The pressures of COVID have forced global organizations to take stock of all aspects of their business, looking for new efficiencies.  Even with the steps they have taken in recent years to freeze and de-risk their pension plans, many still have significant defined benefit (DB) pension obligations around the world.  This is leading multinationals to seek further opportunities to improve their balance sheet, P&L and cashflow positions, and reduce the financial and fiduciary risks associated with these DB plans.

At MBWL we are actively helping new and existing clients take a fresh look at their pension accounting numbers, and identify significant issues and opportunities to improve the organizations’ financials including the process to monitor and control these financials. 

Many companies believe that they have “de-risked” their DB pension plans globally, such as through plan closures, lump-sum offers to members, “journey plans” etc.  In our experience these efforts have often only scratched the surface of managing risk to the business. Despite having established global pension advisers, these pension liabilities still can represent significant and growing financial and non-financial risks.  Often a fresh and independent look can identify real value that is being “left on the table” at a time when organizations and finance leaders need it most.

Below we highlight concrete examples of the issues, opportunities and ways we have found to unlock this value for our clients:

• Overly conservative assumptions: despite many global companies understanding the best-estimate principles of pension accounting, we still find clients using overly conservative assumptions. This leads to over-stated liabilities and lower balance sheet reserves, tying up more capital than necessary. For example, in a recent independent review of plans in Switzerland we found liabilities overstated by nearly 50% due to conservative assumptions (withdrawal, discount rate) and very conservative application of IAS 19 rules (e.g. risk sharing). In the UK, we found the DB liabilities of a new client with a US parent overstated by nearly 10% due to an overly conservative mortality assumption.
• Inconsistency and lack of assumptions strategy: in a recent independent review of IAS 19 valuations across several countries, we discovered discount rates that were extremely conservative in two countries, and very aggressive in a third.  Other assumptions across countries varied significantly vs best estimates (mostly too conservative).  Not only were liabilities overstated (by around Euro 50m), but the inconsistent approach was a symptom of other questionable interpretations of IAS 19.  Having a clear global assumptions policy will ensure your balance sheet and P&L are aligned to your corporate priorities.  It should also improve governance, confidence in your numbers, and help avoid surprises.
• Getting the (important) details right: some assumptions are very significant but not obviously so. Following an independent review of a US retiree medical plan, we identified that the current actuary was using a very simple and very conservative assumption about HRA (health reimbursement arrangement) increases – potentially overstating liabilities by up to 60% compared to how the plan is administered in practice.  For another plan in Switzerland, the calculation of service periods was likely overstating pension liabilities by up to 10%. It’s critical to get these details right.  Such specifics are not always picked up in companies’ global summaries of key assumptions and may go unnoticed if they are not independently reviewed.
• Little value for money: we hear time and again that clients feel they are not receiving value for money from the global accounting process. The work is far too routine, focused on crunching numbers the same way year after year. There is no proactive advice aligned to business priorities, and no focus on continuous improvement in process efficiency, or fresh reviews of the accounting approach.   Work is often delegated to junior staff but fees stay high.  For a new multinational client, our senior experts were actively involved in providing the IAS 19 results and strategic advice more quickly and with a significant reduction in cost compared to their previous global actuary
• Lack of transparency and control: Despite the routine nature of global pension accounting, there are often surprises each year and unexpected “out of scope” work. There is little budgeting and planning, and fees often far exceed the fixed (expected) fees agreed.  For a UK-based multinational our proactive approach and use of our online consolidation system increased the transparency of the year-end process, helping to reduce both management and audit time and providing new strategic ideas to reduce DB risk, whilst ensuring our fixed fee remained fixed.

Clearly every case is different. Not every company will have all these issues, but we observe more and more global organizations lack genuine control on their numbers and process and are letting opportunities for improvement pass them by.  And worse, many do not realize it, even when organizationally they are striving desperately for efficiency, profit and stronger balance sheets – especially in a challenging economic environment.

We recommend global finance leaders take stock now of your global pension accounting process, to ensure you are optimizing your financial position, cashflow and efficiencies.  The impact on numbers and opportunities can be significant, at a crucial time for most global businesses.