The typical leading-edge multinational will have spent many years controlling and managing its defined benefit (DB) liabilities around the world. Benefit accrual may well have been curtailed and processes put in place to monitor the accounting consolidation of pension costs regularly. Asset management will be on a path toward liability matching to reduce volatility within carefully constructed cost targets. This will have been achieved by the central management of decisions and clear policies worked through with local decision makers. While the need for financial policies for DB plans is well understood, what about those for defined contribution (DC) plans?

The purpose and rationale for switching the provision of retirement benefits to a DC model is to allow the multinational to reduce its financial risks and pass most of these onto employees, including investment, inflation and longevity risks. DC has now become the new global standard. In this new DC world, is there a need for control through a global policy and, if so, how would a multinational develop one?

Several years ago, this question would be hard to answer, but over the past three or four years, new information, tools and ideas of best practices have been developed and have begun to gather increasingly hard evidence to support them. A primary obstacle for developing a global DC policy has been the huge variation in mandatory state provisions between countries; another has been the country variation in available mechanisms. While development continues, increasing evidence of an emergence of best practice concepts that have been tested and thought through is seen. So why should the multinational now consider this, and what are the benchmarks?

What employees value

In Mercer’s recent Inside Employees’ Minds ^TM survey of attitudes concerning elements of the employment value proposition, effective savings and retirement programs were highlighted as important elements of the value proposition in nine of the 17 countries surveyed. Further, in the US and Canada, retirement programs ranked the second-most important element (behind pay) among the elements of the employment “deal.” 

The problem for the multinational is that not just any DC plan will automatically meet the basic criteria to satisfy the needs of both employees and employers. This is because:

• The basic contribution level may or may not be right when local and state provision and market practice are accounted for

• Poor communication or high costs inside a plan may come back to damage the employer’s reputation at a later date

• Employees who end up with an inadequate sum at the time of retirement may not want to retire – causing a talent management problem for employers, with older workers creating a bottleneck, preventing the advancement of younger staff.

Creating and perfecting a global DC plan

Following are what we believe to be the characteristics of the world’s best DC plans. These could be used to form a benchmark for a given multinational’s DC plan around the world.

It is assumed that a range of investment choices is available within the restrictions of tax approval and commercial availability. However, members need to be informed clearly about the possibility and consequences of negative returns on investments. More conservative investment options must be available for members who are not comfortable with such investment risk.

The three main components of adequacy, sustainability and integrity, shown in the diagram above, are useful categories through which to evaluate the success of any DC provision. As the index covers both state and private provision, interpretation is required to provide policy measures for the multinational, but it indicates that reasonable comparisons on key issues can be made. The latest MMGPI report for 2011 has recently been published and gives full details on these factors and measures across countries.

For more detail on benefits and legislation around the world, an up-to-date summary is provided in Benefit Plans Around the World.

How multinationals can use this information

All these factors can be analyzed relative to a specific company’s position. For instance, is your organization’s objective to outperform the median on benefits in all markets? Are there regional business issues about retention to be considered?

Once you have a clear understanding of the importance of these factors for your company, the final step is to see how they can be applied to create policies. Because these policies need to apply across the world, you must consider that language suitable for one country may not be suitable for another. So it’s important to ensure that your global policy accounts for these differences.

The more organizations can monitor the factors that will affect the benefits that members receive, the more they will be able to anticipate the degree to which their DC plans will be successful from a member’s perspective.

However, retirement provision expense must be cost-effective, which means knowing whether it is successful. Successful outcomes in a complex world are unlikely to happen by chance. With modern information systems, tools and knowledge of best practices, there is now a real possibility to have a creative and constructive global policy to achieve and control success.