After numerous acquisitions, Tyco International found itself with 20 distinct defined benefit pension plans at its U.K. businesses in 2003. The decentralized administration was cumbersome and lacked economies of scale, making it disproportionately expensive. Moreover, says David Charlot, director of capital planning and asset management, "the risk and effort were compounded as U.K. pension regulations were rapidly changing in reaction to significant funding deficits in many of the largest plans in the country."
In response to a clear need for change, the U.K. Common Investment Fund (CIF) was born. Over three years, Tyco's treasury led an initiative to leverage corporate investment expertise and the scale of the assets across the plans, while still providing each with the flexibility to tailor its investment policy.
When a turnkey solution couldn't be found, the company built its own program from scratch through a collaborative effort of various constituencies. Led by treasury, Tyco created the investment pooling structure with its customized investment units each chosen to fill a specific role within an overall strategy. Developing this framework included the establishment of a governance structure, administration process (now outsourced), unitization methodology, cost sharing arrangements and reporting structure.
Success hinged on wide-ranging support from corporate and business management teams. At various stages, the efforts were led by Amar Duvvur, now vice president and assistant treasurer of capital planning and capital markets, Richard Proko, now director of retirement benefits, and Charlot. Treasury and human resources staff, lead pension trustees, outside counsel, custodian, actuarial advisers, and investment advisers also played critical roles.
The CIF, with more than $1 billion under management, is governed by six trustees, three from Tyco's treasury and three from participating plan trustee boards. These trustees now offer a range of diversified investment units (representing asset classes) and are responsible for evaluating investment managers and allocating assets within each investment unit. Participating Tyco plans can choose from the investment units with help from their own advisers. This allows them to make decisions about the most suitable asset allocation in light of their plan's characteristics and risk tolerance. "We give the local schemes a cafeteria-style template of choices, and they decide how much to invest in each option," says Charlot. U.K. law prohibits companies from imposing a corporate "across-the-board" investment policy.
Tyco's efforts paid off. The CIF, coupled with plan design changes, now saves Tyco over $2 million a year in external fees and internal costs. Governance has improved while at the same time deploying in-house finance expertise to address the challenges of selecting and monitoring external asset managers. There have been intangible benefits, as well, such as developing closer working relationships between corporate staff and local trustees. "With such a decentralized pension plan structure, it is critical to establish a productive relationship with the businesses and establish treasury as a collaborative partner as well as an approval authority. The common investment fund is testament to what can be accomplished to shareholders' benefit with effective teaming." says Duvvur.
In 2007, Tyco spun off its healthcare business and electronics business leaving behind a company that owns the fire protection, ADT Worldwide, flow control, safety products and services and electrical and metal products businesses. The breakup, along with strategic plan mergers executed in tandem with the introduction of the CIF, left Tyco International with six U.K. pension plans.
"We have plans to build upon this successful implementation," says Charlot. "This will include further expanding CIF's role to make it an efficient central training and communications hub for pensions. It's a win-win, benefiting the scheme trustees, business managers and treasury and human resources professionals."