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back to index backGLOBALtalk December,  2004

Multinationals rely more on corporate HQ and finance in managing global benefit programs

Rising costs and heightened financial uncertainties associated with pensions and other employee benefit programs are leading multinational companies to give greater control of their benefit plans to corporate headquarters while stepping up the involvement of the finance department.

These are among the key findings of a Towers Perrin survey of global benefit management practices at large employers. The survey, which updates a similar study conducted in 2001, drew responses from 134 organizations in a range of industries. Slightly over half (52%) of the sample are European companies, and 42% are U.S.-based. The average company surveyed has almost 30,000 employees worldwide. 

The survey found that controlling costs and managing financial risk - especially with regard to global pension obligations - are the top benefit management concerns at multinational companies today, followed closely by the need to ensure greater consistency and transparency in financial reporting. These objectives are consistent with the ongoing drive by companies to manage their HR programs more efficiently and increase productivity in a highly competitive global economy.

The growing financial challenge of managing pension plans on a global scale is especially striking and clearly one with growing business implications for many multinational companies. More than one quarter (26%) of the companies surveyed said that their global pension liabilities represent more than 25% of their market capitalization today. For more than one in ten of these companies, global pension obligations represent more than 50% of current market value.

The survey also found that pension plan financial management is now more complicated for major multinationals because they often have large plans scattered around the globe. While pension obligations outside the headquarter's country make up less than a quarter of total pension liabilities for 40% of respondents, they make up more than half of the total for almost a third (31%) of the companies. Moreover, the combination of volatile asset performance and continuing low interest rates in the last several years has reduced plan funding ratios in many countries and forced many companies to revisit their pension funding, investment and benefit strategies.

In light of these and other challenges, it is perhaps not surprising that corporate headquarters is exerting more influence over the worldwide benefit management process. Just over a quarter (29%) of the participating companies report that their worldwide benefit plans are entirely in local control today. Far more common is the move toward shared corporate and local responsibility for key benefit policies and activities, the approach in place at over half (57%) of the participating companies. Only a small minority (14%) of our respondents have moved all the way to full corporate control. Exhibit 1 shows how widespread the move to centralize global benefit management has been since our last survey on this issue, while Exhibit 2 suggests that the tilt toward headquarters is likely to accelerate in the next few years.

The trend toward centralization of the benefit management function is consistent with companies' recent emphasis on improving financial controls, governance practices, reporting processes and operational efficiency in all areas of their businesses. Indeed, at the individual policy level, corporate headquarters is assuming more responsibility for virtually all aspects of benefit plan financial management and governance. Only employee communications remains predominantly the purview of local managers ( Exhibit 3 ).

Setting a global framework
Almost half of the participating companies have already defined global objectives for their employee benefit programs, and another third are in the process of doing so. A large majority of companies also indicated that they have already issued or are moving to establish specific policies to guide their local operations on key aspects of plan management. Benefit design considerations are the most common issue addressed in these guidelines, followed by governance issues and an array of financial considerations, ranging from funding and insurance to accounting and investment policies.

Management structure
More than two-thirds of the respondents (70%) have established central committees or management teams with specific oversight responsibility for pensions and other employee benefits on a worldwide basis. Here again, a financial focus is most common for these groups. 

The HR function continues to play the lead role in defining global benefit objectives in three quarters of the responding companies. However, more than a third (37%) of the respondents report that the level of influence among corporate functions has shifted in the past two years - with the finance function most commonly mentioned as having assumed a more prominent role.

The survey also confirms that leading multinationals are adopting a growing range of tools and techniques to improve the management of their benefit programs around the world. The most common include:

•  A consistent approach to benefits accounting
•  Multinational pooling of insurance risks
•  Closer monitoring of emerging pension and other benefit issues
•  A consistent approach to benefit design
•  A consistent approach to benefit funding
•  Appointment of a global coordinating actuary.

Ultimately, effective management of global pension and other employee benefit costs and risks requires a high level of management attention and a thoughtful approach to governance that balances corporate needs and goals with appropriate local involvement. This overall objective can be supported by sophisticated tools and continually updated information on the company's plans and on developments in the countries where the company has offices.

Source: Towers Perrin - November/December 2004 - GAI

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