Managing Pension Risk: A Global Perspective and Local Case Study Hosted by the Alberta Regional Council May 11, 2017 Lawson Lundell LLP Calgary, Alberta
Global Pension Governance Rob Vandersanden Partner Aon Hewitt Alberta Regional Council 2
Multinationals take many risk management actions locally to reduce costs and risks due to their retirement programs… Alberta Regional Council 3
…however managing global retirement programs is challenging for many companies Complexities Multi due to number of dimensional countries, types costs and risks and number of plans Multiple stakeholders at New EU corporate, requirements regional and local around levels, and governance businesses Missed Lack of ready opportunities to Oversight / Changes in access to data improve cost/risk control over local legislation and information profiles of local decisions plans Lack of skilled Lean staffing resources at local models levels Alberta Regional Council 4
Aon’s second study of 200+ multinationals provides insights into the challenges and best practice for managing global retirement programs Key Drivers of Best Practice Challenges Centralisation Companies ▪ Senior management and finance ▪ Knowledge management: corporate lack ▪ Report effectiveness across all five concerned about costs/risks access to information and insights for measures of governance informed decision-making ▪ Corporate HR concerned about lack of ▪ Say their benefits are aligned with ▪ Execution of strategy: lack of operational appreciation and wellbeing broader organizational and discipline and infrastructure to execute workforce objectives ▪ Financial concerns, regulatory risks, and their benefits strategy ▪ Demonstrate materially higher lean benefits staffing will continue to drive greater centralization confidence levels in managing costs and risks Alberta Regional Council 5
Second study with ABI since 2012 of how multinationals make and execute strategic benefits design, financial and operational decisions 7% 4% 3% 16% 4% 3% 16% 5% 8% 55% 21% 8% 16% 7% 3% 15% More than 300,000 100,000 - 300,000 US CAN UK DE CH NL FR Other EU 50,000 - 100,000 25,000 - 50,000 APAC Other 10,000 - 25,000 Less than 10000 Operational complexity … About the respondents… • 70% with more than 4 business lines • 88% are HR leaders • 44% in 50 - 100 countries, and 30% in 25-50 countries • 70% have responsibilities for all benefits • Most US companies have 50%+ employees in international locations • 55% of HR leaders manage benefits in HQ • More than a third of companies had more than 75% of their global country as well as international locations workforce in international locations Alberta Regional Council 6
Most common drivers of corporate involvement in benefits management are costs and risks of benefits in mature markets Over 75% 60% are concerned worry about about medical healthcare cost increase legislation Mature changes Markets 70% 60% say employees report concerns don’t appreciate about DB benefits risks and costs Emerging Markets 45% Nearly Half say employees are concerned about don’t appreciate market benefits competiveness Very important Important Alberta Regional Council 7
Companies continue to report a strong desire to increase the level of current corporate oversight and implement a centralized approach… Alberta Regional Council 8
…however, without formal adoption of protocols centralised management of benefits is not effective Best Practice: • Formally established governance protocols • Representation of HR, finance and legal functions, and business leaders on their corporate committee • Same committee managing their retirement, insured and other benefits such as allowances • Governance protocols covering all countries and not just the large ones • Governance apply to all countries and across all business lines Alberta Regional Council 9
Defining best practice in global benefits governance: only 20% of companies follow best practice* across all five measures of effective governance Alberta Regional Council 10
Companies that don’t follow best practice report lack of access to benefits related data & information, and knowledge of risks and opportunities Alberta Regional Council 11
Best Practice companies manage all their global benefit programs more centrally Alberta Regional Council 12
Does good governance achieve better outcomes? Best Practice companies report better alignment with organizational strategy Other companies Best practice companies Market competitiveness 59% 90% Design Emphasis on 39% 78% individual responsibility 52% 92% Harmonization Efficient design of 33% 76% benefit plans Financial mgmt. 73% 51% Efficient financing 87% 68% Investment management 75% 59% Pension de-risking 69% Externalization of liabilities 69% 86% Administration 67% Operations Legal and regulatory 67% 83% compliance 64% 27% Employee communications 74% Vendor management 41% % report benefits aligned % report benefits not aligned Alberta Regional Council 13
Does good governance achieve better outcomes? Best Practice companies report higher confidence levels in managing costs and risks Alberta Regional Council 14
In Conclusion… Alberta Regional Council 15
Best Practice companies do a better job of knowledge management and execution of strategy Best Practice companies more commonly say… • They have effective oversight of their compensation and benefits plans in international locations. • Their Benefit plans support broader organizational workforce and talent management strategies and initiatives. • Local country benefit plans are aligned with company’s design, financial and operational objectives. Alberta Regional Council 16
Risk- view of global benefits governance: knowing the ‘why’ before defining the ‘how’ of global governance and operations yields better business outcomes • Governance of global benefits decisions is complex due to many factors such number of countries, business lines, types of benefits, local legal frameworks, and stakeholders • Companies want to: Design benefit programs that are aligned with organizational, financial and talent strategies, and deliver economic value of scale to employees Minimize the cost of benefits through efficient financing and rewarded risk Reduce operating risks and deliver benefits efficiently to employees • Our findings do not support the assertion that centralization in itself drives better governance • The study provides strong evidence to support the ‘why’ before the ‘how’ argument: Definition of specific design, financial and operational objectives provides a context for systematically evaluating risks and identifying opportunities Implementing disciplined protocols to make and execute risk management decisions provides a framework for governing global benefit programs Alberta Regional Council 17
How strategic objectives and principles can be used to improve governance of defined benefit plans worldwide… Policy Metrics CAN DE NL CH UK US Open union; closed Several open DB 1 open, 1 closed DB DB to DC Open DB plan CB plan established DB plans frozen salaried plans plans Program Design Below market: EE Below market: EE Above market FAP DB Above market FAP DB Market competitiveness Market competitive N/A contributions contributions plan plans One plan each: One plan each: Consistency of benefits Multiple open plans One plan Two plans Two plans salaried/union salaried/union Employees cost sharing No EE contributions EE contributions EE contributions No EE contributions N/A No EE contributions Investment performance B/M+ N/A BM- B/M B/M+ B/M++ Management Cross-border Financial Efficient financing Pooled A/L N/A Pooled A/L A/L not pooled Pooled A/L financing opp. Undue exposure to L hedge ratio not Risk optimization De-risking glide path Unfunded plans L hedge maximised De-risking glide path growth assets optimal Longevity risk Longevity risk Significant deferred Risk settlement N/A N/A Subsidised annuity exposure exposure liability Compliance review in Insourced admin. (3 Compliance review in Compliance review in Data not settlement Compliance review in Administration and compliance 2015 plans) 2012 2014 ready 2015 Operations Member communication Suboptimal. TR comm. TR comm. TR comm. TR comm. TR comm. Vendor consolidation and management Optimal Multiple vendors Optimal Optimal Multiple vendors One DB provider Delegated fiduciary No admin. High cost of trustee Effective governance and delegation Optimal Optimal Delegated manager Committee board Moderate risk High risk Best practice Low risk Alberta Regional Council 18
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