New AEGON Global Pensions white paper "Asset pooling comes of age"

8/9/2019 New AEGON Global Pensions white paper "Asset pooling comes of age"

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Asset poolingcomes of age

A roadmap to pooling

assets for pensions

Alexander W.A. van Ittersum


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Table of Contents

Introduction 1

1 Assetpoolingbenetsnowavailabletointernationalcompaniesofallsizes 2

Theneedtosimplifypensionsmanagement 2

Assetpoolingintheorydecreasingcomplexity,improvingcontrol 2

Whythedelay? 4

2DiversityinpensionsaunitedEurope? 5

Managingyourpensionplans 6

3 Manywaystopoolyourpensions 8

Administrativeanddatapoolinginterimsolutions 9

Globalcustodyapartialsolutionforlargermultinationals 9

Multi-clientassetpooling 9

Bespokeassetpoolingsolutions 9

IORPsunderdevelopment 9

AssetpoolingandIORPs 10

4 Multi-clientassetpoolingtheadvantagesofareadymadesolution 11

Assetpoolinginpracticeonesizetsall? 11

Arststeptowardspensionpooling 13

5Assetpoolingcomesofage 14

Improvinginternationalpensionmanagement 14

Fivestepstoimplementingassetpooling 14

Acknowledgements 15

Referencesandnotes 16


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Introduction

Inthelightoftheeconomiccrisis,pensionsarenowverymuchaboardroomissue,withCFOslookingtoreducepensionrisks1andtocontrolcosts.Forcompanieswithpensionplansinmultiplecountries,

thisisnoeasyundertaking.Duetothediversityofinternationalpensionregulations,companieshave

torunseparatepensionplansforeverycountryinwhichtheyoperate.Thismakesitdifcultforthem

togainaclearoverviewoftheirpensionassetsandliabilities(increasingrisk)andtotakeadvantage

oftheirinternationalscale(increasingcosts).Inordertoaddresstheseissues,anumberofsolutions

havebeendevelopedtohelpcompaniesimprovetheirinternationalpensionsmanagement.

Overthepastfewyears,asseverallargemultinationalcompaniessetuptailor-madeassetpooling

solutions,itlookedasifassetpoolingforpensionswasabouttobreakthroughasamust-havesolution

forallcompanieswithmultiplepensionplansinEurope.Then,asattentionshiftedtoIORPs(Institutions

forOccupationalRetirementProvision) thenewhope forEuropeanpensionconsolidationandthenancialcrisisforcedcompaniestofocusonmoreurgentproblems,attentionforassetpooling

waned.However,asithasbecomeclearthatIORPsarepresentlylimitedanddifculttoimplement

andmulti-clientasset-poolinghasbecomeavailable,assetpoolingisnowenteringanewphaseasit

opensuparangeofbenetsforcompaniesofallsizes.

No longer a solution for the fewThepoolingofpensionassetsclearlyofferssponsoringcompaniesandtheirpensionfundsdistinct

benets.Inpractice,however,thetechnicaldifcultiesofdesigningarobustandeffectiveassetpooling

solutionhavemeantthatonlythelargestofmultinationalcompanies(Unilever,ShellandNestl)have

startedtopooltheirpensionassets.Smallerandmedium-sizedmultinationalshavenotbeenableto

benetfromassetpooling,asitdoesnotmakenancialsenseforthemtoinvestindesigningand

implementingtheirownbespokesolution.Untilnow,therefore,theexpectationsaroundassetpooling

havenotyetsolidiedintobenetsforcompaniesotherthanthe largestmultinationals.However,

assetpoolingisnowcomingofage,asnewofftheshelfmulti-clientsolutionsarereadytoplace

assetpoolingwithinthereachofinternationalcompaniesofallsizes.

InthisAEGONGlobalPensionswhitepaper,weexaminetheissuesthatmultinationalcompaniesface

inmanagingtheirpensionsandintroduceassetpooling.Havingdiscussedthediversityofpensions

andpensionssystemsinEuropetoday,weexplorethedifferentpoolingsolutionsavailableandshow

howmulti-clientassetpoolingnowoffersarobustandfuture-readysolutionforcompaniesofall

sizes.Finally,weprovidevebriefguidelinesonhowcompaniescanimplementassetpooling.


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1 Asset pooling benets now available to

international companies of all sizesThe need to simplify pensions managementAscompaniesgrowovertime,itisnotunusualforthemtogainadditionalpensionplansthrough

mergers,acquisitionsandthecreationofnewsubsidiaries.Historically,manycompanieshaveallowed

theirpensionplanstoproliferatewithlittlethoughtforharmonisation.Thisinturnleadstoincreased

complexityinpensionsmanagementandincreasedrisk.Acombinationoftheeconomiccrisisand

tighteninginternationalregulations(forexample,IFRS)haveledcompaniestolookoncemoreattheir

pensionsinadrivetomanagerisk,increasecontrolanddecreasecosts.

When pension plansare managed individually, country by country, it isusual for the trusteesof

individualpensionplanstodecideontheirinvestmentpoliciesandtochoosetheirowninvestmentmanagers.Thiscanresultininefciencies,hiddenrisks,inconsistentreportingandopaquecosting

(thatcanamountto15%oftheriskpremium).2

Assetpoolingoffersmultinationalcompaniesthepossibilityofoptimisingtheirpensionmanagement,

delivering benets to all stakeholders. Bypooling their pensionassets from different countries,

multinationalcompaniescanimprovetheirpensiongovernance,bettercontroltheirnancialrisk,

increasetheiroperationalefciencyandobtainaccesstobetterinvestmentsolutions.Assetpooling

enablescompaniestoremoveinvestmentmanagementinefciencies,helpingthemtomanagetheir

pensionsbetterandmorecost-effectively.

Asset pooling in theory decreasing complexity, improving controlTheideabehindassetpoolingissimple:companieswithmultiplepensionplanscanpooltheirassets,

givingthemgreatercontrolovertheirpensionplansandenablingthemtogainfromefcienciesof

scale.Corporateheadquartersreceiveup-to-date,consolidatedreportingofalltheirpooledpension

assets.Assetpoolingremovescomplexity(andthereforereducesrisk)andimprovescorporatecontrol

overpensions.

Ontheinvestmentside,assetpoolingprovidessavingsinmanagementandcustodyfeesandmakes

iteasierfortheplanmanagers(thetrusteesorsponsoringcompany)todesignappropriateasset

allocation strategies. The overall cost and efciency savings are highest when multiple smaller

pensionplanscombinetheirpensionassets,asopposedtowhenasinglelargeandalreadyefcientpensionplancombinesitsassetswithsmallerplans.Thisfactmeansthat,paradoxically,thepotential

benetsandsavingsarehighestforthesmallerpensionplansthathaveuntilnowbeenunableto

affordassetpooling.Withthedevelopmentofmulti-clientassetpooling,thesesmallerpensionplans

arenowabletobenetnotonlyfromthecostsavingsthatassetpoolingoffersbutalsofrombetter

riskdiversication,asassetpoolingprovidesaccesstomoreassetclassesandmanagerstyles(which

previouslywouldonlyhavebeenavailablethroughexpensivefundsoffunds).


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Benets of asset pooling for all stakeholders

Asset pooling offers companies benets in three major areas: improving governance andcontrol (and reducing complexity), providing insight into risk (allowing companies to control

risk more effectively), and enabling companies to control their costs. Finally, asset pooling

provides benets to all stakeholders a key factor in successfully implementing any solution.

Figure 1: Benets of asset pooling for all stakeholders

1 Improved governance and control

The most important reason for multinational companies to consider asset pooling is to improve

their international pension governance. The economic crisis has revealed the potential risk that

pensions represent to the corporate balance sheet. Asset pooling offers a unied investment

solution with centralised reporting, providing companies with better insight into potential

investment risks and decreasing the complexity of their pension reporting.

2 Managing risk

Knowing your risk is the rst step to managing it. Conversely, not knowing what you have in

your pension funds or where you have it is a considerable risk for a sponsoring company. An

asset pooling platform provides a fast and consistent way to gain an overview of investmentrisk on both a consolidated and plan basis. Asset pooling enables companies to take advantage

of a controlled investment manager selection process with ongoing monitoring, offering

complete transparency and reducing risk.

3 Reducing costs

For smaller companies, economies of scale mean that asset pooling provides them with

signicant savings on their investment costs. As larger companies often possess larger, more

efcient pension plans, combining these large plans will not always result in such signicant

savings on asset management fees. In addition to investment management savings, however,

asset pooling also offers savings on internal monitoring costs and consultancy.

Headoffice

Loca

lsubsid

iaries

Tr

us

tees

Ris

k

Cost

s

Asset

pooling

Control

Members


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Providing benets for all stakeholders

Asset pooling not only provides the CFO with the means to gain better control over the

companys pensions but it also delivers benets to the other pension stakeholders. Theindividuals responsible for the management of the individual pension funds can be assured

of a high quality and well managed investment solution for their particular pension plan.

Although local pension fund trustees may be hesitant to give up their freedom to choose their

own investment strategy, in return they gain access to the best investment managers and to

greater diversication at a lower cost. In addition, they are able to focus on achieving optimal

asset allocation for their local plan and on other important areas such as communication to the

members.

Why the delay?Consideringthebenetsthatassetpoolingpromises,itisperhapssurprisingthatithasnotbeen

adopted morequickly.Asusual, the devil lies in the detail. Using nontax-transparentoropaque

investmentfundsisrelativelysimplebutcanleadtosubstantialunderperformance(particularlyfor

equityfunds),greatlyreducingoreveneradicatingthepotentialbenetsofassetpooling.Inorderfor

assetpoolingtobeeffective,itisimportantthatthesolutionbetax-efcientanddevelopingatax-

efcientsolutioniscomplexandtimeconsuming.However,nowthattaxefcientmulti-clientasset

poolingisavailable,companiescanbenetfromassetpoolingwithouthavingtodevelopabespoke

solutionthemselves.

Figure 2: Unied investment management

This gure demonstrates how asset pooling unies investment management for the pensions

of a multinational company, catering for a wide variety of different pensions including, for

example, a Dened Benet plan (DB) provided by a self-administered pension fund (Pension

Plan A), a trust-based Dened Contribution (DC) plan (Pension Plan B) and a unit-linked DC plan

as part of a life-cycle solution provided by an insurer (Pension Plan C).

Multinational Company

Pools Reporting

Pension Plan B Pension Plan C Pension Plan DPension Plan A

DB Plan DC Plan Insured DC Book reser. DB

UK Subsidiary NL Subsidiary FR Subsidiary Other Subsidiaries

(Source:AEGONGlobalPensions)


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2 Diversity in pensions a united Europe?

WithinEurope,nosinglestatepensionsystemisthesameasanother.Asaresult,itisdifcultformultinationalcompaniestoprovideauniedpensionsolutionforalloftheirEuropeansubsidiaries.

WhenacompanytakesinventoryofitspensionplansinvariouscountriesacrossEurope,itbecomes

rapidlyclearthatthereisstillawidevarietyinpensionsystemsandpracticesacrossEurope.The

differencesapparentaretheresultofthedifferentstatepensions,differentpensionvehiclesand

differentpensionpromisesmade(notwithstandingthedifferentterminologyusedineachcountry).

WhenlookingatEuropeanpensions,themajordifferencesbetweenthevariouscountrysystemslie

withthestatepension(rstpillar).AlthoughallEuropeancountriesprovideaminimalstatepension,

theimportanceofthisprovisionvariessubstantially.Forexample,inFrance,Germany,SpainandItaly,

thestatepensionpresentlyprovidesthemajorityofretirementincome.IncountriessuchastheUK,

Ireland,theNetherlandsandSwitzerland,occupationalpensions(thesecondpillar)aremuchmoreimportant.

Diversity of pension systems: the differing importance of the 1st, 2nd

and 3rd pillars

The graph below includes all premiums paid to insurers, pension funds and banks for pension

savings and all contributions made by employers and employees into the social security

system.

Figure 3: Shares of the three pillars in the total premium income

0%

20%

40%

60%

80%

100%

2nd pillar

3rd pillar

2nd and

3rd pillar

1st pillar

Unite

dKi

ngdom

Neth

erla

nds

Germ

any

Switz

erland

Denm

ark

Swed

en

Finland

Spain

Fran

cePo

landTu

rkey

Belgium

PortugalItaly

(Source:CEAStatisticsNo28,September2007)3


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Managing your pension plansItiseasierforcompaniestoexercisecontroloftheirpensionplansincountrieswhereinsuranceand

bookreservesdominateasopposedtocountrieswhereautonomouspensionplansarethenorm.IntheUK,IrelandandSwitzerland,self-administeredpensionfundsaretheprimaryvehicleforproviding

pensionstoemployees.InDenmarkandSweden,insurancecontractsdominatethemarket,whilein

GermanyandAustria,bookreserves(thatisreservesheldonthebalancesheetofthecompany)are

themainvehicleusedtoprovideoccupationalplans.Anysolutionthatinvolvescombiningdifferent

pensionplansmustthereforesatisfytheindependentpensionfundtrusteesaswellastheboardof

thesponsoringcompanyitself.

Diversity of pension systems: organisation of occupational pension plans

The graph below demonstrates the diversity of the various national pension systems,showing the different vehicles employed for occupational pensions across Europe.

Figure 4: Financial vehicles used for occupational pension funds

0%

Unite

dKi

ngdo

m

Neth

erla

nds

Germ

any

Switz

erla

nd

Denm

ark

Swed

en

Finlan

d

Spain

Fran

ce

Irela

ndIta

ly

Belgiu

m

Portug

al

Austria

Norw

ay

20%

40%

30%

50%

70%

10%

60%

80%

90%

100%

Other

Book reserves

(non-autonomous)

Pension

insurance

contracts

Pension funds

(autonomous)

(Source:PensionMarketsinFocus:November2007,Issue4-OECD2007)


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Diversity of pension systems: different pension promises

Another element of the diversity of the pension systems in Europe that any unifying solution

has to be able to address is the different types of pension promises made to employees in each

country. This refers not only to the differences between DB and DC pension plans but also to

different interpretations of these systems in each country. For example, in Switzerland the DC

system (a cash balance system) allows employees no investment freedom and the employer/

occupational pension fund has to guarantee the paid-in premiums. This is very different from

contract-based DC plans in the UK, where the employee has complete investment freedom and

no guarantees.

The different types of pension promises within Europe were mapped out by Oxera in the gure

below, ranging from pure DB via hybrid plans to pure DC.

Figure 5: The full spectrum of pension plans

Asset pooling report Company XYZ

COMPANY NAME PLAN PLAN TYPE No PREMIUM AUM EUR PLANLIVES EUR COUNTRY

Company XYZ Materials NL B.V. Garantiecontract insurer ABC DB Insured 25 500,000 5,000,00 0 Netherlands

Company XYZ trading BV Stichting Pensioenfonds XYZ DB career average 1000 5,000,00 0 50,000,00 0 Netherlands

Company XYX Electri cal appliances Contrats cotisations dnies Dened Contribution 200 28,000 800,000 France

Company XYX Electri cal appliances Fonds collectif de retraite Group Pension Fund 100 1,200,0 00 12,000,00 0 France

Company XYX Electri cal appliances Fonds collectif dI. F.C End of career insurance 30 800,000 8,000,000 France

Company XYZ Group Personal GPP Group Personal Pension DC 270 500,000 5,000,00 0 UK

Pension Scheme

Company Xyz Ltd GP STAKEHOLDER Group Stakeholder DC 550 1,000,00 0 10,000,00 0 UK

Company XYZ AG Vorsorgungskasse XYZ Cash balance DC 50 1,000,00 0 10,000,00 0 Switzerland

Company XYZ AG Company XYZ CTA DB Bookreser ve 500 1,500,0 00 15,000,00 0 Germany

Company XYZ AG Pensionsfonds DC guaranteed 120 - 8,000,000 Germany

Pure DB Average Various DC with Outcome- Pure DC

(nal salary) salary DB hybrids guarantees oriented DC

(Source:Oxera)4

Figure 6: An example of the various different pension plans a single multinational company

could have within Europe



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3 Many ways to pool your pensions

GiventhediversityofpensionsandpensionsystemsacrossEurope,itisunsurprisingthatdifferentmethodshavebeendevelopedtotrytoimprovepensionsmanagementacrossEurope(andbeyond).

Ifwelookatthesolutionspresentlyonoffer,thereisavarietyofpoolingsolutionsavailable,ranging

fromadministrativeanddatapoolingthroughtoIORPs.Thechartbelowhighlightsthebenetsofthe

differentsolutionscomparedwithhoweasilytheycanbeimplemented.

AlthoughIORPSultimatelypromisethegreatestbenets,theyarepresentlydifculttoimplement

anditwillbesometimebeforetheycanachievetheirfullpotential.Attheotherendofthespectrum,

globalcustody,andadministrativeanddatapoolingoffermorelimitedbenetsbutrequirelesseffort

toimplement.Assetpooling,however,providesconsiderablymorebenets,and,whilebespokeasset

pooling isonly feasible for the largest multinational companies,multi-client assetpoolingoffers

companiesofallsizesthepossibilitytorealisesignicantefciencygains.Inaddition,itiseasiertoimplementandfuture-readyforinclusionintoanIORPsolution,ifrequired.

Figure 7: Comparison of added value and ease of implementation of different pooling solutions

Administrative

and data pooling

Multi-client

asset pooling

Bespoke

asset pooling

IORP

Difficulty of implementation

Added value: improved

control, cost savings

Global

custody

Information

Assets

Liabilities



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Administrative and data pooling interim solutionsSeveral multinational companies, including Mars and Reckitt Benckiser, have implemented data

andadministrativepoolingsolutions(alsoreferredtoasinvestmentorportfolioaccounting).Thisinvolves centralising pension management, including themanagementof pension assets without

actuallypoolingtheassetsintoasingleinvestmentvehicle.Administrativepoolingrequiresinternal

organisationalchanges,suchassettingupassetmanagementcommitteesforhiringmanagers.The

pensionassetsremaininvestedwithintheirpresentlegalvehiclesandpoolingisonlycarriedoutatan

administrativelevel.Administrativepoolingofferssomebutnotallofthebenetsofassetpooling

andcanbeusedasarststeptowardsfullassetpooling.

Global custody a partial solution for larger multinationalsGlobalcustodyoffersprimarilylargercompaniesawaytolowertheircostsandpoolthereporting

oftheirpensionplanassetsbyplacingthecustodyoftheirpensionassetswithasingleprovider.

However,globalcustodydoesnotautomaticallyleadtouniedreportingandimplementationnorevennecessarilytoimprovedinvestmentmanagement.Inparticular,itdoesnotprovidetheadditional

controlsandefciencygainsininvestmentmanagementthataremadepossiblebyassetpooling.In

addition,althoughcompaniesshouldbeabletobenetfromsomeefciencygains,thescaleofthe

providerinvolvedmayreducethenegotiatingpowerofallbutthelargestcompanies

Multi-client asset poolingMulti-clientassetpoolingprovidescompaniesofallsizeswiththeabilitytopooltheirpensionassets

andtoreceiveconsolidatedreportingontheirassets.Assetpoolingcanhelpcompaniestoimprovethe

managementoftheirpensioninvestments,generatesefcienciesandmakesiteasierforcompanies

tocontroltheirpensionplans.Multi-clientassetpoolingoffersmostofthebenetsofbespokeasset

poolingsolutions but, because companies can participate inpre-existing assetpools, it iseasier,

quickerandlessexpensivetoimplement.

Bespoke asset pooling solutionsTheearliestassetpoolingsolutionsweretailor-madesolutionscreatedforthelargestmultinationals

(forexample,NestlandUnilever).Thesetailor-madesolutionscanrequireenormousinvestmentin

timeandresources.Asoneofthepeopleinvolvedinabespokeassetpoolingprojectsaid:Murphys

lawwilldenitelystrikemorethanonce.Suchone-offsolutionsaresimplynotaffordableforsmaller

companies,whichisoneofthereasonswhyassetpoolinghasbeenslowtobeadopted.Creating

bespokeassetpoolingsolutionscanbedifcultandcomplicated,andthecostscanbesubstantial,

whichiswhytheonlycompaniesthathaveadoptedthemtendtohavemorethantenbillioneuroinassets.

IORPs under developmentCross-borderIORPs,likeassetpooling,appeartohaveexperiencedtheirshareofattention,asthey

offerthepotentialfortruepan-Europeanpensionprovision.IORPswilleventuallyprovidecompanies

withtheabilitytopoolboththeirEuropeanpensionassetsandliabilities.Atpresent,however,IORPs

remainlargelyelusive,asdifferingsocial,labourandtaxlawsthroughEuroperemainaconsiderable

barriertotheiruse(andwillremainsofortheforeseeablefuture).Althoughthebenetsofpan-

Europeanpensionpoolingareclear,pensionbenetsystems(likeotherlabourarrangements)within

theEuropeanUnionarenotyetharmonized,whichhassignicantimpactonattemptstoconsolidate

pensions.ItisforthisreasonthatearlyattemptstocreateIORPs(andmorethan70cross-border


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IORPsnowexist)haveconcentratedoncountrieswithsimilarpensionstructures,suchasIreland

andtheUK.Atpresent,suchIORPstypicallycontainDCplansforexpatsorexecutives,aspension

planswithinanIORPstillhavetoadheretolocaltax,socialandlabourlaws.Asaresult,memberadministrationisstillcomplexandefcienciesarenoteasilyaccomplished.

Asset pooling and IORPsAlthough IORPswilleventuallyoffer anoverarchingpension solutionwithinEurope,considerable

furtherdevelopmentsinEuropeanharmonisationarenecessarybeforethesecanbetrulyrealized.

ThereareimmenseobstaclestobeovercomebeforeIORPscanachievetheirfullpotential.Inthe

meantime,standaloneassetpoolingsolutionsprovideanachievablerststeptowardspan-European

pensions,futurereadyforinclusionintooneormoreIORPsatalaterdate,ifrequired.Inaddition,

assetpoolingsolutionscanalsobeusedtopoolnon-Europeanassets,forexamplepensionsassets

fromUS,Asianorotherpensionfunds.

Figure 8: Asset pooling a future-ready solution

Asset pooling solutions can be used in IORPs and also for pooling non-European assets.

Multinational company

UK Subsidiary NL Subsidiary

Pools Reporting

FR Subsidiary Other Subsidiaries

IORP Pension Plan C Pension Plan D



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4 Multi-client asset pooling the advantages of a

readymade solutionAsset pooling in practice one size ts all?Althoughthebenetsofassetpoolingmaybeclear,creatingacross-borderassetpoolingsolution

forthersttimeisadifcultprocessrequiringconsiderableinternationalexpertise.Inordertobe

abletocopewiththeimmensediversity5ofpensionsacrossEurope,assetpoolingsolutionsneedto

beexibleandreadyforchange.

Thevarietyofpotentialandpartialsolutionspresentlyonoffermayhavemadeitdifcultfor

companiestodecidewhichsolutionmaybeappropriateforthem.Withthedevelopmentofmulti-

clientassetpooling,companiesnolongerneedtodesigntheirownsolutionsandinsteadhaveaccess

toaready-madesolutionatafractionofthecost.Asaresult,assetpoolingisnowwithinthereachofallsizesofcompanies.Multi-clientassetpoolingcanbeofferedeitheraspartofaninsuredpension

solutionorasanasset-onlysolution.Aseparatesolutionnaturallyprovidesmoreexibility,andmay

facilitatecompanieswishingtoimplementassetpoolinginphases.

Multi-clientassetpoolingplatformsprovidecompanieswithaccesstoaready-madepoolingplatform,

removingthebarrierofexpensivestart-upcostsandenablingcompaniestobenetimmediatelyfrom

economiesofscale.Whenpoolingpensionassets,itisimportantthattheinvestmentvehiclesusedare

asefcientaspossiblefromataxationperspective.Atpresent,taxefcientinvestmentvehiclesare

currentlyavailablefromLuxembourg(FCP:FondsCommunedePlacement),Ireland(CCF:Common

ContractualFund)andtheNetherlands(FGR:FondsvoorGemeneRekening).

Inconnectionwiththis,itisveryimportantthattheassetpoolingproviderhandlesthetaxrebate

issuesonbehalfofitsclients.Thisinitselfcanprovideconsiderablebenets,asmanyinvestorssimply

donotapplyfortaxrebatesastheproceduresareparticularlycomplicated.Thiswasconrmedby

theEUInternalMarketsDirectorateGeneralinamemoinOctober20096statingthatmanyinvestors

donotreclaimtheirshareoftheEUR5.47billioninforegonewithholdingtaxannually.


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Tax efcient pooling

Claiming back taxes requires expertiseIn October 2009, the European Unions Internal Markets Directorate General issued a

memo stating that many investors simply dont reclaim their share of the EUR 5.47 billion

in foregone withholding tax annually. The procedures for validating investors entitlements

are so complicated that they discourage investors from applying. For those who do apply for

reimbursement of their taxes, the cost of doing so is thought to amount to approximately

EUR 1.09 billion every year.

The clear benet of tax-transparent investment vehicles

Tax-transparent investment vehicles offer a clear advantage to investors in comparison to

tax-opaque vehicles (as illustrated in the graph below). Over an 8-year period, the return on

investment from a global equity portfolio where all dividends can be reinvested outperforms aportfolio where withholding tax is paid by about 6% (for example, a Luxembourg-based SICAV:

Socit dInvestissement Capital Variable).

Figure 9: Additional returns gained from tax-transparent global equity fund compared with

tax-opaque global equity fund

For example, if we were to take a closed Dened Benet pension plan of EUR 50 million in 2001(into which no further contributions are being made), by October 2008, the total assets of the

plan would be EUR 76 million, if all dividends were reinvested, as opposed to EUR 73 million if taxes

were paid over the dividends. Over 8 years, this would amount to a loss of almost EUR 3 million.

If instead we look at a new Dened Contribution plan set up in 2001 for 150 members with a

contribution rate of 6% on average salaries of EUR 30,000, after 8 years, if withholding tax

were paid (and if 100% of assets were allocated in equity), the total pension assets would be

approximately EUR 2,480,000. If a tax-transparent vehicle were used, the assets would instead

be about EUR 2,540,000 a difference of approximately EUR 60,000 or more than two and a

half months premium. Although these costs are more likely to be borne by the participants, the

cumulative effect over the course of an individuals working and saving life would be signicant

and the worth of the benet provided by the employer would be unnecessarily devalued.

Nov 01 Nov 02 Nov 03 Nov 04 Nov 05 Nov 06 Nov 07 Nov 08 Oct 09

0%

1%

2%

3%

4%

(Source:MSCI-Barra,AEGONGlobalPensions)


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A rst step towards pension poolingMulti-clientassetpoolingisarststeptowardsbuildingasharedservicecentreforpensionsfor

multinationalcompanies.Given thechangingpensionsenvironment, it isveryimportant thatanyassetpoolingsolutionshouldbeexibleandfuture-ready,asacompanysneedsarelikelytochange

anddevelop.

Althoughitwillbealongtimebeforecross-borderIORPsarecommonlyinuse,IORPsdoalready

existandtheirusewillcontinuetogrow.Assetpoolingsolutionsneedtobeabletotseamlessly

intoanIORP,ifandwhennecessary.Inaddition,unlikeIORPs,assetpoolingsolutionsextendbeyond

thebordersofEurope,enablingcompaniestomanagetheirpensionsthroughasinglevehicle.For

example,inanadvisoryopiniononpensionsin20087,theUSDepartmentofLaboropenedupthe

possibilityforUSpensionassets(ERISA)tobepooled,alongwithpensionfundsfromtheMiddleEast,

Asia,AfricaandEurope.

Amodularsolutionshouldbeabletoservicethedifferenttypesofassetmanagementmodelsrequired

by different pensionsystems. Althoughsomecompanies willbeable toreapbenetsfrommore

customizedsolutions,itisimportanttondabalancebetweenincreasedcostsandthebenetstobe

gained.Astandardized,multi-clientassetpoolingsolutioncanbeeasilyandefcientlyimplemented.

Anassetpoolingsolutionmust:

Beefcientandtransparent,withlowoperatingcosts

Havelowimplementationcosts

Provideexcellentgovernanceandcontrolovertheinvestmentsolution

Provideahighqualityinvestmentsolutionthatissuitableforavarietyofpensions

Provideconsolidatedreporting

Offeramodularinvestmentsolutiontoservicedifferentassetallocationsandcurrencies

Befuture-readyforIORPs,andtheshiftfromDBtoDCpensionplans.

Mostimportantly,anassetpoolingsolutionmustdelivervaluetoallstakeholders,andnotjustthe

CFO.AgoodassetpoolingsolutionshouldofferimprovedgovernanceandcontrolfortheCFO,asolid

investmentsolutionttinglocal requirements forthe trusteesandemployees, andlowcostsand

reliablehighqualityforthelocalsubsidiaries.


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5 Asset pooling comes of age

Withtheadventofmulti-clientassetpooling,itistimeforcompaniestoreassesstheavailablepoolingsolutions.Multi-client assetpoolingprovides companieswithaexible, future-readysolutionthat

willhelpthemtodrivedowncostsandimprovetheirriskcontrolandpensionsmanagement.Asset

poolingisavailableandachievablenow.

Improving international pension managementByenablingcompaniestoharmonisethemanagementoftheirpensionplans,multi-clientassetpooling

providesthemwithincreasedcontrolandconsolidatedreporting.Notonlydoesthisallowcompanies

tobetterunderstandandcontrolrisk,butitalsoenablesthemtooptimizethemanagementoftheir

portfolioofpensionassets.Smallerpensionfundscanbenetfromaccesstothebestmanagers,and

allpensionfundscanbenetfromtransparentcostsandcompetitivemanagementfees.

Asset pooling reduces complexity for the corporate headquarters, providesa high quality asset

management solution for the local subsidiaries (coupled with reduced operational and reporting

costs),andprovideslocaltrusteesoftheindividualpensionplanswithgoodinvestmentperformance

andincreaseddiversicationatalowcost.

Five steps to implementing asset poolingForassetpooling,astep-by-stepimplementationprocessispreferabletoaBigBangapproach.As

assetpoolingisintroducedacrossacompany,internalprocesseswillhavetobealteredandadapted,

andcontactsandcontractswithexternalproviderswillhavetobechangedaccordingly.Ifpension

plansareaddedoneatatime,astheybecomereadytojoin,anyissuescanbedealtwithasthey

arise.

Step1: Establishwhetherassetpooling(orotherpoolingsolutions)willbenetyourcompany.Does

centralisationtwithinyourcompanyculture?

Step2: Identifywhichpensionplansyouhave,inwhichcountries.Whichassetsdoyouholdand

inwhatkindsof investmentvehicles?What typesofplansdoyouhave,withhowmany

participants?

Step3: Perform a cost benets analysis establish the potential benets of asset pooling in

termsofcostsavings,improvedcontrol,riskmanagementandreducedtaxdrag.Identify

whichpensionplanswillbenetfromassetpoolingnotonlyintermsofpotentialsavings

forthecompanyheadquartersbutalsointermsofqualityofinvestmentsolutionsavailableformembers,trusteesandlocalsubsidiaries.

Step4: Secure executive sponsorship involve all stakeholders, from board members to local

trusteesinordertoidentifytheirrequirements.Togetherwithyourconsultant,identifythe

appropriateassetpoolingsolutionforyourneeds.Carefullybalancetheneedforyourown

uniquerequirements(andtheaddedcomplexitythismaybring)againstthebenetsoffered

byeasy-to-implement,ready-madescalablesolutions.

Step5: Planandexecute.Makeadetailedprojectplanofhowandwhentoswitchfromthecurrent

investmentsolutiontotheassetpoolingsolution,takingintoaccountlocalrequirements

andlongrunningcontracts.


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Acknowledgements

Iwouldliketothankthefollowingpeopleforprovidingtheirmuchvaluedinputandinsight.AlexandervanIttersum

JeroenBogers

Product development manager, AEGON Global Pensions

SteveChapman

International sales director, AEGON Global Pensions

BernardHanratty

Managing director head of investor services EMEA, Citi

FransvanderHorst

Managing director, AEGON Global Pensions

AnneLaning

Head operations, TKP Investments

MischaMuntinga

Head tax and regulatory, AEGON Asset Management

PhilipPennings

Tax department, AEGON Asset Management

FrankRandall

Director, AEGON Global Pensions

ThurstanRobinson

Communications manager, AEGON Global Pensions

MartijnTans

Director marketing, AEGON Global Pensions

PietVandenbossche

Consultant and project manager asset pooling, TKP Investments

AndrewWood

Regional sales director, UK and Nordics, AEGON Global Pensions

KarenZeeb

Director investor services Global Transaction Services, Citi


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References and notes

1 Planningyourwayoutofthenancialcrisis,aroadmaptoderisking,JeroenJ.J.Bogers,AEGONGlobalPensionsMarch2009.

2 IPE31March2010:Multinationalsunawareofoverseaspensionscost,Allianz.

3 StatisticsN28,Theroleofinsuranceintheprovisionofpensionrevenue,September2007.

Note:CH:3rdpillarunderestimated;DE:Datafor2ndpillarmissing;DK:1stpillaris

underestimatedbecauseitdoesnotincludecontributionstothepublicscheme;FR,UK,DE,ES:

1stpillarestimatedonthebaseofthebenetspaid;IT:2003data;FR,UK:Nosplitavailable

betweenthe2ndandthe3rdpillars.

4 Source:Denedcontributionpensionschemes,risksandadvantagesforoccupational

retirementprovision,OfamaOxeraJanuary2008.

5 ChristinaMatos,UnreformedorHybrid?AccountingforPensionArrangementsDiversityinthe

EU,Springer,7April2009.

6 PressannouncementIP/09/1543,Brussels,19October2009,Securitiesincome:Commission

recommendssimpliedproceduresforclaimingcross-borderwithholdingtaxrelief.

7 2008-04AERISASEC404(b)U.S.DepartmentofLaboradvisoryopinionconcerningthe

indiciaofownershiprequirementsinsection404(b)oftheEmployeeRetirementIncome

SecurityActof1974(ERISA),andtheimplementingregulations.


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AEGON Global Pensions and asset pooling

In June 2009, AEGON and Citi launched the rst multi-client cross-border asset pooling platform. Thegroundbreaking asset pooling platform, developed by TKP Investments, Citi and AEGON Global Pensions,

was launched with total assets invested with a value of more than 9 billion. Through the use of tax

transparent investment funds under a European passport (UCITS), the unique platform will enable

the multinational clients of AEGON Global Pensions to consolidate the management, investment and

reporting of their pension assets, reducing both risk and costs.

Currently, the AEGON Global Pensions asset pooling platform is being used by Dutch pension funds and

a UK and French insurance company. The platform contains tax-transparent UCITS equity and bond

funds, but can also cater to alternative investments. The asset pooling platform provides companies with

a modular, exible and scalable solution. In addition, it provides share classes at different fee levels in

order to cater for different distribution methods (for example, asset pooling is available through a DC

fund platform, via an insurer or directly to a self-administered pension fund).


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Contact details

AEGONGlobalPensionsP.O.Box85

2501CB,TheHague

TheNetherlands

Telephone:+31(0)703448931

E-mail:[email protected]

Website:www.aegonglobalpensions.com

Disclaimer

Thiswhitepapercontainsgeneralinformationonlyanddoesnotconstituteasolicitationoroffer.No

rightscanbederivedfromthiswhitepaper.AEGONGlobalPensions,itspartnersandanyoftheir

afliatesoremployeesdonotguarantee,warrantorrepresenttheaccuracyorcompletenessofthe

informationcontainedinthiswhitepaper.

AEGON,June2010

New AEGON Global Pensions white paper "Asset pooling comes of age"

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