Tel: 1 312 917 9255
Written by: Stacy Scapino
Over recent years, the global shift from DB to DC has been both rapid and profound. However, over 80%(1) of DC plan assets held in private savings or occupational plans have accumulated in only three countries: the United States, Australia and the United Kingdom. Such a high concentration of assets means that scale and investment product choice do not exist in most local markets. Additionally, multinational corporations most familiar with at least one of these three markets often believe they can easily offer the same efficient investment products and sophisticated approaches across all their plans around the world.
Where a complete and integrated multi-country DC plan management framework may not exist today, the building blocks to create such a program usually do. Additionally, as multi-country and local market DC providers evolve and integrate into a more globally – or at least pan-regionally – consistent architecture, realizing an efficient multi-country approach becomes more feasible.
Fundamentally, multi-country asset pooling is the commingling of assets from multiple investors, domiciled in different countries, into one vehicle. Typically, the pooling vehicle has a governing body that selects and monitors the investment managers. The investment managers can be combined in different ways to create custom funds that participants/members see as local investment options in the local DC plan.
For example, the investment managers or their funds can be combined to create custom target date or life path funds or risk-defined funds. The same managers could also be combined to create asset class funds in locations where the market norm is to make asset class funds available to participants/members. Deciding on the design of target date or life path approaches is time-consuming. Once the philosophy and logic behind the policies have been finalized, the local implementation can be facilitated through an asset pool. As an example of the efficiencies, only one global equity manager or fund need be available and every local plan could use the manager/fund as part of a customized local asset allocation strategy. In other words, if a plan in Brazil and a plan in Germany both require a global equity fund, why have two?
Currently, to make these types of structure work, most of the monitoring and governance occurs at the investment manager level. Asset pooling provides the following significant benefits:
For multinational corporations not wanting to create custom asset pooling vehicles, options exist today for buying off-the-shelf custom fund solutions that achieve the same results. For example, multinationals can work with an established fund-of-funds provider to use existing asset pooling vehicles to create custom funds for their local DC plans. Such arrangements provide the multinational with flexibility in aligning investment options with the company’s benefit philosophies while accessing the provider’s buying power and using established administrative and operating infrastructure to contain costs and reduce the multinational’s resource requirements. Although it is a bit more time-consuming and onerous, multinationals can work with investment managers that already have multi-country asset pools and multi-country distribution networks to create more efficient local investment options.
Using cross-border asset pools with local DC plans may become difficult when selecting the most efficient mechanism for funding the plan − for example, with respect to taxes and employer contributions − and when trying to appoint a local plan administrator or recordkeeper. Of these two issues, the former can be managed with good advice and planning; however, the latter presents significant challenges. Most local plan administrators have preferred arrangements with regard to their investment offerings. These preferences are driven partially by fee arrangements, but operating infrastructure and communication protocols also play a significant role in determining which investments are offered, and these factors are difficult to alter and adapt. Consequently, getting recordkeepers to use a company-customized investment solution for what initially may be a small quantum of assets is difficult.
While a complete multi-country solution does not exist today, the market is quickly adapting and changing. In our opinion, the plethora of local regulations is not the critical barrier. The greatest synergies and benefits for employees and multinational corporations will come through aggregating assets and enabling smaller DC plans to access global buying power. Over time, changes will occur even in the more rigid and expensive plan operating and administration infrastructures. Such changes are likely to require several companies coming together to strengthen the arguments for accommodating custom solutions and/or creating an incentive for the shift. Most likely, this evolution will occur within individual countries rather than with international partnerships. It is only a matter of time before assets accumulate to a critical level and key players realize the significant benefits of creating a win-win situation.
About the author
+1 312 917 9255
Stacy is a partner and the Global Leader for Mercer Investment's Multinational Consulting activities. Stacy has 20 years of experience within the pension, investment and banking industries.
A collection of global perspectives on DC issues
In this issue, we explore the critical success factors of defined contribution plans. The topic of plan success comes during a period of turmoil that is driving the priorities of the DC plan.