Global solutions for multinational organisations

WoRLd CLASS PENSIoNS EXPERTISE

Foreword – The multinational pension journeyHeadquartered in The Hague, the Netherlands, Shell is a global group of energy and petrochemical companies, with operations in over 90 markets. In recent years, the Shell board noticed an internal “pension struggle” that existed between its Group Pensions team and Shell Asset Management Co (SAMCo) from a communications, investment strategy, risk management, asset consolidation and cost perspective. The board decided to adopt an asset pooling structure, and a project was initiated to define a suitable solution.

Within SAMCo, we identified three key project objectives:

• Reduce operational risk – for example, trade execution in front and back-office operations – by appointing a single, global custodian

• Increase SAMCo’s capacity to take on more internal clients while continuing to offer quality customer service

• Provide a better and more cost-effective investment management product to Shell clients

The successful implementation of the project raised a number of important questions. We also learnt valuable lessons along the way that I would share with other organisations considering asset pooling for their pension scheme:

• Significant time needs to be allocated to choosing the right pooling vehicle and to explaining the reasons behind the choice; such as why it was chosen, how it compared against other options available, and the tax considerations. A key driver for our eventual decision was the ability to facilitate securities lending per contractual entity through a dutch FGR (Fonds voor Gemene Rekening or joint investment fund) vehicle.

• We were initially looking for a non-regulated fund, although later in the process we accepted that the fund would have to be regulated to comply with our internal standards as well as local regulations for some of the individual pension schemes. The UCITS application procedure via Autoriteit Financiële Markten added some additional unexpected work to establish the requirements and the appropriate regulatory functions such as a depository. We foresee this will continue to add costs and incremental administration to the pools, but it does give added comfort to clients.

• Liability hedging portfolios caused some complications as certain countries wanted details of exposure to their specific market or durations, which meant the appetite for generic fixed income pools was lower than anticipated. From this, we would recommend that hedging, rebalancing and collateral needs should be factored into the design of the pension plans.

• Partnering with a single custodian was another vital step in the process. But above all, the key point that arose throughout the project was the independence of the individual pension plans, which needed to ensure that the best interest of their pensioners was supported.

So what next?

The original fixed income pools were launched in 2009, and we are now looking to launch equity pools, both opaque and tax transparent. To date, we have experienced benefits around enhanced governance and risk management, reduced transaction volume and less variability across plans, as well as improved transparency on the investment activities.

With the further rollout into equity pools, we anticipate significant cost reduction and economies of scale, since larger asset pools command lower asset management and legal fees, as well as reduced operating and trading costs, and we will also benefit from centralised administration.

Finally, the move to pooled funds is a long journey, and one not to be embarked on without full consideration of the costs and benefits. But provided the above are taken into account, it should result in a lower cost and better controlled asset base.

Oliver Capon, COO and Finance Manager Shell Asset Management Company (SAMCo)

These include balance sheet volatility, due to the inclusion of net pensions assets or liabilities, as well as longevity forecasts. The latter are difficult to predict, but have high impact since any increase in assumed life expectancy increases pension fund liabilities – which increases the total liability on the balance sheet. Volatility in turn gives rise to risks, including triggering loan covenants or borrowing limits, which may impact corporate investment plans.

Multinational organisations also need to manage multiple stakeholders. Actuarial assumptions and attitudes towards investment risk will influence the size and scale of future sponsor contributions, and individual pension stakeholders may favour different measures of liability – creating varying investment risk tolerances and strategies.

Challenges and priorities for corporate sponsors The current economic climate has lent greater urgency to key business challenges that are faced by the majority of multinational organisations and pension funds.

In our experience, priorities for multinational pension funds typically include the following:

• Improving risk management at a corporate level

• Timely access to global pensions exposure in case of market crisis or event

• Maximising performance through fund manager selection

• Taking every opportunity to make assets work harder

• Managing costs more effectively

• Creating economies of scale

Partnership for mutual benefit Multinational organisations operating pension plans in different geographies and jurisdictions have now started to consider ways to improve overall pension fund governance and reporting standards. As one of the world’s leading global custodians, J.P. Morgan has purpose-designed a set of solutions to help clients address these challenges.

‘Global Headquarters Reporting’ is a set of independent, staged solutions comprising some, or all, of the following elements:

• Multinational custody, fund accounting, performance, risk and compliance reporting

• Multinational custody, fund accounting, performance, risk and compliance reporting, plus all reporting on assets under custody elsewhere and including liability information

• Multinational asset pooling

• Global consolidated performance reporting to capture asset and liability performance across multiple pension plans

By taking a consultative, long-term partnership approach to working with our multinational clients, we agree which single solution or combination of solutions, best meets their business needs.

The benefits of taking a multinational approach

Enhanced governance and risk management

• Improved risk/return profile and better spread of investment risk

• Centralised and improved decision-making process with best practice governance standards across all pension plans

• Enhanced monitoring of service providers

• Standardised and consistent reporting to facilitate informed decisions across all plans

Potential cost reduction and economies of scale

• Larger asset pools may command lower fees, as well as reduced operational and trading costs

• Centralised administration

Improved performance

• All pension plans (large and small) have access to best-of-breed fund managers

• Enhanced opportunity for investment diversification

• our choice of tax-transparent asset pooling vehicle allows revenue generation through securities lending

Potentially more efficient tax treatment

• Improved tax relief and reduced tax drag

• Potential reduction of VAT on fund management fees

Case study: Global automobile manufacturerJ.P. Morgan has a long-standing relationship with the premier German automobile manufacturer, providing global custody and master record keeping services across their three global pension plans (Germany, UK and the United States).

Solution

Global Headquarters Reporting – providing transparency and exposure reporting across multiple geographies:

• Management reporting – overview of NAVs, cashflow, portfolio performance, asset manager performance, asset allocation and top holdings

• Monthly reporting – greater detail across cashflow, asset allocation and asset manager performance

With J.P. Morgan as sole global custodian, the client is also able to monitor their entire pensions portfolio through a single technology and reporting platform (J.P. Morgan ACCESS™).

Benefits

• Consistent reporting, leading to improved internal operations and governance

• Enhanced transparency across accounting, performance measurement and analytics

• Reduced plan expenses by implementing consistent fees globally

Case study: Global technology/outsourcing companyJ.P. Morgan is the primary global partner for the world’s largest pension provider, acting as trustee for the client’s $46 billion defined benefit plan in the United States and custodian for the $10 billion German and $1 billion Austrian pension plans.

Solution

Global Consolidated Performance Reporting covering:

• Local plans that custody their assets with J.P. Morgan

• 59 additional local plans (both defined benefit and defined contributions) worldwide

Reporting for the client captures both asset and liability information and provides the US head office with full transparency into each pension plan’s performance. This solution, which has been in place for over 10 years, is considered the most extensive in the industry today.

Benefits

• Comprehensive view of all pension assets and liabilities globally

• Transparency into all aspects of performance measurement

• Consistent reporting globally

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Contact detailsWe would welcome the opportunity to talk to you about the pension challenges your organisation faces.

Benjie Fraser Practice Lead, EMEA Pensions and Endowments Business J.P. Morgan Worldwide Securities Services +44 (0)20 7742 0214 benjie.h.fraser@jpmorgan.com www.jpmorgan.com/wss

Best Custodian Pension Funds Global Investor Global Custody Survey, 2008, 2009, 2010

Fund Administrator of the Year Global Investor, Annual Awards, 2010

Transition Management Provider of the Year Professional Pensions, UK Pensions Awards, 2010

Best Pensions Custodian for Securities Lending Best Pensions Custodian for Foreign Exchange Financial News, Excellence in Institutional Client Service, 2010

Innovation in Custody and Securities Services The Banker, Innovation in Banking Awards, 2010

Pension Fund Custodian of the Year ICFA Magazine, Global Awards, 2009

Fund Administrator of the Year: Europe ICFA Magazine, ICFA Global Awards, 2008, 2009

Global Custodian of the Year ICFA Magazine, ICFA Global Awards, 2009

Custodian of the Year: Europe ICFA Magazine, ICFA Global Awards, 2009

Transition Management Provider of the Year ICFA Magazine, ICFA European Awards, 2009

Best FX Provider, Europe Global Investor, FX Survey, 2009