new aegon global pensions white paper "asset pooling comes of age"
TRANSCRIPT
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Asset poolingcomes of age
A roadmap to pooling
assets for pensions
Alexander W.A. van Ittersum
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Table of Contents
Introduction 1
1 Assetpoolingbenetsnowavailabletointernationalcompaniesofallsizes 2
Theneedtosimplifypensionsmanagement 2
Assetpoolingintheorydecreasingcomplexity,improvingcontrol 2
Whythedelay? 4
2DiversityinpensionsaunitedEurope? 5
Managingyourpensionplans 6
3 Manywaystopoolyourpensions 8
Administrativeanddatapoolinginterimsolutions 9
Globalcustodyapartialsolutionforlargermultinationals 9
Multi-clientassetpooling 9
Bespokeassetpoolingsolutions 9
IORPsunderdevelopment 9
AssetpoolingandIORPs 10
4 Multi-clientassetpoolingtheadvantagesofareadymadesolution 11
Assetpoolinginpracticeonesizetsall? 11
Arststeptowardspensionpooling 13
5Assetpoolingcomesofage 14
Improvinginternationalpensionmanagement 14
Fivestepstoimplementingassetpooling 14
Acknowledgements 15
Referencesandnotes 16
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Introduction
Inthelightoftheeconomiccrisis,pensionsarenowverymuchaboardroomissue,withCFOslookingtoreducepensionrisks1andtocontrolcosts.Forcompanieswithpensionplansinmultiplecountries,
thisisnoeasyundertaking.Duetothediversityofinternationalpensionregulations,companieshave
torunseparatepensionplansforeverycountryinwhichtheyoperate.Thismakesitdifcultforthem
togainaclearoverviewoftheirpensionassetsandliabilities(increasingrisk)andtotakeadvantage
oftheirinternationalscale(increasingcosts).Inordertoaddresstheseissues,anumberofsolutions
havebeendevelopedtohelpcompaniesimprovetheirinternationalpensionsmanagement.
Overthepastfewyears,asseverallargemultinationalcompaniessetuptailor-madeassetpooling
solutions,itlookedasifassetpoolingforpensionswasabouttobreakthroughasamust-havesolution
forallcompanieswithmultiplepensionplansinEurope.Then,asattentionshiftedtoIORPs(Institutions
forOccupationalRetirementProvision) thenewhope forEuropeanpensionconsolidationandthenancialcrisisforcedcompaniestofocusonmoreurgentproblems,attentionforassetpooling
waned.However,asithasbecomeclearthatIORPsarepresentlylimitedanddifculttoimplement
andmulti-clientasset-poolinghasbecomeavailable,assetpoolingisnowenteringanewphaseasit
opensuparangeofbenetsforcompaniesofallsizes.
No longer a solution for the fewThepoolingofpensionassetsclearlyofferssponsoringcompaniesandtheirpensionfundsdistinct
benets.Inpractice,however,thetechnicaldifcultiesofdesigningarobustandeffectiveassetpooling
solutionhavemeantthatonlythelargestofmultinationalcompanies(Unilever,ShellandNestl)have
startedtopooltheirpensionassets.Smallerandmedium-sizedmultinationalshavenotbeenableto
benetfromassetpooling,asitdoesnotmakenancialsenseforthemtoinvestindesigningand
implementingtheirownbespokesolution.Untilnow,therefore,theexpectationsaroundassetpooling
havenotyetsolidiedintobenetsforcompaniesotherthanthe largestmultinationals.However,
assetpoolingisnowcomingofage,asnewofftheshelfmulti-clientsolutionsarereadytoplace
assetpoolingwithinthereachofinternationalcompaniesofallsizes.
InthisAEGONGlobalPensionswhitepaper,weexaminetheissuesthatmultinationalcompaniesface
inmanagingtheirpensionsandintroduceassetpooling.Havingdiscussedthediversityofpensions
andpensionssystemsinEuropetoday,weexplorethedifferentpoolingsolutionsavailableandshow
howmulti-clientassetpoolingnowoffersarobustandfuture-readysolutionforcompaniesofall
sizes.Finally,weprovidevebriefguidelinesonhowcompaniescanimplementassetpooling.
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1 Asset pooling benets now available to
international companies of all sizesThe need to simplify pensions managementAscompaniesgrowovertime,itisnotunusualforthemtogainadditionalpensionplansthrough
mergers,acquisitionsandthecreationofnewsubsidiaries.Historically,manycompanieshaveallowed
theirpensionplanstoproliferatewithlittlethoughtforharmonisation.Thisinturnleadstoincreased
complexityinpensionsmanagementandincreasedrisk.Acombinationoftheeconomiccrisisand
tighteninginternationalregulations(forexample,IFRS)haveledcompaniestolookoncemoreattheir
pensionsinadrivetomanagerisk,increasecontrolanddecreasecosts.
When pension plansare managed individually, country by country, it isusual for the trusteesof
individualpensionplanstodecideontheirinvestmentpoliciesandtochoosetheirowninvestmentmanagers.Thiscanresultininefciencies,hiddenrisks,inconsistentreportingandopaquecosting
(thatcanamountto15%oftheriskpremium).2
Assetpoolingoffersmultinationalcompaniesthepossibilityofoptimisingtheirpensionmanagement,
delivering benets to all stakeholders. Bypooling their pensionassets from different countries,
multinationalcompaniescanimprovetheirpensiongovernance,bettercontroltheirnancialrisk,
increasetheiroperationalefciencyandobtainaccesstobetterinvestmentsolutions.Assetpooling
enablescompaniestoremoveinvestmentmanagementinefciencies,helpingthemtomanagetheir
pensionsbetterandmorecost-effectively.
Asset pooling in theory decreasing complexity, improving controlTheideabehindassetpoolingissimple:companieswithmultiplepensionplanscanpooltheirassets,
givingthemgreatercontrolovertheirpensionplansandenablingthemtogainfromefcienciesof
scale.Corporateheadquartersreceiveup-to-date,consolidatedreportingofalltheirpooledpension
assets.Assetpoolingremovescomplexity(andthereforereducesrisk)andimprovescorporatecontrol
overpensions.
Ontheinvestmentside,assetpoolingprovidessavingsinmanagementandcustodyfeesandmakes
iteasierfortheplanmanagers(thetrusteesorsponsoringcompany)todesignappropriateasset
allocation strategies. The overall cost and efciency savings are highest when multiple smaller
pensionplanscombinetheirpensionassets,asopposedtowhenasinglelargeandalreadyefcientpensionplancombinesitsassetswithsmallerplans.Thisfactmeansthat,paradoxically,thepotential
benetsandsavingsarehighestforthesmallerpensionplansthathaveuntilnowbeenunableto
affordassetpooling.Withthedevelopmentofmulti-clientassetpooling,thesesmallerpensionplans
arenowabletobenetnotonlyfromthecostsavingsthatassetpoolingoffersbutalsofrombetter
riskdiversication,asassetpoolingprovidesaccesstomoreassetclassesandmanagerstyles(which
previouslywouldonlyhavebeenavailablethroughexpensivefundsoffunds).
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Benets of asset pooling for all stakeholders
Asset pooling offers companies benets in three major areas: improving governance andcontrol (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 benets to all stakeholders a key factor in successfully implementing any solution.
Figure 1: Benets of asset pooling for all stakeholders
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 unied 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 rst 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 investmentrisk 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
signicant savings on their investment costs. As larger companies often possess larger, more
efcient pension plans, combining these large plans will not always result in such signicant
savings on asset management fees. In addition to investment management savings, however,
asset pooling also offers savings on internal monitoring costs and consultancy.
Headoffice
Loca
lsubsid
iaries
Tr
us
tees
Ris
k
Cost
s
Asset
pooling
Control
Members
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Providing benets for all stakeholders
Asset pooling not only provides the CFO with the means to gain better control over the
companys pensions but it also delivers benets to the other pension stakeholders. Theindividuals 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 diversication 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?Consideringthebenetsthatassetpoolingpromises,itisperhapssurprisingthatithasnotbeen
adopted morequickly.Asusual, the devil lies in the detail. Using nontax-transparentoropaque
investmentfundsisrelativelysimplebutcanleadtosubstantialunderperformance(particularlyfor
equityfunds),greatlyreducingoreveneradicatingthepotentialbenetsofassetpooling.Inorderfor
assetpoolingtobeeffective,itisimportantthatthesolutionbetax-efcientanddevelopingatax-
efcientsolutioniscomplexandtimeconsuming.However,nowthattaxefcientmulti-clientasset
poolingisavailable,companiescanbenetfromassetpoolingwithouthavingtodevelopabespoke
solutionthemselves.
Figure 2: Unied investment management
This gure demonstrates how asset pooling unies investment management for the pensions
of a multinational company, catering for a wide variety of different pensions including, for
example, a Dened Benet plan (DB) provided by a self-administered pension fund (Pension
Plan A), a trust-based Dened 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
Pools Reporting
Pension Plan B Pension Plan C Pension Plan DPension Plan A
DB Plan DC Plan Insured DC Book reser. DB
UK Subsidiary NL Subsidiary FR Subsidiary Other Subsidiaries
(Source:AEGONGlobalPensions)
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2 Diversity in pensions a united Europe?
WithinEurope,nosinglestatepensionsystemisthesameasanother.Asaresult,itisdifcultformultinationalcompaniestoprovideauniedpensionsolutionforalloftheirEuropeansubsidiaries.
WhenacompanytakesinventoryofitspensionplansinvariouscountriesacrossEurope,itbecomes
rapidlyclearthatthereisstillawidevarietyinpensionsystemsandpracticesacrossEurope.The
differencesapparentaretheresultofthedifferentstatepensions,differentpensionvehiclesand
differentpensionpromisesmade(notwithstandingthedifferentterminologyusedineachcountry).
WhenlookingatEuropeanpensions,themajordifferencesbetweenthevariouscountrysystemslie
withthestatepension(rstpillar).AlthoughallEuropeancountriesprovideaminimalstatepension,
theimportanceofthisprovisionvariessubstantially.Forexample,inFrance,Germany,SpainandItaly,
thestatepensionpresentlyprovidesthemajorityofretirementincome.IncountriessuchastheUK,
Ireland,theNetherlandsandSwitzerland,occupationalpensions(thesecondpillar)aremuchmoreimportant.
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
0%
20%
40%
60%
80%
100%
2nd pillar
3rd pillar
2nd and
3rd pillar
1st pillar
Unite
dKi
ngdom
Neth
erla
nds
Germ
any
Switz
erland
Denm
ark
Swed
en
Finland
Spain
Fran
cePo
landTu
rkey
Belgium
PortugalItaly
(Source:CEAStatisticsNo28,September2007)3
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Managing your pension plansItiseasierforcompaniestoexercisecontroloftheirpensionplansincountrieswhereinsuranceand
bookreservesdominateasopposedtocountrieswhereautonomouspensionplansarethenorm.IntheUK,IrelandandSwitzerland,self-administeredpensionfundsaretheprimaryvehicleforproviding
pensionstoemployees.InDenmarkandSweden,insurancecontractsdominatethemarket,whilein
GermanyandAustria,bookreserves(thatisreservesheldonthebalancesheetofthecompany)are
themainvehicleusedtoprovideoccupationalplans.Anysolutionthatinvolvescombiningdifferent
pensionplansmustthereforesatisfytheindependentpensionfundtrusteesaswellastheboardof
thesponsoringcompanyitself.
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
0%
Unite
dKi
ngdo
m
Neth
erla
nds
Germ
any
Switz
erla
nd
Denm
ark
Swed
en
Finlan
d
Spain
Fran
ce
Irela
ndIta
ly
Belgiu
m
Portug
al
Austria
Norw
ay
20%
40%
30%
50%
70%
10%
60%
80%
90%
100%
Other
Book reserves
(non-autonomous)
Pension
insurance
contracts
Pension funds
(autonomous)
(Source:PensionMarketsinFocus:November2007,Issue4-OECD2007)
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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 gure
below, ranging from pure DB via hybrid plans to pure DC.
Figure 5: The full spectrum of pension plans
Asset pooling report Company XYZ
COMPANY NAME PLAN PLAN TYPE No PREMIUM AUM EUR PLANLIVES EUR COUNTRY
Company XYZ Materials NL B.V. Garantiecontract insurer ABC DB Insured 25 500,000 5,000,00 0 Netherlands
Company XYZ trading BV Stichting Pensioenfonds XYZ DB career average 1000 5,000,00 0 50,000,00 0 Netherlands
Company XYX Electri cal appliances Contrats cotisations dnies Dened Contribution 200 28,000 800,000 France
Company XYX Electri cal appliances Fonds collectif de retraite Group Pension Fund 100 1,200,0 00 12,000,00 0 France
Company XYX Electri cal appliances Fonds collectif dI. 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 5,000,00 0 UK
Pension Scheme
Company Xyz Ltd GP STAKEHOLDER Group Stakeholder DC 550 1,000,00 0 10,000,00 0 UK
Company XYZ AG Vorsorgungskasse XYZ Cash balance DC 50 1,000,00 0 10,000,00 0 Switzerland
Company XYZ AG Company XYZ CTA DB Bookreser ve 500 1,500,0 00 15,000,00 0 Germany
Company XYZ AG Pensionsfonds DC guaranteed 120 - 8,000,000 Germany
Pure DB Average Various DC with Outcome- Pure DC
(nal 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
(Source:AEGONGlobalPensions)
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3 Many ways to pool your pensions
GiventhediversityofpensionsandpensionsystemsacrossEurope,itisunsurprisingthatdifferentmethodshavebeendevelopedtotrytoimprovepensionsmanagementacrossEurope(andbeyond).
Ifwelookatthesolutionspresentlyonoffer,thereisavarietyofpoolingsolutionsavailable,ranging
fromadministrativeanddatapoolingthroughtoIORPs.Thechartbelowhighlightsthebenetsofthe
differentsolutionscomparedwithhoweasilytheycanbeimplemented.
AlthoughIORPSultimatelypromisethegreatestbenets,theyarepresentlydifculttoimplement
anditwillbesometimebeforetheycanachievetheirfullpotential.Attheotherendofthespectrum,
globalcustody,andadministrativeanddatapoolingoffermorelimitedbenetsbutrequirelesseffort
toimplement.Assetpooling,however,providesconsiderablymorebenets,and,whilebespokeasset
pooling isonly feasible for the largest multinational companies,multi-client assetpoolingoffers
companiesofallsizesthepossibilitytorealisesignicantefciencygains.Inaddition,itiseasiertoimplementandfuture-readyforinclusionintoanIORPsolution,ifrequired.
Figure 7: Comparison of added value and ease of implementation of different pooling solutions
Administrative
and data pooling
Multi-client
asset pooling
Bespoke
asset pooling
IORP
Difficulty of implementation
Added value: improved
control, cost savings
Global
custody
Information
Assets
Liabilities
(Source:AEGONGlobalPensions)
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Administrative and data pooling interim solutionsSeveral multinational companies, including Mars and Reckitt Benckiser, have implemented data
andadministrativepoolingsolutions(alsoreferredtoasinvestmentorportfolioaccounting).Thisinvolves centralising pension management, including themanagementof pension assets without
actuallypoolingtheassetsintoasingleinvestmentvehicle.Administrativepoolingrequiresinternal
organisationalchanges,suchassettingupassetmanagementcommitteesforhiringmanagers.The
pensionassetsremaininvestedwithintheirpresentlegalvehiclesandpoolingisonlycarriedoutatan
administrativelevel.Administrativepoolingofferssomebutnotallofthebenetsofassetpooling
andcanbeusedasarststeptowardsfullassetpooling.
Global custody a partial solution for larger multinationalsGlobalcustodyoffersprimarilylargercompaniesawaytolowertheircostsandpoolthereporting
oftheirpensionplanassetsbyplacingthecustodyoftheirpensionassetswithasingleprovider.
However,globalcustodydoesnotautomaticallyleadtouniedreportingandimplementationnorevennecessarilytoimprovedinvestmentmanagement.Inparticular,itdoesnotprovidetheadditional
controlsandefciencygainsininvestmentmanagementthataremadepossiblebyassetpooling.In
addition,althoughcompaniesshouldbeabletobenetfromsomeefciencygains,thescaleofthe
providerinvolvedmayreducethenegotiatingpowerofallbutthelargestcompanies
Multi-client asset poolingMulti-clientassetpoolingprovidescompaniesofallsizeswiththeabilitytopooltheirpensionassets
andtoreceiveconsolidatedreportingontheirassets.Assetpoolingcanhelpcompaniestoimprovethe
managementoftheirpensioninvestments,generatesefcienciesandmakesiteasierforcompanies
tocontroltheirpensionplans.Multi-clientassetpoolingoffersmostofthebenetsofbespokeasset
poolingsolutions but, because companies can participate inpre-existing assetpools, it iseasier,
quickerandlessexpensivetoimplement.
Bespoke asset pooling solutionsTheearliestassetpoolingsolutionsweretailor-madesolutionscreatedforthelargestmultinationals
(forexample,NestlandUnilever).Thesetailor-madesolutionscanrequireenormousinvestmentin
timeandresources.Asoneofthepeopleinvolvedinabespokeassetpoolingprojectsaid:Murphys
lawwilldenitelystrikemorethanonce.Suchone-offsolutionsaresimplynotaffordableforsmaller
companies,whichisoneofthereasonswhyassetpoolinghasbeenslowtobeadopted.Creating
bespokeassetpoolingsolutionscanbedifcultandcomplicated,andthecostscanbesubstantial,
whichiswhytheonlycompaniesthathaveadoptedthemtendtohavemorethantenbillioneuroinassets.
IORPs under developmentCross-borderIORPs,likeassetpooling,appeartohaveexperiencedtheirshareofattention,asthey
offerthepotentialfortruepan-Europeanpensionprovision.IORPswilleventuallyprovidecompanies
withtheabilitytopoolboththeirEuropeanpensionassetsandliabilities.Atpresent,however,IORPs
remainlargelyelusive,asdifferingsocial,labourandtaxlawsthroughEuroperemainaconsiderable
barriertotheiruse(andwillremainsofortheforeseeablefuture).Althoughthebenetsofpan-
Europeanpensionpoolingareclear,pensionbenetsystems(likeotherlabourarrangements)within
theEuropeanUnionarenotyetharmonized,whichhassignicantimpactonattemptstoconsolidate
pensions.ItisforthisreasonthatearlyattemptstocreateIORPs(andmorethan70cross-border
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IORPsnowexist)haveconcentratedoncountrieswithsimilarpensionstructures,suchasIreland
andtheUK.Atpresent,suchIORPstypicallycontainDCplansforexpatsorexecutives,aspension
planswithinanIORPstillhavetoadheretolocaltax,socialandlabourlaws.Asaresult,memberadministrationisstillcomplexandefcienciesarenoteasilyaccomplished.
Asset pooling and IORPsAlthough IORPswilleventuallyoffer anoverarchingpension solutionwithinEurope,considerable
furtherdevelopmentsinEuropeanharmonisationarenecessarybeforethesecanbetrulyrealized.
ThereareimmenseobstaclestobeovercomebeforeIORPscanachievetheirfullpotential.Inthe
meantime,standaloneassetpoolingsolutionsprovideanachievablerststeptowardspan-European
pensions,futurereadyforinclusionintooneormoreIORPsatalaterdate,ifrequired.Inaddition,
assetpoolingsolutionscanalsobeusedtopoolnon-Europeanassets,forexamplepensionsassets
fromUS,Asianorotherpensionfunds.
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
Pools Reporting
FR Subsidiary Other Subsidiaries
IORP Pension Plan C Pension Plan D
(Source:AEGONGlobalPensions)
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4 Multi-client asset pooling the advantages of a
readymade solutionAsset pooling in practice one size ts all?Althoughthebenetsofassetpoolingmaybeclear,creatingacross-borderassetpoolingsolution
forthersttimeisadifcultprocessrequiringconsiderableinternationalexpertise.Inordertobe
abletocopewiththeimmensediversity5ofpensionsacrossEurope,assetpoolingsolutionsneedto
beexibleandreadyforchange.
Thevarietyofpotentialandpartialsolutionspresentlyonoffermayhavemadeitdifcultfor
companiestodecidewhichsolutionmaybeappropriateforthem.Withthedevelopmentofmulti-
clientassetpooling,companiesnolongerneedtodesigntheirownsolutionsandinsteadhaveaccess
toaready-madesolutionatafractionofthecost.Asaresult,assetpoolingisnowwithinthereachofallsizesofcompanies.Multi-clientassetpoolingcanbeofferedeitheraspartofaninsuredpension
solutionorasanasset-onlysolution.Aseparatesolutionnaturallyprovidesmoreexibility,andmay
facilitatecompanieswishingtoimplementassetpoolinginphases.
Multi-clientassetpoolingplatformsprovidecompanieswithaccesstoaready-madepoolingplatform,
removingthebarrierofexpensivestart-upcostsandenablingcompaniestobenetimmediatelyfrom
economiesofscale.Whenpoolingpensionassets,itisimportantthattheinvestmentvehiclesusedare
asefcientaspossiblefromataxationperspective.Atpresent,taxefcientinvestmentvehiclesare
currentlyavailablefromLuxembourg(FCP:FondsCommunedePlacement),Ireland(CCF:Common
ContractualFund)andtheNetherlands(FGR:FondsvoorGemeneRekening).
Inconnectionwiththis,itisveryimportantthattheassetpoolingproviderhandlesthetaxrebate
issuesonbehalfofitsclients.Thisinitselfcanprovideconsiderablebenets,asmanyinvestorssimply
donotapplyfortaxrebatesastheproceduresareparticularlycomplicated.Thiswasconrmedby
theEUInternalMarketsDirectorateGeneralinamemoinOctober20096statingthatmanyinvestors
donotreclaimtheirshareoftheEUR5.47billioninforegonewithholdingtaxannually.
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Tax efcient pooling
Claiming back taxes requires expertiseIn October 2009, the European Unions Internal Markets Directorate General issued a
memo stating that many investors simply dont 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 benet 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 aportfolio where withholding tax is paid by about 6% (for example, a Luxembourg-based SICAV:
Socit dInvestissement Capital Variable).
Figure 9: Additional returns gained from tax-transparent global equity fund compared with
tax-opaque global equity fund
For example, if we were to take a closed Dened Benet 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 Dened 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 individuals working and saving life would be signicant
and the worth of the benet provided by the employer would be unnecessarily devalued.
Nov 01 Nov 02 Nov 03 Nov 04 Nov 05 Nov 06 Nov 07 Nov 08 Oct 09
0%
1%
2%
3%
4%
(Source:MSCI-Barra,AEGONGlobalPensions)
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A rst step towards pension poolingMulti-clientassetpoolingisarststeptowardsbuildingasharedservicecentreforpensionsfor
multinationalcompanies.Given thechangingpensionsenvironment, it isveryimportant thatanyassetpoolingsolutionshouldbeexibleandfuture-ready,asacompanysneedsarelikelytochange
anddevelop.
Althoughitwillbealongtimebeforecross-borderIORPsarecommonlyinuse,IORPsdoalready
existandtheirusewillcontinuetogrow.Assetpoolingsolutionsneedtobeabletotseamlessly
intoanIORP,ifandwhennecessary.Inaddition,unlikeIORPs,assetpoolingsolutionsextendbeyond
thebordersofEurope,enablingcompaniestomanagetheirpensionsthroughasinglevehicle.For
example,inanadvisoryopiniononpensionsin20087,theUSDepartmentofLaboropenedupthe
possibilityforUSpensionassets(ERISA)tobepooled,alongwithpensionfundsfromtheMiddleEast,
Asia,AfricaandEurope.
Amodularsolutionshouldbeabletoservicethedifferenttypesofassetmanagementmodelsrequired
by different pensionsystems. Althoughsomecompanies willbeable toreapbenetsfrommore
customizedsolutions,itisimportanttondabalancebetweenincreasedcostsandthebenetstobe
gained.Astandardized,multi-clientassetpoolingsolutioncanbeeasilyandefcientlyimplemented.
Anassetpoolingsolutionmust:
Beefcientandtransparent,withlowoperatingcosts
Havelowimplementationcosts
Provideexcellentgovernanceandcontrolovertheinvestmentsolution
Provideahighqualityinvestmentsolutionthatissuitableforavarietyofpensions
Provideconsolidatedreporting
Offeramodularinvestmentsolutiontoservicedifferentassetallocationsandcurrencies
Befuture-readyforIORPs,andtheshiftfromDBtoDCpensionplans.
Mostimportantly,anassetpoolingsolutionmustdelivervaluetoallstakeholders,andnotjustthe
CFO.AgoodassetpoolingsolutionshouldofferimprovedgovernanceandcontrolfortheCFO,asolid
investmentsolutionttinglocal requirements forthe trusteesandemployees, andlowcostsand
reliablehighqualityforthelocalsubsidiaries.
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5 Asset pooling comes of age
Withtheadventofmulti-clientassetpooling,itistimeforcompaniestoreassesstheavailablepoolingsolutions.Multi-client assetpoolingprovides companieswithaexible, future-readysolutionthat
willhelpthemtodrivedowncostsandimprovetheirriskcontrolandpensionsmanagement.Asset
poolingisavailableandachievablenow.
Improving international pension managementByenablingcompaniestoharmonisethemanagementoftheirpensionplans,multi-clientassetpooling
providesthemwithincreasedcontrolandconsolidatedreporting.Notonlydoesthisallowcompanies
tobetterunderstandandcontrolrisk,butitalsoenablesthemtooptimizethemanagementoftheir
portfolioofpensionassets.Smallerpensionfundscanbenetfromaccesstothebestmanagers,and
allpensionfundscanbenetfromtransparentcostsandcompetitivemanagementfees.
Asset pooling reduces complexity for the corporate headquarters, providesa high quality asset
management solution for the local subsidiaries (coupled with reduced operational and reporting
costs),andprovideslocaltrusteesoftheindividualpensionplanswithgoodinvestmentperformance
andincreaseddiversicationatalowcost.
Five steps to implementing asset poolingForassetpooling,astep-by-stepimplementationprocessispreferabletoaBigBangapproach.As
assetpoolingisintroducedacrossacompany,internalprocesseswillhavetobealteredandadapted,
andcontactsandcontractswithexternalproviderswillhavetobechangedaccordingly.Ifpension
plansareaddedoneatatime,astheybecomereadytojoin,anyissuescanbedealtwithasthey
arise.
Step1: Establishwhetherassetpooling(orotherpoolingsolutions)willbenetyourcompany.Does
centralisationtwithinyourcompanyculture?
Step2: Identifywhichpensionplansyouhave,inwhichcountries.Whichassetsdoyouholdand
inwhatkindsof investmentvehicles?What typesofplansdoyouhave,withhowmany
participants?
Step3: Perform a cost benets analysis establish the potential benets of asset pooling in
termsofcostsavings,improvedcontrol,riskmanagementandreducedtaxdrag.Identify
whichpensionplanswillbenetfromassetpoolingnotonlyintermsofpotentialsavings
forthecompanyheadquartersbutalsointermsofqualityofinvestmentsolutionsavailableformembers,trusteesandlocalsubsidiaries.
Step4: Secure executive sponsorship involve all stakeholders, from board members to local
trusteesinordertoidentifytheirrequirements.Togetherwithyourconsultant,identifythe
appropriateassetpoolingsolutionforyourneeds.Carefullybalancetheneedforyourown
uniquerequirements(andtheaddedcomplexitythismaybring)againstthebenetsoffered
byeasy-to-implement,ready-madescalablesolutions.
Step5: Planandexecute.Makeadetailedprojectplanofhowandwhentoswitchfromthecurrent
investmentsolutiontotheassetpoolingsolution,takingintoaccountlocalrequirements
andlongrunningcontracts.
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Acknowledgements
Iwouldliketothankthefollowingpeopleforprovidingtheirmuchvaluedinputandinsight.AlexandervanIttersum
JeroenBogers
Product development manager, AEGON Global Pensions
SteveChapman
International sales director, AEGON Global Pensions
BernardHanratty
Managing director head of investor services EMEA, Citi
FransvanderHorst
Managing director, AEGON Global Pensions
AnneLaning
Head operations, TKP Investments
MischaMuntinga
Head tax and regulatory, AEGON Asset Management
PhilipPennings
Tax department, AEGON Asset Management
FrankRandall
Director, AEGON Global Pensions
ThurstanRobinson
Communications manager, AEGON Global Pensions
MartijnTans
Director marketing, AEGON Global Pensions
PietVandenbossche
Consultant and project manager asset pooling, TKP Investments
AndrewWood
Regional sales director, UK and Nordics, AEGON Global Pensions
KarenZeeb
Director investor services Global Transaction Services, Citi
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References and notes
1 Planningyourwayoutofthenancialcrisis,aroadmaptoderisking,JeroenJ.J.Bogers,AEGONGlobalPensionsMarch2009.
2 IPE31March2010:Multinationalsunawareofoverseaspensionscost,Allianz.
3 StatisticsN28,Theroleofinsuranceintheprovisionofpensionrevenue,September2007.
Note:CH:3rdpillarunderestimated;DE:Datafor2ndpillarmissing;DK:1stpillaris
underestimatedbecauseitdoesnotincludecontributionstothepublicscheme;FR,UK,DE,ES:
1stpillarestimatedonthebaseofthebenetspaid;IT:2003data;FR,UK:Nosplitavailable
betweenthe2ndandthe3rdpillars.
4 Source:Denedcontributionpensionschemes,risksandadvantagesforoccupational
retirementprovision,OfamaOxeraJanuary2008.
5 ChristinaMatos,UnreformedorHybrid?AccountingforPensionArrangementsDiversityinthe
EU,Springer,7April2009.
6 PressannouncementIP/09/1543,Brussels,19October2009,Securitiesincome:Commission
recommendssimpliedproceduresforclaimingcross-borderwithholdingtaxrelief.
7 2008-04AERISASEC404(b)U.S.DepartmentofLaboradvisoryopinionconcerningthe
indiciaofownershiprequirementsinsection404(b)oftheEmployeeRetirementIncome
SecurityActof1974(ERISA),andtheimplementingregulations.
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AEGON Global Pensions and asset pooling
In June 2009, AEGON and Citi launched the rst 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 tax
transparent investment funds under a European passport (UCITS), the unique platform will enable
the multinational clients of AEGON Global Pensions to consolidate the management, investment and
reporting of their pension assets, reducing both risk and costs.
Currently, the AEGON Global Pensions asset pooling platform is being used by Dutch pension funds and
a UK and French insurance company. The platform contains tax-transparent UCITS equity and bond
funds, but can also cater to alternative investments. The asset pooling platform provides companies with
a modular, exible and scalable solution. In addition, it provides share classes at different fee levels in
order to cater for different distribution methods (for example, asset pooling is available through a DC
fund platform, via an insurer or directly to a self-administered pension fund).
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Contact details
AEGONGlobalPensionsP.O.Box85
2501CB,TheHague
TheNetherlands
Telephone:+31(0)703448931
E-mail:[email protected]
Website:www.aegonglobalpensions.com
Disclaimer
Thiswhitepapercontainsgeneralinformationonlyanddoesnotconstituteasolicitationoroffer.No
rightscanbederivedfromthiswhitepaper.AEGONGlobalPensions,itspartnersandanyoftheir
afliatesoremployeesdonotguarantee,warrantorrepresenttheaccuracyorcompletenessofthe
informationcontainedinthiswhitepaper.
AEGON,June2010