Successfully reported this slideshow.

Asset Pooling Comes of Age


Published on

White paper: Asset Pooling Comes of Age (June 2010)

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

Asset Pooling Comes of Age

  1. 1. Asset poolingcomes of age A roadmap to pooling assets for pensionsAlexander W.A. van Ittersum
  2. 2. Table of ContentsIntroduction 11 sset pooling benefits now available to ­nternational companies of all sizes A i 2 The need to simplify pensions management 2 Asset pooling in theory – decreasing complexity, improving control 2 Why the delay? 42 Diversity in pensions – a united Europe? 5 Managing your pension plans 63 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 104 ulti-client asset pooling – the advantages of a readymade solution M 11 Asset pooling in practice – one size fits all? 11 A first step towards pension pooling 135 Asset pooling comes of age 14 Improving international pension management 14 Five steps to implementing asset pooling 14Acknowledgements 15References and notes 16
  3. 3. IntroductionIn the light of the economic crisis, pensions are now very much a boardroom issue, with CFOs lookingto 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 haveto run separate pension plans for every country in which they operate. This makes it difficult for themto gain a clear overview of their pension assets and liabilities (increasing risk) and to take advantageof their international scale (increasing costs). In order to address these issues, a number of solutionshave 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 poolingsolutions, it looked as if asset pooling for pensions was about to break through as a must-have solutionfor all companies with multiple pension plans in Europe. Then, as attention shifted to IORPs (Institutionsfor Occupational Retirement Provision) – the new hope for European pension consolidation – andthe financial crisis forced companies to focus on more urgent problems, attention for asset poolingwaned. However, as it has become clear that IORPs are presently limited and difficult to implementand multi-client asset-pooling has become available, asset pooling is now entering a new phase as itopens up a range of benefits for companies of all sizes.No longer a solution for the fewThe pooling of pension assets clearly offers sponsoring companies and their pension funds distinctbenefits. In practice, however, the technical difficulties of designing a robust and effective asset poolingsolution have meant that only the largest of multinational companies (Unilever, Shell and Nestlé) havestarted to pool their pension assets. Smaller and medium-sized multinationals have not been able tobenefit from asset pooling, as it does not make financial sense for them to invest in designing andimplementing their own bespoke solution. Until now, therefore, the expectations around asset poolinghave not yet solidified into benefits for companies other than the largest multinationals. However,asset pooling is now coming of age, as new ‘off the shelf’ multi-client solutions are ready to placeasset pooling within the reach of international companies of all sizes.In this AEGON Global Pensions white paper, we examine the issues that multinational companies facein managing their pensions and introduce asset pooling. Having discussed the diversity of pensionsand pensions systems in Europe today, we explore the different pooling solutions available and showhow multi-client asset pooling now offers a robust and future-ready solution for companies of allsizes. Finally, we provide five brief guidelines on how companies can implement asset pooling. 1
  4. 4. 1 Asset pooling benefits now available to i ­nternational 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. Asset pooling in theory – decreasing complexity, improving control The idea behind asset pooling is simple: companies with multiple pension plans can pool their assets, giving them greater control over their pension plans and enabling them to gain from efficiencies of scale. Corporate headquarters receive up-to-date, consolidated reporting of all their pooled pension assets. Asset pooling removes complexity (and therefore reduces risk) and improves corporate control over pensions. 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
  5. 5. 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. Figure 1: Benefits of asset pooling for all stakeholders Head office Loc Ri ts a sk Cos Trustees l subsidiaries Asset pooling C o n tr o l Members 1 Improved governance and control The most important reason for multinational companies to consider asset pooling is to improve their international pension governance. The economic crisis has revealed the potential risk that pensions represent to the corporate balance sheet. Asset pooling offers a unified investment solution with centralised reporting, providing companies with better insight into potential investment risks and decreasing the complexity of their pension reporting. 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
  6. 6. 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. Why the delay? Considering the benefits that asset pooling promises, it is perhaps surprising that it has not been adopted more quickly. As usual, the devil lies in the detail. Using non tax-transparent or opaque investment funds is relatively simple but can lead to substantial underperformance (particularly for equity funds), greatly reducing or even eradicating the potential benefits of asset pooling. In order for asset pooling to be effective, it is important that the solution be tax-efficient – and developing a tax- efficient solution is complex and time consuming. However, now that tax efficient multi-client asset pooling is available, companies can benefit from asset pooling without having to develop a bespoke solution themselves. Figure 2: Unified investment management 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 UK Subsidiary NL Subsidiary FR Subsidiary Other Subsidiaries Pension Plan A Pension Plan B Pension Plan C Pension Plan D DB Plan DC Plan Insured DC Book reser. DB Pools Reporting (Source: AEGON Global Pensions)4
  7. 7. 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 formultinational 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 becomesrapidly clear that there is still a wide variety in pension systems and practices across Europe. Thedifferences apparent are the result of the different state pensions, different pension vehicles anddifferent pension promises made (notwithstanding the different terminology used in each country).When looking at European pensions, the major differences between the various country systems liewith 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 moreimportant. Diversity of pension systems: the differing importance of the 1st, 2nd and 3rd pillars 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. Figure 3: Shares of the three pillars in the total premium income 100% 1st pillar 80% 2nd pillar 60% 3rd pillar 2nd and 40% 3rd pillar 20% 0% l ly d y ai n y um n s m nd a rk ce d 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 (Source: CEA Statistics No 28, September 2007) 3 5
  8. 8. 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. Diversity of pension systems: organisation of occupational pension plans The graph below demonstrates the diversity of the various national pension systems, showing the different vehicles employed for occupational pensions across Europe. Figure 4: Financial vehicles used for occupational pension funds 100% 90% Pension insurance contracts 80% Book reserves 70% (non-autonomous) 60% Pension funds (autonomous) 50% Other 40% 30% 20% 10% 0% en um l d ay nd s d ly m ai n a y 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 (Source: Pension Markets in Focus: November 2007, Issue 4 - © OECD 2007)6
  9. 9. 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. Figure 5: The full spectrum of pension plans ‘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 Asset pooling report Company XYZ COMPANY NAME PLAN PLAN TYPE No PREMIUM AUM EUR PLAN LIVES EUR COUNTRY Company XYZ Materials NL B.V. Garantiecontract insurer ABC DB Insured 25 500,000 5,000,000 Netherlands Company XYZ trading BV Stichting Pensioenfonds XYZ DB career average 1000 5,000,000 50,000,000 Netherlands Company XYX Electrical appliances Contrats à cotisations définies Defined Contribution 200 28,000 800,000 France Company XYX Electrical appliances Fonds collectif de retraite Group Pension Fund 100 1,200,000 12,000,000 France Company XYX Electrical appliances Fonds collectif d’I.F.C End of career insurance 30 800,000 8,000,000 France Company XYZ Group Personal GPP Group Personal Pension DC 270 500,000 5,000,000 UK Pension Scheme Company Xyz Ltd GP STAKEHOLDER Group Stakeholder DC 550 1,000,000 10,000,000 UK Company XYZ AG Vorsorgungskasse XYZ Cash balance DC 50 1,000,000 10,000,000 Switzerland Company XYZ AG Company XYZ CTA DB Bookreserve 500 1,500,000 15,000,000 Germany Company XYZ AG Pensionsfonds DC guaranteed 120 - 8,000,000 Germany (Source: AEGON Global Pensions) 7
  10. 10. 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 Added value: improved control, cost savings 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
  11. 11. Administrative and data pooling – interim solutionsSeveral multinational companies, including Mars and Reckitt Benckiser, have implemented dataand administrative pooling solutions (also referred to as investment or portfolio accounting). Thisinvolves centralising pension management, including the management of pension assets withoutactually pooling the assets into a single investment vehicle. Administrative pooling requires internalorganisational changes, such as setting up asset management committees for hiring managers. Thepension assets remain invested within their present legal vehicles and pooling is only carried out at anadministrative level. Administrative pooling offers some – but not all – of the benefits of asset poolingand can be used as a first step towards full asset pooling.Global custody – a partial solution for larger multinationalsGlobal custody offers primarily larger companies a way to lower their costs and pool the reportingof their pension plan assets by placing the custody of their pension assets with a single provider.However, global custody does not automatically lead to unified reporting and implementation noreven necessarily to improved investment management. In particular, it does not provide the additionalcontrols and efficiency gains in investment management that are made possible by asset pooling. Inaddition, although companies should be able to benefit from some efficiency gains, the scale of theprovider involved may reduce the negotiating power of all but the largest companiesMulti-client asset poolingMulti-client asset pooling provides companies of all sizes with the ability to pool their pension assetsand to receive consolidated reporting on their assets. Asset pooling can help companies to improve themanagement of their pension investments, generates efficiencies and makes it easier for companiesto control their pension plans. Multi-client asset pooling offers most of the benefits of bespoke assetpooling solutions but, because companies can participate in pre-existing asset pools, it is easier,quicker and less expensive to implement.Bespoke asset pooling solutionsThe earliest asset pooling solutions were tailor-made solutions created for the largest multinationals(for example, Nestlé and Unilever). These tailor-made solutions can require enormous investment intime and resources. As one of the people involved in a bespoke asset pooling project said: ‘Murphy’slaw will definitely strike more than once.’ Such ‘one-off’ solutions are simply not affordable for smallercompanies, which is one of the reasons why asset pooling has been slow to be adopted. Creatingbespoke asset pooling solutions can be difficult and complicated, and the costs can be substantial,which is why the only companies that have adopted them tend to have more than ten billion euro inassets.IORPs – under developmentCross-border IORPs, like asset pooling, appear to have experienced their share of attention, as theyoffer the potential for true pan-European pension provision. IORPs will eventually provide companieswith the ability to pool both their European pension assets and liabilities. At present, however, IORPsremain largely elusive, as differing social, labour and tax laws through Europe remain a considerablebarrier to their use (and will remain so for the foreseeable future). Although the benefits of pan-European pension pooling are clear, pension benefit systems (like other labour arrangements) withinthe European Union are not yet harmonized, which has significant impact on attempts to consolidatepensions. It is for this reason that early attempts to create IORPs (and more than 70 cross-border 9
  12. 12. 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 and IORPs Although IORPs will eventually offer an overarching pension solution within Europe, considerable further developments in European harmonisation are necessary before these can be truly realized. There are immense obstacles to be overcome before IORPs can achieve their full potential. In the meantime, standalone asset pooling solutions provide an achievable first step towards pan-European pensions, ‘future ready’ for inclusion into one or more IORPs at a later date, if required. In addition, asset pooling solutions can also be used to pool non-European assets, for example pensions assets from US, Asian or other pension funds. Figure 8: Asset pooling – a future-ready solution Asset pooling solutions can be used in IORPs and also for pooling non-European assets. Multinational company UK Subsidiary NL Subsidiary FR Subsidiary Other Subsidiaries IORP Pension Plan C Pension Plan D Pools Reporting (Source: AEGON Global Pensions)10
  13. 13. 4 Multi-client asset pooling – the advantages of a readymade solutionAsset pooling in practice – one size fits all?Although the benefits of asset pooling may be clear, creating a cross-border asset pooling solutionfor the first time is a difficult process requiring considerable international expertise. In order to beable to cope with the immense diversity 5 of pensions across Europe, asset pooling solutions need tobe flexible and ready for change.The variety of potential – and partial – solutions presently on offer may have made it difficult forcompanies 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 accessto a ready-made solution at a fraction of the cost. As a result, asset pooling is now within the reach ofall sizes of companies. Multi-client asset pooling can be offered either as part of an insured pensionsolution or as an asset-only solution. A separate solution naturally provides more flexibility, and mayfacilitate 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 fromeconomies of scale. When pooling pension assets, it is important that the investment vehicles used areas efficient as possible from a taxation perspective. At present, tax efficient investment vehicles arecurrently available from Luxembourg (FCP: Fonds Commune de Placement), Ireland (CCF: CommonContractual 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 rebateissues on behalf of its clients. This in itself can provide considerable benefits, as many investors simplydo not apply for tax rebates as the procedures are particularly complicated. This was confirmed bythe EU Internal Markets Directorate General in a memo in October 2009 6 stating that many investorsdo not reclaim their share of the EUR 5.47 billion in foregone withholding tax annually. 11
  14. 14. Tax efficient pooling Claiming back taxes requires expertise In October 2009, the European Union’s Internal Markets Directorate General issued a memo stating that many investors simply don’t reclaim their share of the EUR 5.47 billion in foregone withholding tax annually. The procedures for validating investors’ entitlements are so complicated that they discourage investors from applying. For those who do apply for reimbursement of their taxes, the cost of doing so is thought to amount to approximately EUR 1.09 billion every year. The clear benefit of tax-transparent investment vehicles Tax-transparent investment vehicles offer a clear advantage to investors in comparison to tax-opaque vehicles (as illustrated in the graph below). Over an 8-year period, the return on investment from a global equity portfolio where all dividends can be reinvested outperforms a portfolio where withholding tax is paid by about 6% (for example, a Luxembourg-based SICAV: Société d’Investissement à Capital Variable). 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 (Source: MSCI-Barra, AEGON Global Pensions) 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
  15. 15. A first step towards pension poolingMulti-client asset pooling is a first step towards building a ‘shared service centre’ for pensions formultinational companies. Given the changing pensions environment, it is very important that anya­ sset pooling solution should be flexible and ‘future-ready,’ as a company’s needs are likely to changeand develop.Although it will be a long time before cross-border IORPs are commonly in use, IORPs do alreadyexist and their use will continue to grow. Asset pooling solutions need to be able to fit seamlesslyinto an IORP, if and when necessary. In addition, unlike IORPs, asset pooling solutions extend beyondthe borders of Europe, enabling companies to manage their pensions through a single vehicle. Forexample, in an advisory opinion on pensions in 2008 7, the US Department of Labor opened up thepossibility 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 requiredby different pension systems. Although some companies will be able to reap benefits from morecustomized solutions, it is important to find a balance between increased costs and the benefits to begained. A standardized, multi-client asset pooling solution can be easily and efficiently implemented.An asset pooling solution must:• Be efficient and transparent, with low operating costs• Have low implementation costs• Provide excellent governance and control over the investment solution• Provide a high quality investment solution that is suitable for a variety of pensions• Provide consolidated reporting• Offer a modular investment solution to service different asset allocations and currencies• Be future-ready for IORPs, and the shift from DB to DC pension plans.Most importantly, an asset pooling solution must deliver value to all stakeholders, and not just theCFO. A good asset pooling solution should offer improved governance and control for the CFO, a solidinvestment solution fitting local requirements for the trustees and employees, and low costs andreliable high quality for the local subsidiaries. 13
  16. 16. 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. Improving international pension management By enabling companies to harmonise the management of their pension plans, multi-client asset pooling provides them with increased control and consolidated reporting. Not only does this allow companies to better understand and control risk, but it also enables them to optimize the management of their portfolio of pension assets. Smaller pension funds can benefit from access to the best managers, and all pension funds can benefit from transparent costs and competitive management fees. 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. Five steps to implementing asset pooling For asset pooling, a step-by-step implementation process is preferable to a ‘Big Bang’ approach. As asset pooling is introduced across a company, internal processes will have to be altered and adapted, and contacts and contracts with external providers will have to be changed accordingly. If pension plans are added one at a time, as they become ready to join, any issues can be dealt with as they arise. Establish whether asset pooling (or other pooling solutions) will benefit your company. Does Step 1: centralisation fit within your company culture? Step 2: dentify which pension plans you have, in which countries. Which assets do you hold and I in what kinds of investment vehicles? What types of plans do you have, with how many participants? Step 3: erform a cost benefits analysis – establish the potential benefits of asset pooling in P 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: ecure executive sponsorship – involve all stakeholders, from board members to local S 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: lan and execute. Make a detailed project plan of how and when to switch from the current P investment solution to the asset pooling solution, taking into account local requirements and long running contracts.14
  17. 17. AcknowledgementsI would like to thank the following people for providing their much valued input and insight.Alexander van IttersumJeroen Bogers Product development manager, AEGON Global PensionsSteve ChapmanInternational sales director, AEGON Global PensionsBernard HanrattyManaging director head of investor services EMEA, CitiFrans van der HorstManaging director, AEGON Global PensionsAnne LaningHead operations, TKP InvestmentsMischa MuntingaHead tax and regulatory, AEGON Asset ManagementPhilip PenningsTax department, AEGON Asset ManagementFrank RandallDirector, AEGON Global PensionsThurstan Robinson Communications manager, AEGON Global PensionsMartijn TansDirector marketing, AEGON Global PensionsPiet VandenbosscheConsultant and project manager asset pooling, TKP InvestmentsAndrew WoodRegional sales director, UK and Nordics, AEGON Global PensionsKaren Zeeb Director investor services Global Transaction Services, Citi 15
  18. 18. 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 31 March 2010: Multinationals ‘unaware of overseas pensions cost’, Allianz. IPE 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
  19. 19. AEGON Global Pensions and asset poolingIn June 2009, AEGON and Citi launched the first multi-client cross-border asset pooling platform. Thegroundbreaking 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 taxtransparent investment funds under a European passport (UCITS), the unique platform will enablethe multinational clients of AEGON Global Pensions to consolidate the management, investment andreporting of their pension assets, reducing both risk and costs.Currently, the AEGON Global Pensions asset pooling platform is being used by Dutch pension funds anda UK and French insurance company. The platform contains tax-transparent UCITS equity and bondfunds, but can also cater to alternative investments. The asset pooling platform provides companies witha modular, flexible and scalable solution. In addition, it provides share classes at different fee levels inorder to cater for different distribution methods (for example, asset pooling is available through a DCfund platform, via an insurer or directly to a self-administered pension fund). 17
  20. 20. Contact details AEGON Global Pensions P.O. Box 85 2501 CB, The Hague The Netherlands Telephone: +31 (0)70 344 89 31 E-mail: Website: 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. AEGON, June 201018