the dominant global retirement savings mechanism today. However, large multinational companies and their employees have not benefited from economies of scale when it comes to managing DC pensions. Instead, they are still operating small, separate DC pension arrangements in each country which makes effective governance problematic. As a result, it is harder to deliver consistent good quality DC pension benefits and support employees with their financial wellness. It is recognised that these challenges will create income adequacy issues and put a strain on future generations of retirees. As a result, the European Commission is focused on creating sustainable occupational pensions to ensure retirement security. Under the European Pensions Directive, employers and pension providers can consolidate cross-border DC and defined benefit (DB) pensions in a single, pan-european pension vehicle, delivering both simplified governance and larger, more competitive economies of scale. Over the past three years, the proportion of multinational companies managing their DC plans centrally has already increased from 37% to 57%. That figure is expected to reach 80% in another three years, according to Aon Hewitt s global governance survey. Overall, European companies expect to remain a little less centralised than their North American counterparts, perhaps as a consequence of the size and maturity of the US DC market. Companies and providers are realising that they can use pan-european pension funds, which are the ideal vehicle to deliver a consistent, multi-country DC solution. A Centralised Approach Percentage of multinational companies that manage their DC plans centrally % % Projected 80% Source: Aon Hewitt s Global Benefits Governance and Operations Study Introducing a cross-border solution increases multinational companies understanding of key factors which impact member outcomes, including: GOVERNANCE INVESTMENT DEFAULTS MEMBER EDUCATION AND FINANCIAL WELLNESS TRANSPARENCY VALUE FOR MONEY A Practical Solution There are two approaches companies may take to adopting pan-european pension funds: singleemployer and multiple-employer vehicles. Over the past five years, a number of large multinational companies have established single-employer, pan- European funds, mostly as a way to consolidate existing DB funds. With large DB assets already included in a pan-european fund, it is easier and more cost efficient to extend coverage to DC assets as well, which helps to build a business case for the cost of implementation. Pan-European pension funds have become a practical reality, and not just a dream which can never be realised. The majority of multinationals, however, may find it too complicated to run their own pan-european DC pension fund and will benefit from looking for a multiple-employer pan-european provider to deliver their European DC pension benefits in a consistent and efficient manner. Those best suited for such a plan are large companies and organisations that provide DC pension benefits to an extensive segment of their workforce in a number of European countries. Such an approach is also appropriate for multinational companies that believe that delivery of DC and the associated risks is best outsourced to a professional provider. The company s role then becomes to choose the best provider, and to establish processes to monitor it. ssga.com/ukdc 19

3 In the past, finding a provider to deliver their European DC pension benefits was a challenge. A lack of demand and the relative immaturity of the DC pension market made providers scarce, as did the variety of DC financing vehicles in different countries. There was also a lack of awareness of how to take advantage of the opportunities that the European Pension Directive presents. Today, however, increased demand means that more providers are available. Although there are no providers able to offer full European coverage, several providers are systematically extending their coverage throughout the region. For example, Aon established a DB multiple-employer pan-european pension fund called United Pensions in Belgium in 2015 and is now in the process of extending this programme to be able to deliver DC in several EU countries, starting with the Netherlands later in Aon is also establishing a similar International DC Mastertrust. Companies interested in hiring a provider should look for such critical factors as the provider s geographical coverage and its knowledge of local laws. (For a full list of selection considerations, see Provider Skill-Set ) Several pan-european pension funds are already in place and their size and geographical reach are growing steadily, as shown in the EIOPA public register; not least due to the active support from EU authorities and sharing of best practice among the involved multinationals. Jacqueline Lommen Senior Pensions Strategist State Street Global Advisors (Netherlands) PAN-EUROPEAN POTENTIAL Improved governance A simple, yet sophisticated, DC investment solution designed to deliver better member outcomes at competitive rates Access to investment economies of scale Imaginative communications powered by user-friendly technology, enhancing member education and financial wellness Consistency in terms of both the investment solution and member experience across different countries Addressing Concerns about Pan-European Plans Employers have historically raised two major concerns about pan-european plans. First, tax efficiencies in European countries vary depending on the tax agreements in place (e.g. WHT on dividends, tax incentives on premium contributions) and are generally more favourable if plans invest in local pension taxfriendly vehicles. Second, administering pensions for different jurisdictions under one umbrella involves substantial complexity. A modern pan-european plan readily addresses these issues. In fact, the first issue is a red herring. While it is true that there are investment tax differences for different pension vehicles in different locations, this fact is not relevant. When establishing a pan-european pension fund, you have the ability to select any occupational pension vehicle in any EEA location. The investment tax conditions in the country in which you establish the vehicle then apply for all local country sections. This means you select a location which has favourable conditions. Further, the EU tax communication then requires all countries to treat a pan-european pension fund in the same manner as a local funding vehicle for income tax purposes. In other words, discrimination is not allowed. The second issue is important. There are still no third-party pension administrators that can deliver full Europe-wide coverage. However, providers are emerging that can cover several countries, and both the number of providers and their coverage area is increasing. In reality, modern pan-european pension funds may still use a number of different administrators, but consistency is possible, particularly for multipleemployer pan-european pension funds. 20 Contribute Autumn 2017 State Street Global Advisors

4 PROVIDER SKILL-SET What to look for Geographical coverage Depth of local knowledge and resources Delivery of economies of scale DC investment expertise Consistent member and employer communication Dow Europe is very aware of the importance of getting DC right for our employees. We considered establishing our own pan- European pension plan, but in the end we decided to appoint a provider to deliver a European solution. Dow remains involved from a governance perspective, and our employees will benefit from a good quality, consistent DC investment solution and member communications to help them make the best choices for their future. Dr Olga Ruf-Fiedler Pension Leader EMEAI Dow Europe With more providers emerging and offering competitive solutions, and the greater availability of multi-country DC Mastertrust providers, this is an excellent time for multinational companies to start exploring cross-border pension solutions. Indeed, pan-european pension funds have become a practical reality, and not just a dream which can never be realised. The potential value to employers is great, with pan-european funds simplifying the management and administration of DC pensions, reducing costs and providing employers and members with consistent solutions across all corporate locations. GOING GLOBAL Maiyuresh Rajah, Senior DC Investment Strategist, State Street Global Advisors Over the past several decades, there has been a substantial increase in the number of large corporations expanding their operations and workforces globally. These companies are looking to develop a strong framework for managing their employee benefits and we have seen a corresponding increase in the use of DC plans. The challenges around providing sustainable yet meaningful retirement provisions to employees are considerable. Given the regulatory differences between nations, multinational corporations may be tempted to develop and manage each country s plan in isolation. We have had many conversations with multinational plan sponsors on the hurdles they face and the practices they employ as they attempt to manage their global benefits as effectively as possible. Through these discussions, we identified 10 best practices for global DC plans from articulating objectives of total rewards globally to seeking efficiencies in investment, administration and communication. It is clear that multinational companies could benefit from the economies of scale and consistency that cross-border plans offer. Well governed pan-european pension funds are now available to European plan sponsors and the time may be right to see if they can help improve the effectiveness of the benefits packages offered to employees across various countries. NEXT STEPS For more information on the 10 best practices for managing DC plans across multiple countries, visit ssga.com/ukdc to see our research paper DC Goes Global. ssga.com/ukdc 21

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