One big happy pension fund.

Does your company have a pension fund in every port? You can save a bundle on fees by consolidating your plans, but there are some hitches. Find out what they are before you dive in.

You thought you'd seen the last of the paperwork on your company's acquisition of a French firm. But now you're pondering a slew of pension-fund issues that arrived with the new unit. The French company had its own pension fund, but your company also has a pension fund in France set up through its French subsidiary. It doesn't seem too efficient to keep both, you muse. But what's the best way to simplify plan operations? And how many people does it take to run an overseas pension fund?

As companies become increasingly multinational in scope, more and more financial executives will be asking themselves those questions. The typical global company manages pension funds of various sizes in many countries. As it acquires new businesses, it inherits more funds - and more duplication of services and fees. Therefore, you need to examine the costs of delivering pension benefits to several groups of participants. Maintaining multiple funds in one country is seldom the optimal approach. At Monsanto, we began globalizing our pension-fund assets in 1993, and we're still ironing out the kinks. We hope to put most of the finishing touches on our global pension-fund management program by the end of this year.

Some degree of pension-fund integration has always been a sound idea, and as companies continue to get leaner and more efficient, integration is starting to look better and better. Traditionally, the finance or human-resources staffs in each geographic area hired and supervised pension-plan service providers. The pension officer at a central location either supervised the local staffs or allowed them autonomy over the pension assets.

It's true that complying with local regulations and knowing the investment environment are essential to carrying out fiduciary responsibilities, and a local representative is best at handling those aspects of pension-fund management. But companies these days often don't need multiple staffs in a country to manage pension assets. Many large organizations, including Monsanto, conduct most of their pension-fund activity from a central location in the United States, enabling them to cut back on their local pension-fund personnel. We have a master trust for some of our North American and European funds, and we pool assets in other countries wherever we can, a process that generally takes us six to 18 months to complete. With our new setup, we expect to save five to 10 basis points in costs annually.

LOOK BOTH WAYS BEFORE CROSSING

But before you reach for your calculator, you should address several questions about your global pension-fund structure, because while pooling your assets can save you money and improve your funds' efficiency, it isn't always easy to do. Here are some questions you should ask before you start the process of globalizing: Why does your company maintain multiple funds and plans in the same country? Do you have a reasonable means of simplifying plan operations in different countries? What kind of staff distribution can most effectively manage the global assets within the regulatory environment?

Our experience in assessing these issues has shown us that you can simplify investment structures without compromising the plan participants' interests. In general, you can integrate your pension assets by either consolidating the separate plans into a master trust or merging the plans. Aggregating assets into a master trust allows you to increase the size of your pension fund and lower your administrative costs and management fees. It should produce improved returns, because the effort involved in pooling the assets of separate funds generally forces you to assess your managers and remove those who aren't performing well. And you can consolidate auditing, actuarial and other services, which will also decrease your costs.

The time and analytical effort required to integrate the separate funds should pay off by producing a more efficient investment structure, too. For example, you'll need to talk to only one investment manager, not five or 10 playing similar roles. You may find the quality and consistency of your pension-fund information improves, again because you're working with only one custodian.

In the United States and Canada, the global trust companies offer a master-trust arrangement that pools the assets but provides separate accounting for each of the funds in the master trust. The United Kingdom offers a common investment fund with similar features.

One drawback to master trusts is that they can be difficult to establish in other countries. They're not nearly as well-accepted and common in other European and Asian countries. France and Italy, which have traditionally provided pension benefits to participants through government programs, are particularly hostile to the idea of permitting global trust companies to offer master trusts. And Germany, which allows companies to simply use book reserves for pension funds and therefore retain the assets, hasn't been very sympathetic, either; nor has Japan. Plan sponsors and the large global-trust companies are eager to set up master-trust arrangements in Continental Europe, and they may drive the regulatory momentum forward, but it's going to take some time.

It's often easier to achieve the desired economies of scale by merging plans within a country. As with a master trust, audit and actuarial costs should be lower when you have only one plan and therefore one fund. But note that you need to address several important and legitimate fiduciary issues in consolidating your plans. For example, should the trustees of an overfunded plan compromise the extent of the plan's surplus by approving a merger with an underfunded plan?

From the corporate side, if you have one plan whose liabilities are 150-percent funded and another whose liabilities are 100-percent funded, merging the two may mean you won't have to make future contributions to the second plan. Yet the fiduciary responsibility is the primary consideration. In a situation like this, you may have to work with the trustees of the overfunded plan to allay any concerns about compromising the interests of their plan participants, and you should get legal and actuarial advice to help you with some of the decisions.

You're likely to run into other complex fiduciary situations, and their nature and extent will vary by country. Still, in most cases, moving toward well-structured, more efficient pension funds enhances the participants' interests.

Another situation we're facing with a different pension plan is getting participants to approve a plan consolidation. We're in the process of merging our pension plans in Australia. Australian pension laws require 100-percent approval from participants before the plans can merge, and that's a slow process. It's uncommon for pension laws to have that requirement, but it does happen, so keep that in mind when you're devising a schedule for consolidating your plans.

SELLING THE SOFT SIDE

As you can see, you'll also have to think through the people challenges in consolidating your pension assets. For example, thorough and timely communications to the trustees and participants on the reasons for the consolidation are very important. Both groups need to be reassured that the pension fund is stable and that a more efficient pension plan is to their advantage.

Continued support of the business units is a must. Many business-unit managers like having a separate pension plan tailored to their unit's participants and business strategies, and they may resist the idea of consolidating at first. You need to be sensitive to their concerns but also let them know you have the backup of senior management. In our case, the CFO made a point of telling the business units that consolidating pension funds was an important initiative for the company, so he smoothed the way for the finance and human-resources people, who are usually on the front lines of this issue.

It often helps to tell business-unit managers that consolidating the pension-plan assets is a separate issue from harmonizing the benefits. You don't have to have identical benefit levels in each business unit to globalize your pension-fund assets, although mergers can indeed be a catalyst for harmonizing benefits.

Of course, you also must meet the regulatory requirements in each country, which is often no easy task. In particular, pooling funds managed separately in different countries remains a special challenge. Ideally, it would be beneficial to pool the assets within a geographic region or perhaps globally. But while some companies, most notably IBM, have made an effort to achieve such a pooling, the tax and legal hurdles so far seem to be insurmountable.

One of the principal issues is the local regulators need to retain control of the pension assets, and they believe they can achieve this only if local custodians hold the assets and if a significant percentage of these assets are invested in local securities. In many instances, keeping pension-fund assets at home is a nationalistic and political issue. In Canada, for example, 80 percent of a pension plan's assets must remain in the country. The European Union would seem to provide an ideal environment for a pension-fund pooling arrangement, but the individual countries differ greatly on their pension-fund policies, and so far they haven't done much to standardize regulations.

THIS LITTLE PIGGY STAYED HOME

Looking on the bright side, keeping some local assets in each country is often a good idea anyway, regardless of whether a country requires you to do so. For example, you can state your liabilities in the local currency, and participants are generally more comfortable when they see that some of their pension-fund money is staying in the country. For this portion of your pension-fund assets, you're better off using local equity, bond or real estate managers, because they're the most familiar with the country's economic and business landscape.

If you decide not to consolidate your pension plans, you can still attain many of the desirable benefits of pooling by retaining common investment managers for each country's pension funds. This isn't a common practice yet, but remember that a global company is committed to drawing its people, ideas and leadership from the whole world. So sponsors who believe in the diversification benefits of international investments shouldn't limit their search to one country but should hire the best multinational manager they can identify to manage global equities or global bonds for each of their country plans. Although the assignments may vary from fund to fund, many of the securities in the portfolios will be similar. And while each fund will need to separately evaluate its common investment manager, you'll find your total oversight activity will be less.

Establishing commonalities among other pension service providers can also help drive your costs down. For years, many pension sponsors have used the same auditing firm for their numerous benefit plans around the world. Likewise, using the same actuarial firm in each country offers you reduced fees, consistent assumptions and valuation methods (when appropriate), common valuation reports and compliance with reporting requirements, such as Financial Accounting Standard 87. Not many sponsors are doing this yet, but if the idea intrigues you, your best bet is to approach one of the large actuarial firms, which have the most comprehensive global capabilities.

Using a common custodian to provide services offers similar advantages. The custodians are more advanced in some countries than others, so their comfort levels on cash management, accounting reliability, recoupment of withholding taxes and custodial fees vary. Again, your best bet for finding a global custodian, other than in the United States, is the United Kingdom, Canada and perhaps Australia.

As companies grow, become more global and seek to lower costs, they'll find other opportunities to manage their global pension funds more effectively. Keeping in mind the paramount fiduciary obligations, most companies are managing too many retirement plans and funds. As sponsors move toward using common providers in each country, they'll begin to press regulators to make the regulatory barriers more rational and less restrictive without compromising the country's legitimate interests. With any luck, that will translate into bigger savings on pension-fund costs.

RELATED ARTICLE: MONSANTO'S MAJOR PENSION FUNDS ...

* Cover four countries in North America and Europe.

* Total $3.5 billion in assets.

* Have a total of 62,000 participants.

* Have a full-time staff of five in the United States.

* Use part-time staff in other countries.

Mr. Wolfarth is assistant treasurer at Monsanto Co. in St. Louis.