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Written by: Mark Price
As Mercer launches the 2012 Benefits Survey for Expatriates and Globally Mobile Employees, we are seeing increased interest and a focus on the use of International Pension Plans (IPPs) as retirement or long-term savings vehicles for expatriates (expats). This article touches on some of the main characteristics of IPPs and decisions to be made by employers in relation to these IPPs and provides a partial list of some of the providers and their IPP offerings.
IPPs are typically established in well-regulated, offshore jurisdictions such as the Channel Islands or Bermuda. They are placed within infrastructures allowing for the tax-free roll-up of investment returns – although contributions are not normally tax-effective. Benefits are free of tax at source and normally taxed in the country in which they are received. IPPs are seen as a flexible vehicle for retirement savings and are typically used for expats who are unable to participate in a domestic or local retirement plan. IPPs are more flexible than most home country plans as benefits are mainly paid as a lump sum at retirement (some providers may facilitate annuity purchase or provide one), and can also be paid when an employee leaves the company.
Why implement an IPP?
There are several reasons why an organization might implement an IPP, as outlined below.
Increased number of expat employees: The increase in the expat population over the past several years has meant that over the course of a career, employees can be based in multiple locations, resulting in fragmented retirement benefits or no provision of benefits at all. An IPP is flexible enough to be useful in most circumstances, although membership restrictions may prevent access for some employees. It is also important that there be a critical mass – defined as plan minima by the provider or assessed in terms of cost per head (or other measure) by the employer – of employees and contributions/assets to make a plan viable.
Competition: Employees who are globally mobile expect to receive retirement benefits. After all, in many cases expats are the most talented employees, and are generally high performers. Therefore, in the expat market, companies wanting to offer a competitive benefits package will often include an IPP.
Lack of home/host country provisions: Employees who are sometimes employed in locations without a domestic company pension plan or are posted to countries with no plan still expect to accumulate a retirement benefit. Where benefits are not provided, the same driver for competitive benefits can apply. It may not be sensible to make the employment proposition unattractive or create reluctance to accept a posting or employment.
Top-up provision: An IPP can facilitate the provision of supplementary benefits for key expats/people (even where localized in some cases). This can apply to the replacement of company benefits as well as to offsetting any loss of social security benefits caused by mobility. (The latter point occurs where local or host social security is seen as insufficient compared to the home country system.)
Response to legislation: Some introductions of IPPs are in response to changes in legislation, a recent example being the Institutions for Occupational Retirement Provision Directive in Europe. In some cases, depending on the interpretation of the terms of the Directive by local competent authorities, expats who may have triggered cross-border status for plans were removed from their home plans and placed into an IPP.
Global management companies: Some companies have created structures – which may take the form of global employment companies from which employment contracts are issued to expats – to deal with expat populations and special employees. Employees of these companies may well receive access to an IPP.
Characteristics of IPPs
The characteristics of IPPs are presented below.
Funded versus unfunded: IPPs can be funded or unfunded and providers may carry out administration for both types of plan (not all will administer unfunded arrangements), with many funded and outsourced to an external provider as there is perhaps a perception that unfunded IPPs lack security. Following are some considerations for deciding whether to fund an IPP:
When multiplied across many countries, the many complex considerations regarding whether to fund an IPP, and the ultimate decisions in any one case, will depend on each particular set of circumstances.
Bundled versus unbundled: Two market options are available when it comes to obtaining the required services.
IPP market providers
Below is a partial list of the main providers in the IPP market.*
Plan design: Eligibility and benefits
A full treatment of IPP plan designs is beyond the scope of this article, so we have focused here on membership issues – namely, eligibility and the creation of notional sections for plan members.
Eligibility: One of the most important elements of plan design is determining those employees eligible for participation. Governance and monitoring will also ensure that the plan is not used as a catchall solution but is only used where necessary. At a high level, the most common membership criterion is to use it for employees who are posted to a location where there is no form of company retirement provision and where membership in the home country plan cannot be maintained.
Sectionalized membership: In any one company there may be multiple employee categories with similar requirements for an IPP but not necessarily for the same level of benefits. A company will often need to consider the balance between keeping the plan design simple and ensuring equitable treatment among members. Given that plans increasingly have notional sections with certain benefit levels in each section, the most complex (typically smaller plans) may have a per member accrual or contribution rate. However, it is more common to apply stepped employer contribution rates targeted at specific areas of need – driven, in many cases, by the relative levels of total benefits available (social security and/or company etc). A plan could also target salary above a given level, depending on the circumstances around benefit accrual in particular countries. Many plans apply benefit offsets and, where benefits are known to accumulate (for example, mandatory termination indemnities), plans can target lower contributions to take this into account where the benefits are known. By grouping employees, the plan is flexible, but administrative complexity can be limited.
IPP plans carry a number of restrictions:
US citizens: The most common restriction regards US members. Most providers will limit plan membership for US citizens/green card holders for an IPP. The limitation may be absolute but more typically takes the form of a percentage of the overall plan population (10% to 30%). Some providers have no restrictions for US employees; others do not allow any US members. Some providers will facilitate reporting to US authorities.
Country restrictions for trust services may apply: For some providers, restrictions on certain countries being included within the trust arrangement may exist. This will affect any potential members in those locations and should be taken into account when undertaking any market review for a trust-based arrangement.
Local nationals and country nationals restrictions: Some providers will exclude persons who are living and working in the same country as the provider. Providers may also restrict membership of other nationalities; this can vary by provider and should be reviewed closely prior to implementation.
Other restrictions may apply in certain circumstances, so it is important to review and understand these prior to plan implementation to determine the impact on the desired potential plan membership.
The future of IPPs
Mercer is anticipating an increase in the use of IPPs. With a view toward global business growth, many companies are increasing their expat populations as they move to grow revenue in new markets and relocate key staff – an important area to keep under review in the light of the increasing flexibility of the available benefit provision.
About the author
+44 20 7178 3652
Mark Price is a Principal in the International Consulting Group based in London. A member of Mercer's Task Force on Pan-European pensions, he provides advice to a broad range of multinational clients on global issues, working extensively on global employee mobility and Pan-European employee benefits.