China MNCs play catch-up on managing benefit plans

Asian and Western multinational companies (MNCs) agree on the importance of good governance and risk management of employee benefit programmes, but there are wide differences between the processes and tools they use, according to Mercer.

The consulting firm published a survey last week, in which around one-fifth of respondents were based in Asia, with 16% of the total in China and 2% in Hong Kong and a minimal percentage elsewhere in the region.

One finding was that, in terms of the implementation of their investment policy around employee benefit plans, Chinese companies are increasingly focusing on benchmarks for different asset classes, as opposed to looking at overall absolute returns.

“So they’re getting more sophisticated, but are still some way off [the approach taken by Western companies],” says Vanessa Wang, Beijing-based partner and Asia leader of retirement, risk and finance at Mercer.

Chinese MNCs also tend to be too conservative in terms of their investment targets for benefit plans, which means they will struggle to meet their goals in terms of returns, Wang tells AsianInvestor.

Nor do Chinese companies implement as robust asset/liability management (ALM) processes as Western firms, she says. That is understandable, says Wang, given that defined-benefit (DB) schemes are far less prevalent in China than in the Western world.

However, more advanced ALM techniques are starting to be used in other Asian countries -- such as Hong Kong, South Korea and Taiwan -- particularly for country-wide, government-run employee-benefit schemes. It’s very important for China to think about doing the same, given how important it is to do so, says Wang.

Asia-Pacific MNCs are in need of more effective oversight tools when it comes to managing the risk of employee benefit plans, adds Wang. In Western countries, a risk register is very popular, but such tools, while seen as important in Asia, are not widely used.

Also, those monitoring risk in the West tend to be very senior-level decision-makers, whereas in Asia-Pacific those responsibilities tend to be delegated to lower-level staff.

However, respondents from Hong Kong showed a high awareness – compared to those in China – of the importance of risk management to benefit plans.

A big difference between the approaches of Chinese and Hong Kong companies is that mainland MNCs don’t implement much market best practice beyond what is mandated by company regulations, she adds.

For example, the regulations clearly spell out the responsibilities of trustees, administrators and so on, which are carried out. But they don't meet very often, says Wang, and there's not a very mature process to enforce the management of those service providers. Yet in Hong Kong, there tends to be a lot of collaboration between trustee and plan sponsors – they meet regularly, even though company regulations don’t require it.

There are also stronger agreements with service providers in Hong Kong than in China. “In China, everyone just assumes the providers will do their job,” says Wang. “But risk management is the responsibility of the sponsor, so the company should take a more active role in terms of enforcement and monitoring.”

That said, Hong Kong still lacks board-level focus on decision-making for risk management that is seen in Western markets, she adds.

Given that only 16% of 114 MNCs surveyed globally by Mercer believe their governance structures are sufficient to meet current and future needs, this is perhaps cause for concern. Some three-quarters (77%) of respondents say they are seeking to make changes to their governance frameworks to facilitate better management of risk.

The Global Governance of Benefit Plans Survey 2009/10 was conducted between October 2009 and January 2010. Responses covered retirement-benefit plans, healthcare/medical plans and insured-risk plans.