A global challenge
Written by Christine Senior
Pension arrangements for globally mobile employees present particular challenges for multinational employers. Pensions are a key element of the employment package that helps attract and retain staff, but expatriates with a career spanning multiple assignments worldwide are unable to build up a conventional pension.
For short term expatriates, usually it’s in their best interests to remain in their home country pension scheme, if possible. But their ability to do this generally runs out after a maximum of five years or so. UK registered pensions by contrast are open to members anywhere in the world, and JLT Benefit Solutions recently pointed out that many employers have not considered this option for expatriates.
The objective for employers is to treat short term expatriates as if they had never been away from home, says Tim Reay, principal in the international benefits practice at Aon Hewitt: “Unless the home country system is bad value for money it’s a good idea to keep them in the home country system. It’s another level of reassurance for people and a link to the home country.”
The usual solution for multinational employers is to set up, with the help of an employee benefit consultant, a bespoke offshore arrangement to suit the profile of the employer’s global nomads. The key feature of any multinational pension scheme has to be flexibility. The member is likely to move several times over a career and the international pension has to adapt to their changing demands.
Around 20 providers offer suitable international pension products – insurance companies, investment managers and banks - but the quality varies significantly, according to Michael Brough, senior international consultant at Towers Watson. In its most recent survey of international pension plans [Francesca this was in 2009 and a new one is due very soon] Towers Watson found the size of these plans varied from fewer than nine to over 5,000 members.
Ideally the plan will contain some elements that are similar to the employer’s main pension arrangements in the home country, which gives it more appeal to members.
“Employers are trying to be as consistent as they can across their global employee benefits,” says Ian Sturgeon, global partnerships manager at Friends Provident International. “They want to make their international scheme look as close to their main scheme as possible so if an employee moves from, for example, the UK to be an internationally mobile employee what they are being offered has the look and feel of what they are familiar with in the UK.”
Important elements of the plan are the number and types of investment fund choices, choice of currencies, level of contributions and age when benefits can be taken. Contributions have to be set at a level that will compensate members for loss of state benefits and loss of tax relief.
Funds offered should ideally be institutionally priced, says Brough: “The offshore world is unregulated. A lot of retail-type charges are suffered by members which are much higher than institutional terms we negotiate with providers for our clients.”
Tax in the host country is potentially problematic. As an international scheme, the plan is unlikely to be authorised and regulated as a local pension scheme. The contributions won’t attract any tax relief, and any employer contributions may be deemed benefits in kind and taxed accordingly.
There’s fierce competition among offshore jurisdictions to attract international retirement plan business. Towers Watson recommends employers choose one that figures on the OECD’s white list of transparent and well regulated centres. The degree of flexibility possible for pension products is an important differentiator between jurisdictions.
Luxembourg, the Cayman Islands and Bermuda are popular, and the Channel Islands and Isle of Man the obvious choices for UK- headquartered employers. Some prefer a location with a dedicated pensions regulator, which gives them greater comfort.
“The advantage for the Isle of Man is pensions provision is a regulated activity here, all administrators and trustees are authorised and registered with the Insurance and Pensions Authority whereas in Jersey and Guernsey they don’t have that,” says Mark Kiernan, director at actuaries Boal and Co. “If employers can set up a scheme in a jurisdiction that’s regulated that is more attractive to them.”
Well established offshore centres have experienced service providers for international pensions. As well as an administrator, the plan needs a trustee to monitor fund performance, make sure contributions are being invested properly and do reporting and record keeping.
The role of administrator and trustee should ideally be split, says Brough: “There can be conflicts between the trustee and administrator relationship. A trustee could say we don’t want you to use a specific fund because our administration team can’t administer it.”
As with most DC schemes members can be reluctant to make active fund choices, so it’s essential the default suits the largest number of members. Another consideration is communicating the plan benefits effectively, which is particularly important for far flung employees remote from their home base.
“If they can’t see on a day to day basis what the scheme offers and how the contributions are being invested, then the chances are they won’t join or will drift away from the scheme,” says Sturgeon. “If the company is using the plan to attract and retain staff it’s often not serving its primary purpose.”
Where many expatriate staff are concentrated in one location, representatives from the provider can visit that location to do a live presentation. Failing that, electronic communications - webcasts, videocasts and online communication - play a major role.
Tax on payout is another issue that employers and members have to consider. Lump sum payout in a high tax jurisdiction is to be avoided if possible. But there are ways to minimise tax. This could be by taking the lump sum while members are employed in a tax free location like Dubai. Another solution for those who retire to a high tax location is to use an “internal” annuity, where for example a proportion of the lump sum is drawn down each year over a period to take advantage of any tax free allowance.
Another issue for employers is US members, who as a group need to be treated with special care. If too many plan members are US nationals the scheme risks being classified as a US plan under ERISA rules, which would not be desirable.
“Most providers will be uncomfortable and may turn away business if more than 20% of the overall population were US members,” says Brough. “Some employers separate out US members within their plan and give them access to US mutual funds.” Concentrations of certain nationalities, particularly Russians or Nigerians – say 95% from one country - are also best avoided.
Increasingly international plans are being used by multinationals to cover pensions arrangements for locally employed staff as well as expatriates. This is particularly true in parts of the Middle East where no suitable local scheme exists for them. Here a separate section of the international plan can be set up with fund choices and contribution rates more geared to their needs. The Towers Watson survey found around 20% of members of international plans were local employees.
The qualifying recognised overseas pension scheme (QROPS) , the format introduced by the UK after A day, has so far not garnered a huge amount of interest from multinationals as an element of their pension provision. It’s hardly a surprise since the QROPS have so far been used by individuals rather than corporates for their pension planning. But in future it could offer advantages for companies employing foreign nationals in the UK who will ultimately retire outside the UK, says Brough.
A company sponsored group QROPS could be used for investments built up by these foreign expatriates when they leave the UK. This version of a QROPS could potentially have the benefit of offering funds with institutional charges that are suitable for the eventual retirement destination.
Brough says: “It does depend on a number of factors – the numbers of people and the countries and term to retirement. An Isle of Man QROPS launched recently can provide enhanced tax free cash the longer you are between transfer and ultimate receipt of benefit. It’s not something many multinationals will have considered,.but it seems to me a sensible thing to think about.”
Written by Christine Senior, a freelance journalist