From the November 2007 issue of Treasury & Risk magazine

Bronze AHA Award Winner in Retirement

It's not unusual for corporations to rethink their retirement strategies in light of the increased scrutiny combined with ongoing market volatility. As a result, many companies have shifted from defined benefit (DB) to defined contribution (DC) plans to put more of the financial onus on employees.

But not SAP America. With 5,000 employees and a well-funded $300 million pension plan, the North American subsidiary for German business software giant SAP AG concluded it would stick with DB. "We recognize the value of our pension plan as a competitive advantage to help us attract and retain top talent," says John McGrath, vice president and treasurer.
That decided, the company still faced challenges on the management front. High on the agenda was diversifying investments. One way it could achieve that goal and meet fiduciary responsibilities was to transfer manager selection to a third party--in this case, SEI Investment Manager Services. As a result of the change, SAP could reallocate internal resources to strategic business functions. "In an ideal world, we would have endless resources and time to research and evaluate the bevy of new investment products designed to help diversification, but that is not our business," says McGrath.

With the management model settled, SAP addressed two other risks it had identified: Its strategy of funding the plan with lump-sum payments on an annual basis led to cash flow uncertainty. And the plan's demographics profile resulted in a "relatively high rate of liability growth," says McGrath. The solution was to incorporate the asset allocation decision of the plan into overall corporate finances, allowing SAP to better understand and plan for the long-term financial scenarios surrounding contributions and cash flow, explains McGrath. "As a result, we were able to outline a strategy for making monthly contributions to the pension plan, which allowed us to continue to fund the plan while closing managing cash flow volatility," says McGrath.

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