Research. Analysis. Perspective.

JUNE 2014

13093A-EN
 Research. Analysis. Perspective.

TABLE OF CONTENTS

Reforming Employee Health Care: 3

Global Challenge, Public and Private Solutions

Unlocking the Power of the 8

New Human Ecosystem

Global Investment Opportunity and the 12

Return to Normality

Navigating Pension Risk: 17

Insights From Both Sides of the Atlantic

Beyond M&A: 22
People Processes for Going and Being Global

To learn more about Mercers thinking and perspectives

on the critical issues facing organizations today, visit us
online at www.mercer.com/insights.
 Research. Analysis. Perspective.
REFORMING EMPLOYEE HEALTH CARE: GLOBAL CHALLENGE, PUBLIC
AND PRIVATE SOLUTIONS
In a world of multinational organizations and shifting
demographics, as vast cohorts of aging employees
face more and more expensive health issues,
governments are forced to review and reform their
approaches to medical coverage. But efforts at health
care reform are inevitably complex, differing from
country to country, compounded by political friction
and cross-border regulatory and cultural differences.
It is a 21st century challenge of unique scope.
JUNE 2014
As individual health care needs and expectations
increase globally due to rising levels of chronic illness,
aging, and a rising middle class, governments are
struggling to ensure equitable access to quality care
or even to provide sufficient regulation. Under the
broad banner of health care reform, multiple tactics
are being used to refinance health care, and while
there are some pockets of systemic change innovation
(for example, preventive care in the UK), short-term
cost containment often involves making employers
assume a portion of the rising costs.
STRATEGIC EMPLOYERS ARE
DEFINING THEIR ROLE IN THE
PROVISION OF HEALTH CARE, BUT
THEY ARE EXPECTING A PARTNERSHIP
WITH EMPLOYEES.
This may include increasing taxes on health insurance
(Ireland), reducing the scope of public schemes
(Canada), mandating minimum standards for health
insurance (Brazil), or increasing social security
contributions (Japan). Income and wealth testing for
access to government health services are being used
by several countries, and others (including the United
Arab Emirates) are following the lead of countries such
as Singapore and Australia to ensure appropriate health
coverage for foreign workers.
Strategic employers are defining their role in the
provision of health care in recognition of the impact
that employee health plays in business performance,
but they are increasingly expecting a partnership with
3
employees that may include defined contribution (DC)
approaches to health care coupled with the provision
of wellness, preventive, and primary care.
The most sweeping recent example of health care
reforms complexity is the passage of the Patient
Protection and Affordable Care Act (ACA) in the US.
As the last of the modern industrialized countries to
enact a national policy to bridge the coverage gap
between its private and public health care systems,
the US now faces an array of implementation
challenges. Meanwhile, its employers who have
provided affordable group access to private-market
health insurance for many Americans must cope
with a changed health care landscape. (See sidebar,
Employers and US Health Reform: The Five Factors.)
Indeed, as the ballooning costs of health care cast a
long fiscal shadow in the US, public policy has shifted,
along with responsibility for the management of cost
and risk. Over the past 20 years, the shift from defined
benefit to DC in retirement plans has provided a model
whereby the DC approach to benefits funding can
be deployed. This shift limits the open-ended costs
of traditional arrangements and gives employers
more control over future premium cost increases. As
common as the DC model is in the US with 401(k) plans,
it is less developed in the UK, many other European
countries, and Japan.
PUBLIC AND PRIVATE EXCHANGES
In the US, the influence of the DC approach is evident
in a key tenet of the ACA: the individual mandate
and the establishment of public exchanges to allow
Americans to directly purchase health insurance. Most
who obtain coverage through a public exchange will be
low-income individuals and families who will qualify for
a government subsidy. The amount of the government
subsidy will be based on a particular plan (the second-
lowest-cost silver plan) and the individual or family
will pay for that plan based on household income.
If individuals would like to purchase a different plan
at a higher or lower cost they may apply the
government subsidy to their preferred option. The
public exchanges include decision-support tools and
navigators to assist potential members in making the
best purchasing decision for their personal health
needs and financial situation.
While the implementations of the ACA will largely
result in greater access to health care for the 30 million
uninsured, the impact on employers will be more a
matter of cost on top of already high costs.
THE EMERGENCE OF PRIVATE
EXCHANGES IS AN AID IN THE QUEST
FOR BETTER COST MANAGEMENT
AND THE EVOLUTION OF THE
DC APPROACH.
Fortunately for employers, the emergence of private
exchanges is an aid in the quest for better cost
management and the evolution of the DC approach.
Indeed, private exchanges allow employers to offer
ACA-compliant health insurance with a new efficiency,
providing access to a range of health plans along with
a full suite of traditional (for example, medical, vision,
and dental) and supplemental benefits. Meanwhile,
the private-exchange mechanism can greatly facilitate
the transition to a DC model for benefits a key
value proposition for employers while empowering
employees to build their individual benefit risk portfolios
a clear value to themselves and their families.
The private-exchange market is growing quickly, as a
number of players, including Mercer, have introduced
private marketplaces for both large and small firms.
Mercer MarketplaceSM, for example, includes more than
20 types of traditional and supplemental products and
is available to employers with as few as 100 and as
many as 100,000+ employees. (For more information,
see sidebar, More About Mercer Marketplace.)
For employers and employees, a private-exchange
model delivers on the value proposition vital to both
groups by allowing both the employer and the employee
to realize the economic benefit of negotiated costs and
services and by providing overall cost transparency,
including full visibility of the employers contribution to
the employees benefit costs. Together, these have the
combined advantage of creating a positive perception
for the organization and its workforce.
4
EMPLOYER/EMPLOYEE VALUE
It is worth re-emphasizing the bottom-line value
proposition for employers. Cost efficiencies of the
private exchanges are derived from the streamlined
administrative aspects, as well as from the competitive
brokering and bundling of all benefit products.
Efficiencies also accrue as employees benefit-buying
behavior leads them to less costly plans.
As for how the private-exchange model provides
employee value, there are some clear advantages, but
it is important to note that employees tend to have
three buying profiles when it comes to making benefit
choices. There are those who like to do it myself,
those who prefer that someone do it with me, and
those who want the organization to do it for me. The
private-exchange strategy works for all three of these
constituencies, empowering each of them to build their
own portfolios of personal protection.
Support for these employee profiles is achieved through
a combination of the intuitive, user-friendly nature
of a private-exchange technology platform and the
personalized service of the benefit counselors staffing
the call center. Both methods provide greater visibility
into the costs and financial options facing employees.
For many, this education process will lead to the
realization that they can reduce their medical coverage
and costs while still protecting their out-of-pocket
exposure by moving to a consumer-directed health plan
or a plan with supplemental medical gap coverage. It all
points to an enhanced employee appreciation of their
employers financial and service commitment to them.

5
EMPLOYERS AND US HEALTH REFORM: THE FIVE FACTORS

The key aspects of the ACA have become well known to This will continue into 2015, when employers must
most US employers, but HR executives are still grappling provide benefits to everyone working 30 or more
with a few additional issues. Here are five key factors for hours per week, satisfy minimum plan design
employers to focus on: requirements and affordable contributions, or
be subject to Shared Responsibility penalties. As
1. THE HOURLY THRESHOLD employers quantify the impact of the law on their
For many companies, the question of providing health overall health benefit costs, many have become
benefits versus managing hourly workers to less than the motivated to embrace bold plan design strategies.
30-hours-per-week eligibility threshold is a key issue, and Mercers research and interviews with HR executives
Mercers discussions with employers have revealed that have revealed a trend toward more companies making
many of them have not addressed it. Beginning in 2015 consumer-directed health plans, or CDHPs, their
(the original deadline of January 1, 2014, was extended default or core plans, and better communicating
to allow employers more time to comply), companies the advantages of the CDHP option, from which
with 50 or more full-time equivalent employees will face employees can buy up to higher benefit levels.
Shared Responsibility penalties if they do not offer a
medical plan that meets minimum plan requirements 4. DRIVING IMPROVED HEALTH
and with affordable contributions for all who work at Employers have long been focused on improving the
least 30 hours per week. overall health of their workforce. Wellness and health
management programs are prevalent strategies, as
Regardless of their strategy, employers will have to is favoring health plans with better-coordinated care
rigorously track their employees hours, relying on management for high-cost patients. More employers
solid databases to document those hours. The data are now willing to reward health performance through
will be critical to prove what they may or may not owe outcomes-based incentives, such as offering lower
in Shared Responsibility penalties based on IRS data premium contributions for nontobacco users or
calculations after the close of 2015. rewarding employees for achieving or maintaining
2. RETHINKING WHERE AND HOW CARE IS DELIVERED specific health status targets, such as body mass index
or blood pressure.
Market innovations such as telemedicine, surgical
centers of excellence, and medical homes are starting While it is challenging to show the savings from
to transform the health care delivery system. Medical improved health, the largest employers are the
homes, also known as patient-centered medical homes, most likely to have formally measured the return on
are team-based health care delivery models led by investment of their health management programs
physicians and include physician assistants and nurse (46% of employers with 20,000 or more employees),
practitioners. The goal is to provide comprehensive and according to Mercers 2013 National Survey of Employer-
continuous medical care to patients in order to achieve Sponsored Health Plans. Nearly nine out of 10 of these
optimal health outcomes. The time to consider these employers say that their programs have had a positive
innovations, along with possible investment in onsite impact on medical plan trend.
medical clinics (which can reduce absenteeism and
further control cost), has never been better. 5. PLANNING AND COMMUNICATING
This includes planning for new federal reporting
3. RESETTING BENEFIT VALUES requirements of the ACA, as well as revising Health
Benefit plan design remains a strategic question for Insurance Portability and Accountability Act privacy
many employers. Each year since the law was signed into and security policies and procedures in compliance
effect, employers have faced compliance requirements with final omnibus regulations. In addition, it is
that have added cost to the health benefits. The important to prepare and distribute required employee
elimination of benefit maximums and 100% coverage for communications for example, summaries of benefits
preventive care are several examples. and coverage, exchange notices, summary plan
descriptions, and summaries of material modification.

6
MORE ABOUT MERCER MARKETPLACESM
Mercer MarketplaceSM includes more than 20 types of
traditional and supplemental products and is available to
employers with as few as 100 and as many as 100,000+
employees. Mercer Marketplace which launched in
2013 and currently works with 67 employers to provide
medical and other benefits to 282,000 employees,
retirees, and family members was developed based on
three concepts:
1. Most people are over-insured for medical they buy
the most expensive plan they can afford to protect
against their fear of the unknown.
2. Given easy-to-understand decision-support tools,
people will buy down their amount of medical
coverage and make smarter financial decisions based
on their own personal needs.
3. If all benefits are packaged together not just
medical to make the most economical use of the
amount of money available for the DC provided by
the employer, then the employee will have a much
better shopping experience.
Mercer Marketplace facilitates employer-sponsored
delivery of a total benefits package to employees, with all
the advantages cited above. These benefits are provided
and managed through a state-of-the-art technology
platform that includes intuitive, user-friendly online
enrollment applications coupled with decision-support
tools for calculating the costs and types of plans (for
CONTACTS
Tracy Watts (Washington DC) Eric Grossman (Norwalk, CT)
Senior Partner, Health & Benefits Senior Partner, Health & Benefits
+1 202 331 5252 +1 203 229 6105
tracy.watts@mercer.com eric.grossman@mercer.com
example, preferred provider organizations and high-
deductible CDHPs) that will best meet the needs of
individual employees and their families.
Employers who join Mercer Marketplace will also
have the option to offer easy access to individual
medical plans both on and off the public exchanges
for their employees and retirees who do not qualify for
sponsored plans. This will be provided by GetInsured,
a California-based private company whose technology
platform powers state government exchanges and is a
federal web-based entity.
The enrollment protocol is also supported through a call
center staffed by seasoned, salaried, and licensed benefit
counselors, thus relieving pressure on HR and benefit
staff within the organization, who are often challenged
to counsel employees on benefit specifics and choices.
In addition to providing enrollment functionality and
technology support, the exchange offers streamlined
administration of benefits, including integration with
payroll systems, along with eligibility management
and billing services. This drives efficiencies to reduce
employer and employee costs.
Learn more about Mercer Marketplace.
Learn more about Mercers other exchange solutions.
Amy Laverock (New York)
Partner, Health & Benefits
+1 212 345 7270
amy.laverock@mercer.com
7
 Research. Analysis. Perspective. JUNE 2014

UNLOCKING THE POWER OF THE NEW HUMAN ECOSYSTEM

Today, more than one-third of employers worldwide
cannot fill all available jobs. Yet an estimated 202
million eligible workers are unemployed globally.
Employers, individuals, and societies alike are
challenged by the disconnect between the skills
people have and the skills employers need.
The prognosis seems grim, but some solutions are
already at hand and more are being developed
day by day. Orlando Ashford, president of Mercers
global Talent business and former chief HR and
communication officer at Marsh & McLennan
Orlando
Companies, has seen firsthand how some of these Ashford
solutions are already being implemented by leading
companies and other stakeholders. In his new book,
Talentism: Unlocking the Power of the New Human companies that are going to win from those that are
Ecosystem (2014, Mercer), Ashford shares new going to lose is the ability to identify, attract, position,
developments in sourcing and developing talent, pay, retain, and motivate people.
articulates a compelling vision for the future, and
Q: IS THE TRADITIONAL ROAD MAP FOR CAREER
describes how employers and individuals can win
SUCCESS STILL VALID?
in the new ecosystem.
O.A.: While I believe that people and organizations will
In the following exclusive interview with
continue to follow traditional paths to finding jobs or
Mercer/Journal, Ashford shares some of the
finding people, respectively, for the foreseeable future,
important insights from his book.
I also think that we will see increasing use of a multitude
Q: YOUR NEW BOOK IS CALLED TALENTISM. of other approaches.
WHAT IS TALENTISM AND WHY IS IT IMPORTANT
TO EMPLOYERS? The ongoing shift in the employer/employee contract
is one factor that is already prompting changes in how
ORLANDO ASHFORD: Talentism is a term coined by individuals plot their careers. As organizations pull
Klaus Schwab, founder and executive chairman of the back from providing all the benefits and services they
World Economic Forum. It refers to the fact that human once did from health and retirement benefits to
capital is the most critical asset for todays businesses career development individuals are becoming more
even more important than capital, raw materials, mobile, perhaps working for one company for three
or technology. Today, what differentiates those to five years and another for the next five to 10 years.

8
They are also thinking of themselves less in terms of a
particular job and more in terms of the skills that they
have amassed through education, experience, and life
itself, and where they can best apply those skills on the
global open-labor market.
At the same time, corporations are going through a
significant evolution in terms of how they approach
sourcing, positioning, and developing talent. Newer
technologies, such as social media crawling,
psychometric testing, gamification apps, and online
video interviewing, are allowing organizations to
assess an individuals particular skills and capabilities
much more efficiently than they can through a
traditional interview.
Q: CAN YOU GIVE AN EXAMPLE OF HOW THESE NEW
TECHNOLOGIES ARE HELPING INDIVIDUALS AND
EMPLOYERS CONNECT?
O.A.: Lets say that a persons LinkedIn profile indicates
that she is a 20% match for a particular job. If she
indicates interest in the job, the employer can then
prompt her to answer a few questions, the results of
which might indicate that shes now a 40% match
for the job. Next, the employer can send her a test
or ask her to play a game that gives insight into her
skills, capabilities, or leadership traits. Now, perhaps
she is a 60% match for the job. Finally, she can be
prompted to point her phone at herself and answer a
few more questions in a video interview. Together these
technologies have taken the candidate 80% to 90%
through the assessment process before she has ever
been brought into the office.
Q: IN YOUR EXPERIENCE AS AN HR LEADER AND A
TALENT CONSULTANT, DO YOU SEE RESISTANCE TO
THESE TECHNOLOGIES AMONG BUSINESS LEADERS
AND HR PROFESSIONALS?
O.A.: Some of these technologies, such as psychometric
tests, have existed in different forms for 40 or 50 years.
But individuals like to have control over who they hire,
and certain paradigms and filters exist in our minds that
influence how we interpret people as we sit across from
them. So if the results we get from these technologies
counter our gut instincts, we tend to ignore them and fall
back on the idea that we are better predictors of future
job performance than those technologies. We have
proved, however, that individuals tend to be inefficient
predictors of capability and talent, and that these

9
technologies, particularly when stacked on top of one
another, are much more efficient.
What I think will drive us to be more accepting of
these different tools is the reality of the talent shortage
and the resulting war for talent. Today, 202 million
people globally are actively looking for work, yet
35% of companies in a recent study said they cannot
fill all available jobs. In some parts of Asia, countries
have worked really hard to accelerate the number of
people coming out of college, but corporations say
that less than 10% of those individuals are ready for the
workplace. So the inefficiency of the yield coming out of
current education systems and current assessment
systems coupled with the expansive need for ready-
made talent or talent with the appropriate potential are
driving organizations to embrace some of these other
talent-assessment techniques.
Q: WHAT DOES THE FUTURE HOLD FOR TALENT IN
TERMS OF HOW INDIVIDUALS DEVELOP IT AND HOW
ORGANIZATIONS ACQUIRE IT?
O.A.: Some of the tools I just described will allow people
to be much more purposeful in assessing themselves
and comparing themselves against opportunities. For
example, instead of following an accidental career
path based on what your parents do or something your
guidance counselor happens to say, you have the ability
to assess your own competencies and think about how
you can apply them.
These tools will also allow you to determine what
skills will be required for you to be whatever it is you
want to be. For example, I know that if I want to be a
lawyer, I should go to law school, or if I want to be a
doctor, I should go to medical school. But if I want to
be a marketing executive or the CEO of a company,
historically it has been harder to understand exactly
what I need to do to prepare. In the past, the only
answer has been to get as good an education as
possible. So if I go to Harvard or Yale versus some
other school, for example, the likelihood of my being
whatever I want to be maybe goes up.
Now, with more customized assessment tools at
my disposal, I am empowered to identify my own
competencies, identify the skills needed to achieve my
goal, and, by comparing these, create a list of any skills
gaps and develop a plan for building them.
Meanwhile, corporations can use these tools to become
empowered with more information about individuals,
which will help them identify who they want to attract
to their organization regardless of proxies such as
what school an individual attended.
THERE IS A CHANGE IN THE IDEA
MANY OF US HAVE BOUGHT INTO FOR
A LONG TIME THAT THE QUALITY OF
EDUCATION IS A PROXY FOR TALENT.
One of the changes to the human ecosystem already
in play has to do with the rise of massive open online
courses and the fact that major universities are placing
huge segments of their curricula online. In speaking
with a group of executives recently, I asked how they
would compare two potential job candidates: one
who attended MIT in person and one who completed
the same courses online. One member of the group
believed that the person who lived on campus would
be a better candidate because he not only completed
the coursework but also learned how to live alone,
manage sharing space with others, engage professors
and even do his own laundry. Everyone agreed that
this type of social development is important. But then I
asked whether the groups opinion might change if they
learned that the person doing the coursework online
lived in a remote village, was raising two children,
taking care of an elderly parent, and had to walk to a
central location for computer access in order to do the
work and get the degree.
The point is that the human ecosystem is becoming
much broader to include those who have not had
the ability to participate in the traditional education
process because of financial constraints, where they
live, or socioeconomic conditions. Now, talent will be
allowed to play through, and some corporations are at
a point where theyre ready to accept talent irrespective
of where it came from.
Of course, the social implications are substantial. As a
person who supports open access for all, I am excited
about how this change may expand opportunities to
broader populations. But as the father of two boys for
whom I am working very hard to pay for expensive
10
prep schools and tutors so they can ideally go to top
universities and have advantages in the labor market,
I am faced with a conflict. This new idea of where we
might look now to source talent is a change in the idea
many of us have bought into for a long time that the
quality of education is a proxy for talent. So even after
my sons get a wonderful education, the new human
ecosystem may say, Thats great that you went to these
schools, but these other people are just as talented.
Q: WHAT DO YOU HOPE BUSINESS AND HR LEADERS
WILL LEARN FROM YOUR BOOK?
I want them to understand that change is coming
that alternative approaches to and technologies for
talent sourcing and development already exist. Senior
leaders and HR have to get to the point of putting more
credence in these assessment tools, because the data
suggest that they are more efficient and effective in
identifying and assessing capability than people are.
When you need to hire en masse, or in economies that
you are moving into for the first time, you will need to
rely on some of these other approaches to get more than
your fair share of the available talent and be able to win.
Those leaders and companies that embrace this first and
get out in front will have a competitive advantage.
Think about Google, which has an enviable
employment brand and could probably get a higher
yield from any top university than any other company.
Nevertheless, it has seen where the world is going and
has broadened its talent pool to include those who lack
traditional degrees because the company believes it will
be better served by having people who are talented,
capable, and diverse in the broadest sense. If you have
a premier employee-value organization choosing to
embrace this change and broaden its recruiting pool,
then the rest of us in HR and talent acquisition in other
CONTACTS
Orlando Ashford (New York) Barbara Marder (Baltimore)
President, Talent Senior Partner, Talent
+1 212 345 4429 +1 410 713 0859
orlando.ashford@mercer.com barbara.marder@mercer.com
organizations better take heed, because if we wait too
long, we will be at a disadvantage.
Q: WHAT DOES THE NEW HUMAN ECOSYSTEM
MEAN FOR OTHER STAKEHOLDERS, SUCH AS
EDUCATIONAL INSTITUTIONS AND GOVERNMENTS?
In the book, I use the word ecosystem because no
company or type of entity owns an ecosystem. While
the book is directed primarily at corporate stakeholders
who are feeling a lot of pressure to find the critical talent
they need as they execute their strategies and take their
businesses global, educational institutions at all levels
also have a part in this. The tools I described could be
introduced not only by organizations, but also by high
schools, colleges, or community organizations to
allow individuals to assess their skills, determine what
career path might be the best fit for them, and map
out what they want to do from a developmental or
educational perspective.
Moreover, aggregating the individual data not only can
help organizations be much more precise in deciding
where they want to build plants or how they want to
attract certain talent but also can help communities and
educational institutions as they plan and organize. You
can see how all these pieces come together to create an
ecosystem that thinks about talent very differently.
Learn more about the book, Talentism: Unlocking the
Power of the New Human Ecosystem.
11
 Research. Analysis. Perspective. JUNE 2014

GLOBAL INVESTMENT OPPORTUNITY AND THE RETURN TO NORMALITY

It is widely viewed that 2013 marked the end of the Indeed, the performance of most emerging-market
period of soft global growth following the global economies will be in their own hands. But those
financial crisis, and that global growth should pick up in economies that fail to improve their efficiency and
2014 and continue doing so for a couple of years. This competitiveness could be challenged by rising US
will eventually return most economies to full capacity, bond yields over the next few years. Those that
with government deficits also back under control. The respond could be rewarded with stronger economies,
return to full capacity represents a return to normality, currencies, and stock markets. On balance, weak
not a deviation from it. Meanwhile, inflation is likely to sentiment and valuations have set the bar very low,
stay low, with wage growth only picking up slowly. and most countries should be able to outperform these
weak expectations over the medium term.
But while economic activity begins to appear more
normal, the same cannot be said of monetary policy.
The key central banks are unlikely to raise interest rates,
while the Bank of Japan and the European Central Bank
may provide further stimulus. However, with the US
Federal Reserve expected to end its quantitative easing
(QE) new bond purchases and unemployment falling
below 7% in the UK, attention will switch to when
interest rates will rise.
Equity markets have been anticipating better
economic conditions during the past few years, with
price increases caused by rising multiples rather
than rising earnings. While multiples still have the
potential to expand (especially outside the US), given
the backdrop of still-low interest rates, investors will
need to see earnings growth pick up in order to push
markets higher.
Assuming this happens, profit margins can be expected
to remain high until wage growth eventually starts to
eat into profits in a few years time. Bond markets have
also started to anticipate a return to normality with real
and forward yields rising after the QE game plan was
announced in May 2013. Yields can be expected to rise
further, with no expectation of a bond market crash, nor
any reason to assume that bond markets are in a bubble.

12
RISK AND EXPECTATION
The key risk in 2014 is whether markets (bond and
equity) will be able to withstand the Feds reduction in
new bond purchases and the possibility of interest rate
increases in 2015. As for other risk-related questions:
Will the economic momentum visible now be sustained
as the year progresses? Will profit growth pick up
enough to meet heightened expectations? Will China
reforms happen? Will emerging markets in general
cope with a higher yield environment?
Here are some expectations for the days and
months ahead:
The global economy will strengthen, with companies
increasing their spending on labor and capital.
Interest rates will remain exceptionally low, but there will
be a shift away from easing and inflation will stay low.
Equities will perform well, although modestly rising
bond yields will put the onus on earnings rather than
multiple expansion. Returns will be much lower than
seen in 2013.
Core bond yields will rise modestly, although peripheral
and non-government bonds should do better.
Most emerging-market economies and markets will
outperform soft expectations, with strong export
growth boosting overall growth and profit margins
while reducing external imbalances.
Key risk will relate to whether bond yields rise only
modestly or whether the end of cheap money
causes more material bond market weakness,
undermining all asset classes.
Despite the risks, there are a number of reasons for
retaining an optimistic economic outlook. For example,
the pace of fiscal contraction across the developed
world is likely to ease gradually over the next few
years, reducing what has been a material headwind
for economic growth. And with inflation remaining
stubbornly, if not worryingly, low, monetary policy is
likely to remain accommodative for some time to come.
At the same time, banks, consumers, and businesses
in the US are generally in good or improving financial
health. Indeed, the debt-service cost to cash-flow ratio
for US households is at multi-decade lows, according
to published research, and high-quality businesses
retain high levels of cash. In addition, the shale oil and
gas revolution taking place in the US should support
growth via lower energy prices. Meanwhile, successful
implementation of structural reforms in China (following
the Third Plenum) has the potential to continue the
transformation of its economy and may eventually lead
to a profound re-ordering of the world economy.
IMPLEMENTATION OF STRUCTURAL
REFORMS IN CHINA HAS THE
POTENTIAL TO LEAD TO A
PROFOUND RE-ORDERING OF
THE WORLD ECONOMY.
Still, the global economy remains fragile and key risks
to the burgeoning recovery include:
Debt levels across much of the developed world
remain extremely high. (It remains to be seen
whether a mixture of experimental monetary policy
and gradual fiscal contraction can bring about a
beautiful reflationary deleveraging, as Ray Dalio of
the investment firm Bridgewater Associates wrote in
his well-known paper, How the Economic Machine
Works, whereby debt levels are gradually reduced
through a benign combination of moderate inflation
and growth.)
The long-term implications of QE and sustained
monetary stimulus remain unclear. Inflation has, to date,
been confined to asset prices; if an economic recovery
does take hold, will inflation expectations prove hard
to contain? In addition, will the improving economic
environment ultimately result in asset-price bubbles?
Can China and other major emerging markets
rebalance their economies and implement the
necessary structural reforms in the face of rising labor
costs and the gradual withdrawal of cheap finance?
Instances of geopolitical and social tensions are
becoming common. Will societal or regional conflicts
have ramifications for global investors in 2014?
13
These broad themes and risks provide a framework for INCORPORATE MULTIPLE DRIVERS OF RETURN IN THE
reviewing portfolios. Having seen very strong returns GROWTH PORTFOLIO
across a wide range of asset classes in recent years, The strong returns achieved across a wide range of
very few markets now look unambiguously cheap. In asset classes in recent years increase the importance
such circumstances, there is merit in being patient and of incorporating a diversifying mix of return drivers in
adopting a long-term mindset. Investors would be well the growth portfolio. Real assets offer the prospects
advised, in addition, to focus on efficiency in portfolio of a diversifying return stream, a premium to reflect
construction and in the harvesting of market returns, as their illiquidity, and, in some cases, a degree of inflation
well as on building in robustness to a range of economic sensitivity. Investors should consider real estate,
and market outcomes. infrastructure, and agriculture/timber assets that offer
Specifically, investors should consider the following a long-term income stream and a positive real yield.
investment ideas. In addition, hedge funds can provide investors with
BE MORE DYNAMIC access to a range of nontraditional return drivers,
including carry momentum, value, illiquidity, deal risk,
A high degree of uncertainty remains around the path
and potential impact of monetary policy, the growth
trajectory of developed and emerging economies, and
the direction of markets. While volatility was subdued in
2013, bouts of volatility are likely over the coming years
as markets respond to policy changes and economic
news. A degree of dynamism is therefore likely to be
helpful, both for return enhancement and as a risk
management tool.
The potential for economic and market volatility should
create the conditions for attractive opportunities in the
coming years. And if sentiment remains pro-risk for a
sustained period, it seems likely that asset bubbles will
emerge. Investors should remain vigilant about these
risks and opportunities.
Investors may consider dynamically managing their
currency exposure over time. The US dollar is likely to
strengthen against most currencies this year, supported
by strong economic growth, a further reduction of new
bond purchases, and the possibility of the Fed raising
interest rates in 2015. Investors should therefore take
the opportunity to review their currency-hedging
policies and practices accordingly.
Investors should also look to put in place the right
governance structure and processes to enable effective
decision-making. This might include the use of flexible
multi-asset strategies such as multi-strategy hedge
funds, multi-asset credit strategies, and diversified
growth funds. In addition, trigger-based de-risking
and liability-hedging strategies will help liability-driven
investors manage risk in a volatile market environment.

14
and complexity risk, among others. Such exposures
can be captured either via traditional hedge-fund
strategies or via less costly, systematic alternative risk
premia strategies.
ENSURE THAT EQUITY PORTFOLIOS ARE STRUCTURED TO
DELIVER LONG-TERM SUCCESS
As noted, the equity market rally in 2013 was driven
largely by multiple expansion; for equity market
performance to be sustained in 2014, corporate earnings term relationships with investment managers.
growth will be required. Mercer expects global earnings
growth, which has been weak over recent years, to
pick up on the back of the global economic recovery
(click here to visit Mercers Strategic Themes and
Opportunities page).
The gradual withdrawal of monetary stimulus (which
is likely to lead to a greater degree of dispersion in
company performance), coupled with a less macro-
dominated economic environment (with lower
correlations between stocks), should be conducive to
active management, best achieved through strategies
that have a high active share.
Investors should try to capture secular trends in portfolios.
This could include tilts to emerging and frontier markets as
well as the use of long-horizon thematic growth managers.
While many such strategies have struggled in recent years
given the markets relatively short-term focus on macro
developments long-term thematic growth strategies
remain a sensible way to build in some exposure to a range
of themes that may have a significant long-term impact on
financial assets.
THE WEAK PERFORMANCE OF
EMERGING MARKETS OVER THE
COURSE OF 2013 OFFERS LONG-
TERM INVESTORS AN ATTRACTIVE
ENTRY POINT.
The weak performance of emerging markets over the
course of 2013 potentially offers long-term investors an
attractive entry point. And alternative indexation (often
called smart beta) offers low-governance investors
a cheap and systematic approach to capturing some
well-known style factors, such as value, size, and low
volatility. Investors need to understand what they are
investing in.
Meanwhile, manager monitoring can be improved.
A better understanding of the drivers of portfolio
performance, more focus on evaluating whether a
manager is staying true to its stated philosophy, and
an assessment of the costs and benefits of portfolio
turnover should contribute to more productive long-
BUILD BETTER BOND PORTFOLIOS
From the perspective of defensive portfolios, developed-
market government bonds remain set to deliver low, or
even negative, real returns. These assets will continue
to play an important role in hedging liability relative
risk for liability-driven investors, but absolute-return
investors should consider the rationale and sizing of any
such holdings. As for investment-grade corporate bond
allocations, buy and maintain approaches offer a more
efficient way of harvesting credit beta than index-based
strategies (both passive and active) by reducing costs
and improving diversification.
From the growth-portfolio perspective, credit markets
(from corporate bonds to high-yield and emerging-
market debt) have seen significant in-flows in recent
years. As a result, prospective returns are relatively
uninspiring, perhaps with the exception of emerging-
market debt. Multi-asset credit strategies represent an
attractive portfolio construction proposition, offering
the benefits of rotation across the credit spectrum
to reflect prevailing market conditions and duration
management (to varying degrees). Notably, one of the
few genuinely attractive return opportunities (across
all asset classes) remains in the European private debt
markets, with opportunities in corporate, real estate,
and infrastructure lending.
BUILD SUSTAINABILITY INTO THE INVESTMENT FRAMEWORK
A significant body of evidence now suggests that
economic agents (at all stages of the investment
decision-making chain) have become increasingly short
term in their outlook and behavior. Long-term investors
may be able to capture a premium by adopting a longer-
term mindset than other investors both in the way that
they interact with their investment managers and in the
way they build portfolios.
15
Part of the answer to building long-term sustainable This does not constitute an offer or a solicitation of an
portfolios will include the consideration of the major long- offer to buy or sell securities, commodities, and/or any
term risks and opportunities that may have an impact other financial instruments or products or constitute a
over a multi-decade time horizon. Key mega-trends solicitation on behalf of any of the investment managers,
include climate change/resource scarcity, technological their affiliates, products, or strategies that Mercer may
advances, demographic trends, fair capitalism, and the evaluate or recommend. For the most recent approved
emergence of China as a global power, among others. ratings of an investment strategy, and a fuller explanation
of their meanings, contact your Mercer representative.
While it is far from obvious how investment portfolios
should be structured to respond to the opportunities Learn more about global investment opportunities.
and risks that arise from these issues, potential solutions
already exist in a number of these areas. For example,
private-asset strategies focused on sustainable
investment in private equity, infrastructure, timber, and
agriculture seek to address the challenges following from
the climate-change/resource-scarcity theme. Mercer
also believes that benefits will accrue to investors that
are able to utilize their ownership rights and harvest an
engagement alpha. Above all, taking the long view in
investment decisions, whenever possible, is as important
as it is challenging.
Information contained herein has been obtained from
a range of third-party sources. While the information is
believed to be reliable, Mercer has not sought to verify it
independently. As such, Mercer makes no representations
or warranties as to the accuracy of the information
presented and takes no responsibility or liability (including
for indirect, consequential, or incidental damages) for any
error, omission, or inaccuracy in the data supplied by any
third party.

CONTACTS

Rupert Watson (London) Terry Dennison (Los Angeles) Phil Edwards (Bristol, UK) Hendrie Koster (Sydney)
Senior Partner, Investments Senior Partner, Investments Principal, Investments Principal, Investments
+ 44 20 7178 3767 +1 213 346 2322 +44 117 988 7548 +61 2 8864 6306
rupert.watson@mercer.com terry.dennison@mercer.com phil.edwards@mercer.com hendrie.koster@mercer.com

16
 Research. Analysis. Perspective.
NAVIGATING PENSION RISK: INSIGHTS FROM BOTH SIDES OF THE ATLANTIC
Plan sponsors recognize the financial threat pension
risk poses to their businesses, and many are seeking
solutions to resolve funding deficits and mitigate the
effects of market volatility. This article explores the
current financial health of defined benefit (DB) plans
on both sides of the Atlantic and investigates the
options available to manage and mitigate pension risk.
The funded position of most DB plans on both sides of
the Atlantic improved considerably in the 12 months
prior to December 2013. Strong equity returns in 2013,
along with higher bond yields, combined to increase
the financial position of pension plans in the US,
Canada, and the UK.
JUNE 2014
In the US, the funded ratio of assets over liabilities for
the S&P 1500 was 87% at the end of February 2014,
which is a significant improvement from 74% at the end
of December 2012. In Canada, plans are well funded,
with the funded ratio of Standard & Poors (S&P)/
Toronto Stock Exchange (TSX) at approximately 98% as
of December 31, 2013. In the UK, good equity returns
have increased pension plan assets. However, UK plan
liabilities are inflation-linked and an increased inflation
outlook has put a drag on funded status. The ratio of
assets to liabilities of FTSE 350 plans was 85% at the
end of February 2014.
Despite the improved funding position, many pension
plans on both sides of the Atlantic still face significant
funding challenges, and as market volatility continues,
many are still exposed to significant downside risk. Plan
sponsors that wish to address pension risk face a key
decision: whether to retain or transfer the risk.
TO RETAIN OR TO TRANSFER
Developing and implementing a risk retention and
management or risk transfer strategy potentially
may add significant shareholder value, but doing
so can be a significant undertaking. Although the
improved funded status of pension plans means that
a pension risk transfer is now within the reach of more
organizations, the best course of action will depend
on the particular circumstances.
To ensure that the right decisions are made, plan
sponsors must understand the risk exposure of the plan,
the risk management objectives, the solutions available,
and the commitment needed to carry them out.
Before embarking on a pension risk management or risk
transfer exercise, plan liabilities should be accurately
17
measured using the best estimates available. It is also Exhibit 1 illustrates some of the tools available for
critical to understand the risk exposure of the pension managing and transferring pension risk, though
plan and evaluate the threats these risks present to the risk transfer and risk management options will
stability of the plans and to the organization. vary by jurisdiction. (Please consult your Mercer
representative for information on the options available
Once the risks are understood, the risk management in your location.)
objectives should be clarified and a decision should
be made regarding whether to remove pension risk
entirely or keep certain risks on the balance sheet.
Much of this decision will be based on how cost-
effective it is to transfer or retain risk, or to implement
a combination of the two.

Exhibit 1: Tools for Managing Pension Risk

FAMILY OF TOOLS

Retain the risk Transfer the risk

Dynamic
Plan re-design Term vested lump sums Retiree longevity swap
investment policy

Best-in-class
Funding strategies Retiree lump sums
growth portfolio

Letters of credit Improve hedge ratio Retiree buy-in

Guaranteed liability-driven Termination and buyout

investment products

Borrow to fund

Dynamic
de-risking strategy

18
RETAINING PENSION RISK
Usually the simplest option for dealing with deficits is
to retain and manage the risk internally, and for some
plan sponsors this is the only option. They may decide
to manage the risk internally in the short term with a
view to transferring to an insurer at a future date.
The attractiveness of risk-retention solutions will vary
depending on where the plan is based and its funding
position. However, the range of options include:
BORROW TO FUND: Given current low interest
rates, sponsors may borrow at attractive levels to
finance the plan.
ASSET-LIABILITY MATCHING: Liability-driven
investment (LDI) strategies involve switching from
equities into bonds with duration similar to that of
the liabilities.
DYNAMIC DE-RISKING: Under a dynamic de-risking
strategy, a glidepath is set to take the plan toward
full funding. Triggers are set at predetermined
funding levels to transfer equities to bonds, and
gradually de-risk the plan. (Mercers Dynamic De-
risking Solutions site provides further information.)
BEST-IN-CLASS GROWTH PORTFOLIO: By
carefully allocating part of the portfolio to growth
assets, plans can use investment returns to
improve funding positions.
SYNTHETIC INSTRUMENTS: The use of synthetic
instruments, such as derivatives, can enable
hedging complex liabilities and/or freeing up
capital to optimize risk and return.
TRANSFERRING PENSION RISK
Momentum in the pension risk transfer market
is building. The number and size of pension risk
transfers have increased significantly on both sides of
the Atlantic in the past five years, with some very large
jumbo deals taking place in the US in 2012 and,
recently, a 3.6 billion bulk annuity deal in the UK.
Even in Canada, where the annuity market has been
static at around C$1 billion per year, 2013 broke all
records with C$2.2 billion of annuities placed.
Plan sponsors have three main options for transferring
pension risk: offering a cash-out to plan members, a
full pension buyout, or a partial risk transfer, which
involves removing a portion of the assets and liabilities
from a plan usually through the purchase of a group
annuity contract with an insurer.
PREPARING FOR A RISK TRANSFER EXERCISE
1. Decide what resources are needed.
2. Take legal advice and consider appropriate
fiduciary process to manage the exercise.
3. Communicate with plan members and
ensure strong links exist between all
stakeholders.
4. When considering a buyout or buy-in, get
an indicative price from an insurer.
5. Work on issues to reduce cost for
example, sectioning the membership.
6. Look at existing assets and possible
changes to investment strategy to ensure a
cost-effective risk transfer.
SEVEN CASH-OUT CONSIDERATIONS FOR
DB SPONSORS
1. Position the lump sum cash-out option as
another choice for participants to consider.
2. Consider optimal populations to whom the
offer should be made.
3. Provide effective and personalized
communication to participants to help guide
them through their decision-making process.
4. Analyze data to ensure that it is complete
and accurate.
5. Prepare to answer questions from a
variety of stakeholders about the business
rationale behind the cash-out offering.
6. Understand the fiduciary responsibilities as
the plan sponsor.
7. Choose a provider that can effectively
execute the entire cash-out program.
19
However, a cash-out known as an Enhanced Transfer
Value (ETV) in the UK and Ireland allows sponsors
to reduce the size of the pension plan obligations by
offering members a lump sum in lieu of plan benefits.
A full pension buyout involves transferring the assets
and liabilities of the plan from the fiduciaries to a
third party, most likely an insurance company, which
then incurs full responsibility for meeting the plan
obligations. (In comparison, a buy-in differs from a
buyout in that the sponsor retains responsibility for the
plan, but the economic obligation to meet payments to
insured plan members is transferred to an insurer.)
For many plan sponsors, the costs associated with a
buyout have been an obstacle to transacting. However,
when the full costs of retaining the plan (including
administration fees and management costs) are
considered, a buyout may look more attractive.
To help plan sponsors assess the cost of a buyout,
Mercer launched the Global Pension Buyout Index,
which indicates the potential cost of transferring
pension liabilities to an insurer, how the potential costs
differ between countries, and how they move over time.
The index averages four underlying indices that reflect
the buyout markets in the US, Canada, the UK, and
Ireland. There is also Mercer pension buyout information
specific to the US, Canada, the UK, and Ireland.
Addressing the full considerations of each of these
options is beyond the scope of the article; however, the
following sections explore their development in the US,
Canada, the UK, and Ireland.
US
The US witnessed some jumbo risk transfer and cash-
out deals in 2012. These included Fords lump sum
payout to plan members, General Motors $26 billion
risk transfer, and Verizons October 2012 $7.5 billion
partial buyout. In 2013, pension risk transfer deals
continued at a similar pace, albeit not at the scale of the
jumbo 2012 risk transfers.
Conditions for pension risk transactions remain good
in the US. Due to increasing interest rates through
2013 and favorable equity returns, most plans are
far better funded than they were in 2012, making a
potential risk transfer more attractive. As of January
2014, as indicated by the Mercer US Pension Buyout
Index, the cost of purchasing annuities from an insurer
TOP FIVE RISK MANAGEMENT CONCERNS
FOR US AND CANADIAN PENSION PLANS
1. Volatility in financial markets.
2. Low interest rates.
3. Financial impact of the DB plan on the
organizations performance or profitability.
4. Employee attraction and retention issues.
5. Investor/credit analyst scrutiny of the
organizations performance, profitability,
and financial health.
was 108.5% of the accounting liability. Meanwhile, the
economic cost of maintaining the liability was slightly
higher at 108.7% of the balance sheet liability.
With Pension Benefit Guaranty Corporation premiums
set to increase immediately, and anticipated revisions
to statutory mortality assumptions in the near future
to reflect increasing longevity, pension risk transfer
opportunities may be at a peak. Plan sponsors are
encouraged to develop a robust pension risk strategy
that reflects the evolving conditions and takes
advantage of the opportunities before they pass.
CANADA
The appetite for risk transfer has grown rapidly over
the past year, primarily due to the sharp improvement
in funded status. Last year had the highest volume of
group annuity transactions in Canadian history, and we
expect 2014 volumes to easily surpass those of 2013.
In Canada, members leaving the plan through
termination are required to be provided with a
lump sum option, so the impact of re-offering lump
sums is smaller than in the UK and the US. Although
the basis on which the benefits are required to be
settled is expensive relative to other measures such
as accounting, many Canadian plan sponsors are
considering re-offering lump sums to cash out their
deferred vested members as a way of settling a portion
of their pension obligations.
UK
In the UK, there have been a handful of multibillion-
pound longevity swaps, and a March 2014 3.6 billion
pension buy-in deal between the ICI Pension Fund and
Legal & General and Prudential. Small and medium-size
20
plans are also entering into buyouts and buy-ins. TOP FIVE RISK MANAGEMENT CONCERNS
FOR UK PENSION PLANS
Pension risk buyouts are relatively expensive for UK
companies because their pension plans are linked to 1. The impact of low bond or gilt yields
inflation. This partly explains the popularity of longevity increasing liabilities.
swaps for larger pension plans as a way to hedge 2. The level of funding required or reducing
longevity risk. the deficit in the DB pension plan.
While the appetite for buyouts and buy-ins is strong, 3. Investment strategy; deciding the correct
important considerations to bear in mind include: level of risk, the type of asset or credit to
invest in, or matching assets to liabilities.
INSURER CAPACITY: Only a small proportion of
the worlds DB plans benefit obligations has been 4. Volatility in the size of the deficit in the plan
transferred to the insurance sector, but questions and the required funding ratio.
have already been raised about capacity. As interest in 5. Investment performance, such as ensuring
risk transfer continues to build, problems with insurer that the return on investments matches the
capacity may arise. DB plan liabilities.
COUNTERPARTY RISK: Although a plan may
transfer pension risk to a third party, it is taking on
remains a threat. Plan sponsors that had taken steps to
the possibility that the third party might default. If
prepare for pension risk action have been well placed
this happens, the event is likely to draw negative
to take advantage of de-risking opportunities as they
publicity toward the plan sponsor that transferred
were presented. Indeed, many plan sponsors have taken
the pension obligation.
positive action to reduce the risk exposure of their plans.
THE IMPORTANCE OF GETTING IT RIGHT: Risk
Though the dynamics and details of pension risk
transfer deals, once completed, are irreversible.
management may vary, the appetite to reduce or remove
Fiduciaries must be confident that the price is fair,
pension risk is strong on both sides of the Atlantic.
the terms are correct, and they have carried out
Whether plan sponsors choose to retain or transfer
the necessary due diligence to ensure a positive
risk, preparation is vital to take advantage of market
outcome. The use of an external fiduciary, as
opportunities as they are presented. To achieve this, it
employed by General Motors and Verizon in the
is vital to have in place a framework that provides at-a-
US, to help oversee the process can prove helpful in
glance plan management information to identify plan-
ensuring a smooth transaction.
specific opportunities as they arise, and support a rapid
response when deemed appropriate.
CONCLUSION
Learn more about global pension risk.
Plan sponsors on both sides of the Atlantic face funding
challenges with their DB plans and are keen to confront
them. In general, the funded status of pension plans
improved considerably in 2013, but market volatility

CONTACTS

Sean Brennan (New York)
Principal, Investments
(Financial Strategy Group)
+1 212 345 1329
sean.brennan@mercer.com
Manuel Monteiro (Toronto)
Partner, Retirement
+1 416 868 2927
marcel.monteiro@mercer.com
David Ellis (Leeds) Hrvoje Lakota (Toronto)
Principal, Retirement Principal, Investments
+44 113 394 7591 +1 416 868 2125
david.ellis@mercer.com hrvoje.lakota@mercer.com
21
 Research. Analysis. Perspective. JUNE 2014

BEYOND M&A: PEOPLE PROCESSES FOR GOING AND BEING GLOBAL

In todays multinational business environment,
successful organizations must view the growth
imperative from more than one perspective. For
some companies, growth is all about expanding into
new geographies. But companies that are already
operating in multiple locales may not be seeking
geographic expansion so much as they are looking for
better ways to realize the benefits of operating as truly
global organizations.
Either way, they face complex challenges in making
their merger and acquisition (M&A) and globalization
strategies succeed, and they must rely heavily on
their human resource (HR) functions to rise to the
challenge posed by a multiplicity of people processes,
policies, and cultural differences.
Thus, it is helpful to view organizations that are
typically in a state of expansion as Going Global.
Their ultimate goal is or should be a state of
ongoing global alignment and operational excellence,
or Being Global.
More specifically, Going Global refers to the process of
entering new geographies through global expansion
and global sourcing, addressing the immediate
needs of adding employees, and meeting local HR
management requirements. Being Global is the state of
business and HR integration that occurs across various
parameters, such as strategy, structure, operations,
financial and risk management, HR effectiveness, and
information flow, which optimizes the performance of
the organization as a worldwide entity.
This typically requires the articulation of a clear
workforce growth-and-development strategy with
underlying HR philosophies, programs, and policies.

22
For the HR function of an organization, whether its
business is Going Global or Being Global, there are
three important considerations:
1. Fully understand the business strategy, specifically
as it relates to operating across country boundaries,
how operating in multiple countries creates value for
the organization, and what the core organizational
behaviors (culture) need to be in order to drive a
successful organization.
2. Recognize that Going Global/Being Global are both
processes with three distinguishable phases:
EXPANDING, whether by acquisition, greenfield
development, materially increasing the
workforce in an existing location, or outsourcing
and offshoring.
ALIGNING operations around the world to the
global business and talent management vision
and strategy.
OPERATING HR efficiently and effectively
recognizing the challenges of global diversity
of practices, regulations, and cultures.
3. Identify and integrate the work required to ensure
consistency in the HR processes of expanding,
aligning, and operating a multicountry business.
This requires the HR functional experts to gain a
broader understanding of Going Global/Being
Global and to develop collaborative and coordinated
approaches to each of the following workstreams:
GROWTH: Supporting complex cross-border
growth initiatives, such as acquisitions, joint
ventures, and new-country startups.
TALENT SYSTEMS: Developing talent
management strategies to secure, retain, and
engage the right employees.
REWARD SYSTEMS: Designing and communicating
programs that motivate desired behaviors and are
sensitive to local and global needs.
ECONOMICS: Ensuring effective financial and
risk management of all HR programs, policies,
and activities.
GOVERNANCE: Executing practices that drive
compliance and alignment with organizational
values across diverse environments.
HR OPERATIONS: Organizing and operating
the HR organization to maximize global and
local effectiveness.
DATA AND INFORMATION: Obtaining the
people-related information necessary to make
informed decisions.
GROWTH
HR has a key role to play in supporting international
growth through acquisitions (or similar transactions,
such as joint ventures), new-site development,
or the rapid growth of employee populations in
existing locations. In pursuing transactions that
enable Going Global, the focus will be heavily on
financial and compliance due diligence and gaining
understanding of locally competitive talent practices,
and considerations will soon turn to the integration of
acquired businesses into existing operations.
HR NEEDS TO BE WELL INFORMED
AROUND LOCAL REGULATIONS
AND PRACTICES, AND ABLE TO
IMPLEMENT PROGRAMS THAT DRIVE
THE PERFORMANCE NEEDS OF
THE BUSINESS.
This requires a greater focus on the alignment of
HR policies, programs, and practices and, most
important, on the challenges of cultural integration
from both national and organizational viewpoints. As
the transactions become more complex, potentially
multicountry in scope, having documented processes
and tools along with a clear vision of roles and
responsibilities should enable a more efficient process
and a more rapid assimilation of the acquired talent.
For new-site development or rapid expansion, HR
needs to be well informed around local regulations and
practices, and able to implement programs that drive
the performance needs of the business. In addition,
it should be able to form assessments of local current
and future labor markets to help leadership determine
optimal locations, and to drive execution of hiring and
onboarding such that the new operations are up and
running as quickly as possible.
23
TALENT SYSTEMS
When Going Global, the preliminary talent focus will be
on ensuring that the appropriate leadership is in place
and effective. This will likely involve the development
of an expatriate community of leaders together with
an assessment of local talent, especially those in more
senior positions and depending on the strategic priorities
of the business. Many companies are now developing
approaches to global job leveling that provide the
foundation for the talent management structures needed
to align and operate global businesses.
With these foundations in place, HR can focus on more
sophisticated talent planning and resource allocation
with the long-term view of Being Global, establishing
a global workforce that is leveraged to maximize value
and manage cost a workforce that is more focused on
talent capability than it is on location. Steps in doing so
require aligning the approach to talent and leadership
development, diversity training, engagement, adopting
global career paths, and implementing a clear vision of
employee mobility and its value to the organization.
Recognizing that talent markets are at different stages
of evolution, it is not uncommon for organizations to
develop different strategies for different markets and
regions. Most notably, many companies have addressed
needs in emerging markets by developing specific talent-
development strategies that reflect the best opportunities
for business growth in the coming years.
REWARD SYSTEMS
Whether Going Global, Being Global, or operating
in a single location, it is well understood that the
talent system needs to support the recruitment and
engagement of the workforce and drive the desired
behaviors. In a global setting, this becomes more
challenging because the complexities of differing
cultures, regulatory/tax environments, and history
result in a smorgasbord of practices that need to
be understood and managed effectively. The key
to success is to have a sound understanding of the
desirable behaviors of the talent base and make a
comprehensive total rewards platform for developing
appropriate programs and driving desired behaviors.
The Going Global focus will most likely be on
benchmarking and positioning relative to relevant local
practices at an affordable level of cost in compliance
with the organizations core rewards values. As greater
consideration is given to Being Global and to aligning
and operating the global rewards system, emphasis
needs to be given to the performance-driving elements
of the rewards programs and an understanding of how
these need to be adjusted to balance a desire for global
program consistency with the preferences of local
employees and their cultural differences.
The goal is common outcomes of behavior
(performance, engagement, recruitment/retention,
etc.) with as much common design as is possible,
compromising on consistency where needed. Too
often, organizations act contrary to this; they look
for consistency of design and then compromise
on performance.
24
ECONOMICS
The potential risks, liabilities, and costs of a global
workforce are significant. While controllable through
the establishment of a thorough due-diligence
process for growth, most global organizations have
legacy or regulatory commitments they need to
manage, future budgets they need to control, and
opportunities to manage their expenditures through
global economies of scale or approaches to risk
mitigation. At a minimum, HR (together with Finance
and Risk Management) needs to develop approaches
to inventory the global talent financial commitments
and to establish a regular reporting, assessment, and
planning cadence.
With the basics in place, opportunities for economies
of scale and improved risk management are available
through vehicles such as the multinational pooling
of risk benefits, risk mitigation, and asset/liability
management of retirement and similar plans, and
the use of captive insurers for both risk benefits and
asset management. All can be facilitated through
alignment with global advisors who gain a thorough
understanding of corporate needs and tap into their
local networks to ensure that advice and reporting are
appropriately aligned.
GOVERNANCE
To a large extent, governance is an extension of
economics. Global organizations need to adopt the
checks, balances, and decision-making protocols that
ensure they remain compliant with ever-evolving global
and local regulations, align with corporate policies and
values, and enable global alignment and effectiveness.
While conceptually straightforward, the sheer volume of
work in a global setting is significant, and the execution
of global HR governance is challenging.
One common pitfall is that companies have a tendency
to export HR policies without considering whether they
are locally appropriate or even viable to apply. This is
particularly true in sensitive areas such as diversity,
discrimination, ethics, and other behavioral policies.
As for reward systems, governance policies need to
focus on consistency and alignment of outcomes
without being overly dogmatic in the wording of the
policies themselves. It is beneficial to obtain local legal
advice (preferably coordinated globally) on the local
application of all global policies to ensure that there will
be no unintended consequences.
HR OPERATIONS
Technology advances have had a major influence on
the globalization of HR operations. While much of the
HR service-delivery model remains local, especially
when organizations are in initial expansion stages,
much can be achieved through consistent alignment
and operating of HR, resulting in improved data-
analysis capabilities; cost-effective service capabilities
(internal or outsourced), such as payroll, HRIS, and
related technologies; shared-services centers; and the
technical content expertise required to develop global
centers of excellence in areas such as rewards and talent
management. Centralization of functional expertise not
only enhances the professionalism of the function but
also enables better-aligned governance processes and
decisions better aligned to corporate strategy.
THERE IS A RISK OF CENTRALIZED
HR BECOMING DISTANT FROM THE
BUSINESS. HR SHOULD OPERATE AS
A VIRTUAL TEAM.
That said, there is a risk of centralized HR becoming
distant from the business. HR should operate as a virtual
team, staying closely connected with the business
locally and globally, learning from and training local
leadership and HR resources, and leveraging expert
local and global advisors, where appropriate.
DATA AND INFORMATION
High-quality HR data and information are core
elements of HR governance. In early expansion
phases of globalization, local data and knowledge
sources are helpful, assuming they are of sufficiently
high quality, but when attention turns to alignment
there is value in developing a more comprehensive
data acquisition strategy that focuses on consistency
of data provided through a common platform
accessible locally and globally.
25
Such an approach builds confidence in data analytics
and is typically cost-effective. Further, limiting the
variation in data sources, already made complex
through different platforms (HRIS, payroll, salary
surveys, talent acquisition, etc.), enables more
comprehensive data analysis to be completed and
presented, moving the organization to the use of
data to create insights into the organizations global
talent systems, all of which are essential to creating
competitive advantage.

CONCLUSION
In todays global economy, senior leaders understand
that talent is a primary source of competitive
advantage, more so than ever before. Yet research
tells us that leaders cite a lack of adequate talent
pipelines among their most critical business
challenges. HR must lead the way in addressing
this challenge as organizations expand, align, and
operate globally. This requires training HR team
members on the business and workforce needs of the
global organization; developing the tools, processes,
and resources necessary to execute on this global
journey; implementing the appropriate programs;
and supporting infrastructure to ensure success.
Learn more about global M&A HR issues in 2014.
Learn more about talent assessment in M&A.

CONTACTS

Chuck Moritt Ake Ayawongs (Bangkok) Gareth Williams (Chicago) Graham Pearce (Munich)
(Washington DC) Partner, M&A Partner, M&A Partner, International Practice
Senior Partner, M&A +66 36368300 +1 312 917 9622 +89 242 68 497
+1 202 331 5296 ake.ayawongs@mercer.com gareth.williams@mercer.com graham.pearce@mercer.com
chuck.moritt@mercer.com
26
For further information, please contact
your local Mercer office or visit our website at:
www.mercer.com

Argentina Indonesia Saudi Arabia

Australia Ireland Singapore

Austria Italy South Africa

Belgium Japan South Korea

Brazil Mainland China Spain

Canada Malaysia Sweden

Chile Mexico Switzerland

Colombia Netherlands Taiwan

Denmark New Zealand Thailand

Finland Norway Turkey

France Peru United Arab Emirates

Germany Philippines United Kingdom

Hong Kong Poland United States

India Portugal Venezuela

Copyright 2014 Mercer LLC. All rights reserved. 13093A-EN