The current economic downturn, unprecedented in its scale and scope, has raised the stakes for multinational sponsors of retirement plans. Business analysts, among others, are spending more time describing pension issues and their impact on companies’ prospects for the future, particularly in  manufacturing and other sectors with large defined benefit (DB) liabilities.
 
Whether a multinational is focused on short-term survival or on longer-term repositioning for recovery, we expect that all companies will be taking a cold hard look at retirement and other benefit programs going forward. 

The challenges for employers

Typical multinational sponsors may currently be faced with some or all of the following challenges in different countries: 
 

Against the backdrop of these challenges, let’s look at what companies are doing or planning to do.  

Survey indicators

Our global “Leading through Unprecedented Times” and “Multinational Retirement Plan”  surveys at the end of 2008 give us a picture of the steps companies are considering to manage retirement plans. The first of these surveys was a quick snapshot of views of more than 1,000 HR executives. Exhibit 1 illustrates that the crisis had not, at that time, translated into much direct action.

The right time to measure actual decisions that have been made will be late in 2009, even if implementation of those decisions is not complete. This article reviews where we were headed toward the end of 2008, and provides examples of specific individual corporate decisions and actions that are currently being taken. As evidenced by Exhibit 1 above, employers surveyed last year were looking to deepen their understanding of the risks related to their DB plans, perhaps as a prelude toward taking specific actions in 2009. We now turn to the more general Multinational Retirement Plan Survey.

Reducing the cost of benefits

The global trend toward DC plans is well-documented. It did not come as a surprise that multinational headquarters are taking a stronger view on the types of retirement benefit plans new hires receive, compared with our previous survey of plans offered in 2004. Across all regions, the percentage of respondents whose companies have a stated global policy of using only DC plans for new hires has almost doubled.
 
However, one-third of multinational respondents still leave plan design decisions to their local entities or have no stated preference as to the types of plans. (See Exhibit 2.)
 

Adopting a global DC plan policy seems to be most prevalent in Europe, where more than 80 percent of respondents have a global policy to provide benefits for new hires using DC plans. By contrast, only 42 percent of respondents with headquarters in North America have such a policy.
 
The introduction of DC plans is also closely linked to a reduction in the level of benefits provided by DB plans. More than half of respondents have closed DB plans to new members or to future accruals for existing members in conjunction with introducing or enhancing a DC plan.

Reducing risk

Multinationals are increasingly managing pension risks on a global basis, and making changes to benefits is one of the levers that can be used to reduce risk. Implementing global benefit policies gives corporate headquarters more control over benefit design, which in turn helps it to reduce pension risks and pension costs.
 
The most important reasons cited by survey participants for making changes to benefit design are to: 

  
As retirement plan issues have moved up the corporate agenda, more than 50 percent of respondents see retirement plans as presenting a financial risk to their company “to a moderate extent” and a further 20 percent “to a great extent.” As a result, almost all respondents have taken some form of action to address this risk, at least in relation to their main plans, but more often on a global basis.
 
More than half of respondents (56 percent) have reduced their equity allocations and increased their allocations to fixed income (64 percent). More than one-third have increased their allocation to alternatives or reduced their interest rate exposure – by either increasing fixed income assets or hedging with derivatives. 
 
The fact that nearly 50 percent of companies indicated that they would run their plans on a fully de-risked basis if funded status permitted shows how attitudes toward pension risk have changed in recent years. This is unlikely to happen without significant resources being applied by multinationals toward establishing long-term aims and developing action plans to achieve these goals.

Increasing control

Governance remains a high priority for multinationals. The main driver behind the focus on retirement plan governance is the desire to have a framework in place that mitigates financial risk and volatility.
 

Most organizations surveyed have already shifted to or are moving decisively toward a more global perspective in managing their retirement plans. Of our respondents, 59 percent expected this trend to continue, with greater involvement from corporate headquarters.
 
Monitoring is one of the main pillars of a strong governance framework. The majority of companies now monitor their funding position at least annually and their asset performance quarterly or monthly. An increase in the use of global custodians makes this regular information flow more feasible than in the past. 

More details on specific actions

Tracking corporate news around the world leads to a convincing conclusion that most employers are now pursuing the above principles and putting them into action, and sometimes adding a short-term overlay of cash reductions, if they can. Here are a few of the actions being taken:
 

We are convinced that we will see a continuing stream of these types of changes in many countries, and they will set precedents for the future. These precedents could lead to future problems, but they could also yield good opportunities.

“A crisis is a terrible thing to waste …”

We suggest that the crisis and the focus it brings to retirement plans present a unique opportunity for multinationals to step back and look at necessary changes in a strategic way, in the context of the role retirement programs play in their businesses, and then to implement actions accordingly. The following 10 questions could be used to frame this context for a review: