Investing In The Future

4 February 2008 Richard Christou

Pensions are an executive nightmare, but worrying about them can be more problematic, says Fujitsu's Richard Christou. He tells Nigel Ash that it is much easier to deal with regulations, risks and trustees than to manage fear over future finances.

In recent years, the multiple challenges in managing and accounting for pension risk have brought on grey hairs among more than one worried top executive.

Richard Christou, Fujitsu Ltd corporate senior vice-president and head of EMEA operations, says that there was a time when UK occupational pension provisions were the envy of the world.

"However, what we have seen over the years is a tremendous number of attempts by governments of all political persuasions to meddle with occupational pension schemes for reasons that are not always easy to understand," he says.

Christou feels that, while creating security for pension members and increasing the portability of pensions between jobs are laudable aims, some political interference has also been prompted on fiscal grounds.

Part of the problem, according to Christou, is that governments have sought to clamp down on a minority of individuals who have taken advantage of loopholes in the rules. "In order to prevent an undesirable activity by a small minority, the fiscal authorities have tightened up the pension rules. On accrual rates, for instance, the rules are now so strict that they are actually making life difficult for the majority of pensions."

Christou adds that progressive restrictions and regulations to occupational pension funds since 1980 have made them less flexible, more difficult to operate and actually, in many cases, less attractive to members and the companies that run them.


Fujitsu has long operated a pensions policy sub-committee of the board, currently chaired by Christou, which includes the finance director and the head of human resources.

He explains: "We started to be concerned when we saw the changes in accounting standards, which said that you had to carry the deficit on the balance sheet. I personally believe that a snapshot on a single day, based on clearly defined criteria, is not the best way to analyse your liabilities. Discounting them in terms of bond rates is to me too much of a snapshot.

"It does not take account of the long-term trends in a way that I feel comfortable with. I have always felt SSAP 24 was a better approach. It spread things in a more sensible way, because you were looking at something longer term."

Christou points out that had a snapshot approach been adopted in the 1970s when there were serious concerns that occupational pension schemes were doomed because of high inflation, there would be no schemes at all today.

He says: "I do believe that to some extent we have terrified ourselves. This is not to say that there isn’t an issue. But I think we tend to scare ourselves with the pensions question because of the change in accounting standards. It has focused people’s minds on a fear of the future, and fear is always harder to manage than risk."


Fujitsu’s pension scheme is its largest subsidiary. It closed its defined benefit scheme in 2000 to all new employees and now runs the old scheme alongside its defined contribution pension plan.

Over the last decade, the company has focused on financial and longevity risks, but not to the extent, says Christou, of eliminating risk, thereby killing the goose that lays the golden egg.

He says: "One of the hardest things for most people to realise is that you can never eliminate the risk inherent in investments. The only question is who bears the risk and how capable is he of sustaining that risk?

"I have always believed in spreading your investments, and a significant investment in equities is the right thing to do, though I am not saying that you don’t need to be in cash at some point. For me, there is no one type of investment vehicle. You should be in a sensible spread that changes over time on the basis of your market information. That means you have to have professionals who spend their lives managing this. That is why I talk about taking risk where it is rewarded in a managed way."

Fujitsu has eschewed the balanced fund management approach and chosen specialists. These implement the asset allocation strategy decided by the pensions policy committee and the trustees with the help of independent advisers.

"If you sell for a known hit now, you are just transferring the risk."

Christou explains: "We have found so far – touch wood – that this gives you a better return. And they do say that most of the earning power of a fund is generated choosing the right spread of asset allocation, rather than actually fingering the internal investment in a particular class of assets. So it is important to periodically consider whether you are investing in gilts, equity, property or whatever." Fujitsu also monitors its specialist fund managers closely: it recently fired its defined contribution managers for poor performance.

Fujitsu has not considered selling its pension book because Christou believes that: "If you sell for a known hit now, you are just transferring the risk. Those who sold the risk to, to take an unfortunate example, Equitable Life, offloaded the risk, but their members were no better off. However, from a corporate point of view, you are well and clear if you can afford to take the knock."

But therein lies the rub. The purchasers of pension funds calculate the deficits on a fully funded discontinuous basis, which is very expensive. According to Christou: "You can probably only afford to do this if your deficit is pretty small or you are in some kind of surplus. That is not to say that if your investments are performing well and you’ve reached a certain stage, it would not be a good idea to do it. But for most companies operating defined benefit schemes, given the current state of deficits, I doubt this is entirely practical.

"But, if you can argue that it is a good idea and can afford it, you can transfer risk to people who professionally are more capable of managing it because it is their job. Indeed it is not only their job; it is their money."


Christou also has to sensitively manage the relationship between the pension trustees and the pension policy committee. "I feel that one of the main difficulties with the current regulatory regime is that it allows trustees to determine the investment policy but makes the company pay off the deficit if they get it wrong. I am not sure that there is a solution under the current regime. Dividing responsibility and authority is not necessarily the best way to go.

"The trustees have no resources other than the pension fund. One would argue that if the company is responsible for the deficit, then it would make sense to require the company to be more responsible for managing investments."

"If the company is responsible for the deficit, then it would make sense to require the company to be more responsible for managing investments."

Christou points out that the legislation has been developed so that a company is only consulted by the trustees. The trustees decide the final investment strategy and monitor investment managers. In Fujitsu’s case, this is done via a special committee. Membership of both the trustees and the pensions policy committee is not permitted.

Christou explains: "Our trustees are made up of employees and company-appointed members and independents.’ In 2006, Fujitsu reported a pension deficit of some £500m."

He continues: "Under current regulations, a company has to negotiate with its trustees to decide how to fund the deficit. We have had reasonably sensible discussions with our trustees, reaching an agreement that we pay a certain amount in cash to cover the shortfall over a period of years.

"But because of this split between responsibility and authority, the two parties are to some extent on opposite sides of the equation. This means that the trustees and the company cannot use the same fund actuary.

"When we had these discussions, we appointed an actuary and lawyers, and the trustees had their own fund actuary and fund lawyers. This made it quite an arm’s length negotiation."

Managing a company pensions scheme may be a minefield of regulations and risk, but with careful investment and a calmly managed relationship with trustees, there is no need for nightmares.