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June 2014

INTERNATIONAL PENSION PLANS: A GOOD FIT FOR TODAY’S MOBILE WORKERS


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Companies are employing more long-term expatriates than ever before, so providing suitable benefits for these globally mobile employees is paramount. These employees not only represent a growing proportion of a global business’ workforce but they are also invariably made up of experienced, senior, and highly qualified individuals who can prove difficult to attract and retain.

Mercer’s 2012 Benefits Survey for Expatriates and Globally Mobile Employees — a survey of 288 multinational companies covering a total of 119,000 expatriates — found that the majority (65%) of multinationals rely on retirement provision that is based in home or host locations for their long-term expatriates. However, the survey also uncovered increasing recognition that more flexible savings arrangements may be better able to meet the specific demands of expatriate and global nomad employees (employees who move from one international assignment to the next without returning to a home country).

The international pension plan for rewarding global assignees

Mercer’s survey shows that 12% of multinational employers have implemented international pension plans (IPPs), mainly in cases for which there is no suitable home- or host-country retirement plan. The incidence of IPPs reflects the long-term expatriate and global nomad populations, but also an appreciation that conventional provisions may not be adequate for those spending the majority of their working life overseas.

In particular, global nomads may find that there are no suitable plans available in a particular jurisdiction or suffer from fragmented benefits as a result of changing location frequently. IPPs offer a single plan to employees irrespective of where they are based, allowing for regular, consistent contributions. IPPs help to create a globally attractive and competitive benefits package that can be simpler to administer and monitor than running many disparate plans.

Companies can also take advantage of the flexibility of IPPs to top up existing retirement savings, particularly for senior employees or for expatriates working in locations where retirement plans are mandatory and benefits may be lower than any home-country plan. By implementing an IPP, the individual’s retirement benefit accumulation can be protected from any negative impacts of their assignment.

Understanding the benefits of an IPP

The survey revealed that IPP take-up is relatively low at 12%, and 17% of multinationals were unaware of the benefits or had never considered setting one up. Further, Mercer found that more than a third (38%) of the survey respondents said they had not adopted an IPP because they did not have enough eligible employees to justify it.

However, just a handful of global nomad or long-term expatriates can make an IPP arrangement attractive both in terms of retaining the individuals and providing a simpler “single point” pension plan.

Just under a third (30%) of respondents believe that domestic (home- and/or host-country) plans can adequately meet employees’ needs, yet this may not prove to be the case. Some host countries may not offer a supplementary retirement plan, or they may be inflexible and unattractive to employees. Additionally, in some jurisdictions — notably the EU, following the Institutions for Occupational Retirement Provision Directive — there may be unintended consequences of maintaining membership in the home-country plan.

Multinationals may perceive IPPs as complicated or lacking transparency, and because the offshore status of the plans may be off-putting, may prefer to offer expatriates an allowance (rather than an increase in salary) in lieu of a separate benefit. However, this may underestimate the importance employees place on formal retirement saving opportunities.

Other obstacles lie in the limitations imposed by plan sponsors on the nationality or location of employees allowed to join the plan. US citizens, for example, are often subject to restrictions in terms of plan membership.

Recent tax regulation changes in the US, namely the Foreign Account Tax Compliance Act (FATCA), has further complicated matters and has implications for the adoption of IPPs. FATCA is designed to improve the tax compliance of US persons with foreign financial assets and offshore arrangements/accounts by introducing information reporting and withholding tax provisions.

Under FATCA, all US citizens must report their worldwide assets and earnings to the Internal Revenue Service, regardless of where they live, how long they have lived there, or whether any money is owed. Foreign financial institutions (FFIs) then must report on financial accounts held by US taxpayers. Pension funds are potentially FFIs, unless exempted under the FATCA regulations or under the terms of an Intergovernmental Agreement between the US and the country in which they are established.

Implementing an IPP

IPPs need not be overly complex or opaque and employers can work with providers and advisors to ensure the scheme is designed appropriately. However, multinationals wishing to implement would do well to consider the following:

  • A basic but key consideration is whether the plan should be funded or unfunded — the increasing preference is for the former, since these are seen as more secure and providers are more willing to administer them.
  • Next is whether to use a trust or contract structure. Increasingly, employers are favoring contract-based defined contribution plans since these are perceived as less legally onerous.
  • Finally, employers must choose between bundled or unbundled arrangements. The former involves one provider taking care of the administration, investment, and insured or trust services, while the latter allows the employer to take elements of the plan operations in-house or choose multiple best-in-class external providers.

Making the right choice is dependent on employers understanding the demographics and expectations of the global nomad and expatriate workforce.

Prior to implementing an IPP, multinationals should:

  • Understand what the globally mobile population looks like, including demographics, nationalities, locations, expected service in location, availability and suitability of current supplementary retirement arrangements, and local mandatory schemes.
  • Define expatriate categories and decide whether it is appropriate to set up an IPP for the short term or longer term and to whom the IPP would be best suited.
  • Decide on how much to contribute. There is no “typical” IPP contribution level, but the amount paid in should reflect the particular company and employee circumstances. (The average contribution rate to an IPP is 8.5% of compensation.)
  • Consider segmenting the mobile employees and decide which differences between segments should be reflected in the plan. Based on the intended contribution levels, forecast the amount the company will need to contribute over time and the projected asset levels.

IPPs are not without flaws; they require effort on the part of the employer to ensure they are set up effectively and monitored regularly. However, in an increasingly global workplace the IPP offers a real solution to the employee benefits challenges of multinational companies.

For further information on the mechanics of IPPs, read International Pension Plans — A Growing Trend.

Purchase a copy of Mercer’s 2012 global Benefits Survey for Expatriates and Internationally Mobile Employees

Contacts

Mark Price (London)
Principal, International Consulting
+44 20 7178 3652
mark.a.price@mercer.com
Alan Oates (Hong Kong)
Principal, Retirement
+852 3476 3849
alan.oates@mercer.com
Callum Burns-Green (San Francisco)
Principal, International Consulting
+1 415 743 8777
callum.burns-green@mercer.com
Francois Racicot (Sao Paulo)
Principal, Investments
+55 11 3048 5791
francois.racicot@mercer.com

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