AEGON Global Pensions: Local Knowledge - Frans van der Horst

Frans van der Horst, managing director of AEGON Global Pensions, explains that the move to de-risk by transferring defined benefit schemes is gathering pace.

As companies adopt fair value accounting, company pension liabilities are increasingly being treated as corporate debt. As a result, pension funds can have a major impact on a company’s share price, especially in times of market volatility. In addition, many companies are beginning to realise the effect that increasing life expectancy is having on their pensions liabilities.

Many companies are therefore looking for a way to remove these elements of uncertainty in order to allow them to focus on managing their core business operations. Although companies with international operations usually take the decision to de-risk their pensions centrally, the actual process of de-risking must take place at a country level – for each individual pension scheme.

This poses many challenges, in terms of jurisdiction, customs and buy-out terms. At AEGON Global Pensions, we remove the complexity from the global buyout process for our clients, providing them with a single point of contact to coordinate the execution of the defined benefit (DB) pension buyouts. Our clients communicate with AEGON Global Pensions and we, in turn, arrange and oversee all the local contracts in order to meet our clients’ requirements.

Creating international buyout strategies is far from simple because there are so many differences between countries. For example, indexation is mandatory in the UK but rare in the US.

In Germany, where companies often hold pension liabilities directly on their balance sheets, strict rules on tax benefits enjoyed by financial institutions taking on a company’s pension liabilities mean that most solutions are driven by fiscal considerations. Then there are issues such as common funding levels and whether particular markets favour a one-off or phased buyout of liabilities.

At AEGON Global Pensions, we help our clients to understand these differences – and their implications – so that they can create an effective international buyout strategy.

Transfer strategies

When businesses first started transferring their DB schemes to specialised pensions providers, they only had the option to do this in one single transaction. However, since not all pension funds can fund such a transaction from the start, phased transitions, which split the transaction over multiple years, have become an attractive option.

Within a country, DB buyouts can, for instance, be phased according to participant age. Likewise, on an international level, DB buyouts can be phased by country. At AEGON Global Pensions, we help our clients to plan and structure such phased buyouts prior to implementation. A country-by-country, phased buyout may take between five and seven years to reach completion.

Enhancing competitive edge

Companies are increasingly moving from DB to defined contribution (DC) schemes. For many of these companies, the transition is gradual, with DB schemes being frozen while employees move to DC schemes. Such companies may wish to de-risk these frozen DB schemes through a buyout.

The shift from DB to DC may provide multinational companies with a chance to enhance their competitive edge in emerging markets. By limiting their pension liabilities in mature markets, they can focus on providing attractive schemes for employees in new markets, enabling companies to recruit good people.

An additional and compelling reason for companies to use a global buyout solution is to free themselves from the day-to-day operations of pensions by outsourcing all these commitments. The scheme members continue to receive benefits they have been promised while the company is free to focus on business.

Of course, DC schemes are not going to replace all DB schemes overnight, and countries like the Netherlands maintain a very strong DB culture. Some businesses say that DB schemes can be relatively cheap, if they are managed well, while many believe that DC schemes transfer too much risk to employees.

By risk, they don’t only mean investment risk but also the interest rate risk when the lump sum becomes available to buy an annuity.

Personally, I believe that we will see a shift to DC schemes in the Netherlands, as multinationals move to de-risk their Dutch pension schemes, but there will always be some companies that choose to retain their DB schemes.

The message really is that de-risking pension liabilities across jurisdictions is by no means simple and requires considerable care. AEGON Global Pensions offers a unique platform to address these complex issues.