Global actuaries: the newest boardroom adviser

By Tony Broomhead and Alex Young-Wootton

Globalization is a growing presence in today’s corporate boardrooms. With companies pushing into new markets and regulators demanding details on investments abroad, directors are increasingly in need of advisers who understand pension liabilities, assets and rules worldwide. While this trend is especially pronounced in the United States due to the requirements of the Sarbanes-Oxley Act of 2002, firms in many other countries are experiencing similar pressures. Many are turning to global actuaries to fill their needs. While this is a logical progression, companies need to consider a variety of aspects as they decide how to proceed.

The Drive Toward Global Governance
With the cost and administrative burden of doing business in the US ever increasing, many companies are looking to overseas growth as the road to expansion. Growth in Brazil, Russia, India, China and Mexico, coupled with expansion into other areas such as Central and Eastern Europe, is a recurring theme among US multinationals’ business strategy discussions. The immediate effect of this is that non-US business is becoming a more material part of the company and is commanding more attention from both a ‘governance of benefits’ and a ‘financial disclosure’ perspective.

The growing focus on global governance of benefit arrangements is driving a review of the way companies look at actuarial work globally. The Sarbanes-Oxley Act of 2002 is demanding that US companies understand the materiality of the liabilities of each plan globally to ensure full and accurate financial reporting. This is understandably a steep learning curve for many corporate employees, who have largely focused on domestic issues to this point.

Companies can no longer ignore ‘non-material liabilities’. They must identify and consider all arrangements. If they wish to exclude certain retirement liabilities from accounts, companies must still identify them before submitting their case to the auditors. Accounting standards require material liabilities to be disclosed and the trend toward growth overseas is increasing the significance of locations that were deemed immaterial in the past.

This pattern is not uniquely reserved for US multinationals. For example, it is now mandatory for EU countries to comply with IAS19 requirements, leading some European-based multinationals to look at non-domestic benefits for the first time (France is an example of a country with many multinationals affected by this).

These accounting and legislation requirements are driving multinational corporations to create and manage a governance structure, not just to cover the United States, but to cover all their global locations.

So what are companies doing to respond to the changing demands of running a global company outside of the United States?

The role of the global actuary
In this changing environment, many companies are turning to global advisers to extend the controls and knowledge in place nationally to the global scene.

The reasons to consider employing a global actuary vary from company to company, but at a high level, when a company wants to extend its governance procedures outside the United States, it is often easier for them to explain corporate philosophy and policy to a single global third party. This party is then given the task of functioning as an extension of corporate, with the aim of facilitating consistent migration of corporate philosophies throughout the globe through one global voice. Goals and initiatives are better communicated from corporate offices to local ones, and ideas and best practices are more easily elevated from the locals to corporate. Thus, issues are addressed sooner and at the right level.

So what does a global actuary do? The services of a global actuary might start as coordinating actuarial work efficiently through multiple points of contact with overseas locations. This could be used to offer a global consolidation service simply as an extra level of check and feeling of security for the company. Through a natural progression, this could expand to include advising and assisting a corporation in global funding and investment strategy for retirement and other long-term benefit programs.

A global actuary can help create an overall global benefits policy that outlines a consistent set of principles to guide the design and financing of all of a company’s benefit programs. This may include, for instance, a preference for defined contribution retirement programs (where feasible), full integration with local social insurance benefits, insurance of certain types of risks, and advance funding of future commitments where advantageous from a tax or investment perspective. Having such policies in place simplifies the governance process at the corporate headquarters.

Taking this one stage further, rather than the global actuary simply playing a coordination role, many companies are considering moving toward the use of one firm worldwide.

Why use one firm worldwide?
A growing number of companies perceive several key advantages to using a single provider worldwide. New global governance policies are demanding that the same quality standards be applied globally as have been (or are now) in place in the United States. Companies can look to one firm to provide assurance that there is adherence to a single set of global quality standards, as well as ensuring the use of consistent actuarial methodology and tools globally. They can be certain the systems will be in place to handle increased disclosure requirements, which may not be the case with local firms. Using the same actuarial systems globally provides further efficiencies, such as having backup resources and easy access to data. This also ensures globally consistent assumptions, standardized data collection, compliance with purchase accounting entries, consolidation of worldwide disclosures and a review of the following-year expense. In addition, managers of overseas subsidiaries are advised and assisted by qualified local actuaries who have experience in dealing with US multinationals, with the aim that corporate guidelines are applied consistently when local plans are created or modified and more rapidly approved by headquarters.

Some companies see this as an opportunity for better service at a lower cost. The expectation is that the company is now in a position to leverage the size of its global presence to demand the firm's best resources in every country because of the size and importance of the overall business relationship, even in countries where their operation is relatively small. There may also be the opportunity for worldwide fees to be reduced because of efficient coordination.

Given these perceived advantages, why are some companies making the conscious decision to stay away from a single global provider?

Why not to use one firm worldwide?
By choosing one single provider, some companies feel they are locking themselves into only receiving one firm’s view on global issues. By using several providers globally, there may be more opportunity to obtain diverse views on any issues.

Many companies also believe that there are few truly global providers with the worldwide capabilities required to meet a large multinational’s requirements. In some instances the company may be more global than the provider and in others the provider may be strong in several locations, but not all. In this way, by following a single-firm approach, a company may eliminate firms that have strong services in a particular location or region because they cannot serve all of their locations and may be compromising in the global provider’s weaker locations.

In making this decision, consideration needs to be given to the level of push back expected from certain locations currently using local firms with whom they are happy. There may also be situations where corporate cannot dictate. For example in the United Kingdom, the scheme actuary is appointed by the trustee, a body that is independent of the company.

Conclusion
As more and more companies focus on global governance, multinationals will need to assure themselves that they have the right network of advisers to support the corporation’s global strategy. The current environment is demanding more governance, more legislation and more growth outside the United States due to cost of labor, profit margins and competition. This is forcing companies to think globally. In many cases, appointing a global actuary – in either a coordination role, or as part of moving to a single global provider – is the natural progression.

“Retiree benefits is a complex accounting area for which our business unit finance staff generally does not possess the necessary technical expertise to fully execute. It is, therefore, a great comfort to the corporate staff to globally coordinate through a single subject matter technical expert.

“Using one global provider enables us to leverage synergies between global coordination of benefits reporting and stock option valuation/reporting services.” Christy Hughes, director, accounting research at Kellogg Company

“Having a single actuary provides greater assurance that all company plans will be valued using consistent US GAAP accounting rules and that methods used in determining valuation assumptions are in synch with corporate expectations.” Claud Blackburn, director, corporate accounting at Cummins Inc.Tony Broomhead is the global actuarial function leader in Watson Wyatt's International practice in the United States. He is a fellow of the Institute of Actuaries, an associate of the Society of Actuaries, and a member of the American Academy of Actuaries, where, until recently, he served as the Academy's representative on the Pensions and Employee Benefits Committee of the International Actuarial Association.

Alex Young-Wootton is an international actuary for Watson Wyatt Worldwide, with experience consulting to both US and UK based multinationals. He is a fellow of the Institute of Actuaries in the United Kingdom and the Society of Actuaries in the United States, as well as a member of the American Academy of Actuaries.