Cross-Border Pooling - Frans van der Horst, AEGON

The pooling of pension assets has mainly been the privilege of large multinationals, but as Frans van der Horst of AEGON Global Pensions explains, smaller multinationals can now benefit from cross-border asset pooling.

The pooling of pension assets in different countries has been largely confined to jumbo multinationals like Unilever, IBM and Nestlé, which have built their own sophisticated in-house systems. These platforms allow better governance, a firmer grip on financial risk, increased operating efficiency and, arguably, improved investment returns.

For small and medium-size multinationals, the in-house pooling of pension assets is cumbersome and uneconomic, mainly because European states are drawing closer together economically while wide variations remain in their social, labour and fiscal laws.

PENSION ASSET POOLING

To address these issues, AEGON is launching a tax-transparent pension asset pooling platform that offers smaller multinationals all of the benefits enjoyed by larger companies.

This also offers the opportunity to cut costs by reducing the country-by-country administrative burden currently deployed to manage pension assets.

As pension regulation and liability reporting have increased, the finance function has rightly taken control. CFOs now look for the most costefficient method of running often highly complex and remarkably varied pension plans. Companies, perhaps because of past acquisitions, will typically have several different pension plans in the same country, be they defined benefit, defined contribution or final salary. Each plan carries an administrative overhead and because the investment portfolios are probably uncoordinated, lack economy of scale.

Working with Citigroup as the custodian, AEGON is creating the first cross-border pension asset pooling platform that will allow multinationals to concentrate the management, investment and reporting of these assets. This new vehicle uses the Dutch Fonds voor Gemene Rekening (FGR).

FLEXIBLE MANAGEMENT

Multinationals signing up to the pooling platform will be able to retain local pension plans but channel all domestic pension assets into a single pool of funds, consisting of a series of ‘best-of-breed’ multi-manager funds.

The pooling platform gives multinationals the freedom to switch all their pension assets into this common investment vehicle at once. With the help of their consultants and pension providers, they can opt for a steadier, more phased approach.

AEGON also recognises that pension trustees have their own areas of responsibility and will rightly need to be convinced that cross-border pooling of assets will both enhance value and performance while reducing costs. Some trustees may wish to see the added value of cross-border asset pooling demonstrated by other pension plans within a multinational before backing the change themselves.

The pooling platform is designed to be highly flexible. A multinational might, for example, begin by bringing only the pension plans of certain countries together, which typically have strong historical, structural or economic similarities.

REGIONAL FOCUS

Multinationals might equally decide to cluster by regions, such as the accession states of Central and Eastern Europe. Such clustering would inevitably encourage a more efficient overall approach to retirement management and represent a spring board for eventual pan-European asset pooling.

The possibilities of asset pooling go much further. Bringing the management of pension assets closer together could eventually open the door to other areas of integration.

High on the list would be pension organisation or administration. When this begins to happen, multinational companies will inevitably find themselves edging closer to something that, until the arrival of the FRG, has proven highly elusive – a genuinely integrated pan-European cross-border pension market.