IORP II offers the opportunity for multi-national employers to run diverse schemes running in multiple jurisdictions through a single vehicle – with cost savings of up to 30 per cent argues Amundi global head of retirement solutions Christian Lemaire
Successful corporations are built up over years by buying and investing in companies across different regions and markets. The end result is a network of businesses, market shares and skill-bases owned by one organisation.
The patchwork of pension schemes they acquire tend to be more complicated. When a business is acquired, it is integrated into the larger operation as quickly and completely as possible. Integrating pension schemes is another matter. Even if the local rules and regulations allowed it – and they often didn’t – the disparity between benefit promises, funding rates and liabilities made it a daunting prospect.
The result is that international groups still maintain a range of legacy local pension schemes which vary greatly in terms of how they work and what they offer members. They usually use local providers and different advisers. The investment parameters on return, risk and fees will most likely differ from one scheme to another. Each will have its own accounting, administration, legal and actuarial support.
The way the schemes are monitored is seldom uniform across the group, making governance difficult and exposing the parent company to potential risks. Member administration and communication tools will also be different with various levels of quality.
Globally, multinational groups face indirect and hidden pension costs and a lack of control.
Add to this mix mobile employees moving from one of the company locations to the next, or leaving and becoming deferred pension scheme members.
This all adds up to a big monitoring and governance headache. If an investment option is too risky and inadequate information is provided to members, holding companies can face reputational and financial risk. Likewise, if a local service provider defaults or mis-manages the scheme, the corporate sponsor may face calls to compensate members.
In countries where regulations insist on guaranteed annual returns even on DC schemes, such as the Netherlands, Belgium and Germany, these can effectively become a new form of DB. Here, guaranteed rates can remain the responsibility of the sponsor. The risk is especially real in the context of falling interest rates impacting yields on insurance contracts.
The principal reason this patchwork of pensions still exists is that the management of the local subsidiaries will have, rightly, pointed to the need to comply with local regulations and laws.
This is where things are changing. There is a way out of the maze.
The clumsily-named IORP II directive is now in place. This allows different local schemes in Europe to be hosted within the same pension fund vehicle while still complying with countries’ different regulatory rules. This greatly simplifies and improves monitoring, oversight and governance, and lowers costs.
It makes the whole management and administration process more efficient and less risky. Cost control of investment and support services fees is improved. Common investment parameters – risk and return – can be introduced.
But developing a cross-border retirement plan requires time, money, and expertise that only a few large corporations can afford.
Happily, the pension industry is beginning to see a few large providers offering pan-European pension solution that can service multiple unrelated employers while segregating their assets. The employers’ schemes still comply with different European countries’ pension regulations, but are managed within a single common structure. The main challenge is to be up and running in at least around 10 European states.
To support this single pension fund, providers should offer an efficient administrative platform which can adapt to the specific needs of employers and offer a range of online services to their employees.
There is also a requirement to offer an open architecture that can integrate tens of thousands of external funds and avoid any conflict of interest.
On average, this approach can offer savings around 30 per cent on the undisturbed cost of the existing pension patchwork.
At last the finance director of a multi-national has an alternative to the local pension ‘known-unknown’ worry: unwieldy, complex, expensive and difficult to manage. Thanks to IORP, he or she can start the pan-European process of applying appropriate monitoring and governance and exploiting the benefits of scale.