Recent years have witnessed a surge in the number of expatriates, as companies pursue international business expansion and global growth in an environment of acute skill shortages. It is no longer enough for companies to rely upon traditional generous perquisites and allowances to make up for the lack of adequate employee benefits. As a result, expatriate (expat) benefit programs are becoming increasingly complex, as companies strive to maintain global consistency among plans while allowing sufficient flexibility to ensure appropriate and adequate coverage in an increasing number of, often challenging, locations around the world.
 
This is no easy task, and Mercer’s recent Benefits Survey for Expatriates and Globally Mobile Employees was designed to assess how employers are dealing with these issues.

The traditional expat model

The traditional model for delivery of employee benefits is to provide competitive benefit packages in each location. Usually overlaying this is an expat benefit program for those sent on assignment from their country of hire (“home” country) to another country (“host” country) for a specific project or length of time. The typical package is handled as follows:
 

This package applies for a limited period, typically five years – often to align with the maximum period the employee can be retained in the home-country social security system. At the end of this period, the employee is either repatriated or localized.

Limitations of the traditional expat approach

The traditional approach works well for employees when there is an expectation of return to the home country, thus maintaining links. It also avoids gaps in benefit coverage while the employee is on assignment. The real challenge for organizations typically arises on localization, especially when the host country arrangements have a lower value than those in the home country.  According to the survey, over two-thirds of companies do not provide any compensation in the form of augmented pension benefits or additional cash for employees who localize to a less-generous employee benefits package (see Table 1). This is perhaps understandable because companies want to avoid creating a long-term financial commitment based on current home-country benefit policies that may be difficult to administer and that recognize service long after the assignment has ended.

Although the traditional expat model is the most common method of delivering benefits – according to the survey, 56 percent of globally mobile employees are treated as traditional expatriates by their employers – this approach may not always be the best solution.
 
Here are two possible limitations of a traditional expat model:
 

How can companies address these limitations? 

Based on the survey responses, 86 percent of organizations regard expat benefit provision as a medium- or high-level priority (see Table 2). The survey also found the following to be the biggest challenges noted: developing a more globally consistent approach to benefit provision; ensuring that expatriates are not disadvantaged by accepting international assignments; and cost containment (see Table 3 ).

Also surprising is that 26 percent of companies do not have an expat policy in place. Of those companies that do have a policy, 8 percent have never reviewed it. Clearly, there is room for improvement in the governance of expat policies.

Developing an expat benefits policy

Companies are pulled in two directions when developing a policy for expatriates. The need to retain central control is balanced against the need for a policy that is flexible enough to address the increasingly diverse needs of expatriates, particularly as operations are established in new locations. Interestingly, for those companies planning to make changes in expat benefit provision, one of the most common expected changes is to more closely define the different “types” of expatriates and provide different levels of benefits accordingly.  Companies will consider various factors in the process of reviewing and aligning benefits with expatriate and business needs, including the following: 

While organizations want to ensure that they are addressing expatriate needs and facilitating mobility, they do not want to do this at any expense. Cost containment is cited by 52 percent of organizations as a challenge in expat benefits provision.  Clearly, companies need to ensure that programs are cost-effective as well as valued by expatriates. However, the costs associated with an assignment should not be viewed in isolation, but should be considered against the returns achieved or the value added by a successful assignment. 
 
The implementation and operation of a policy is often a hugely complex, ongoing challenge for organizations. It requires a reliance on robust databases in order to record and monitor expat benefits provision, effective administration processes and potentially some outsourcing to specialist providers to ensure that employees receive the benefits to which they are entitled. This is an area that appears to be subject to frequent review, with 38 percent of companies responding to the survey, indicating that they intend to change their approach to outsourcing or intend to review providers of plan administration in the near future.

Retirement benefits

As mentioned above, the most common approach for provision of expat benefits is to keep them in home-country plans. This is reflected in the survey results, which indicate that 64 percent of traditional expatriates remain in the home-country retirement plan. However, there will still be some cases where employees cannot be retained in the home-country plan, and either no host-country plan exists or the local provision is inadequate.
 
These situations have increasingly led companies to introduce international/offshore retirement plans (“international plans”), which are now provided by 32 percent of survey respondents. Historically, it has been typical to provide a defined benefit (DB) promise with an offset for benefits from other sources (such as social security, other company-sponsored retirement arrangements and mandated benefits). However, the design of international plans has now shifted to the defined contribution (DC) arrangement (see Table 4), with 52 percent of US plans and 74 percent of European plans now being DC arrangements. Interestingly, the survey indicates that with companies with DB plans, only 7 percent plan to close them to new joiners and none plan to reduce benefits in the plan.

Design of a typical international DC plan:
 

Table 5 - Typical Expatriate Benefits Package

Looking into the future, with the increasing demands and complexity of globalization, Mercer expects to see the demand for international plans increase as globe-trotting employees expect to be offered an arrangement that keeps retirement benefits consistent and that eliminates the fragmentation that occurs when employees move from plan to plan.
 
Mercer also sees Pan-European pension plans playing a part in expat retirement provision. The 2005 EU IORP Directive has paved the way for Pan-European pension plans. If a company were to implement such a plan in the future, it could move employees around Europe while minimizing administrative complexities.

Health and group benefits

Risk benefits form an important part of the expat benefits package. Medical benefits, in particular, can be an emotive issue for expatriates as an area that affects not just them personally, but also any family members accompanying them on assignment. This perhaps helps to explain why the majority of companies say they provide high- or medium-level medical benefits.
 
Also, the survey indicates that 66 percent of companies now provide an international medical program specifically aimed at expatriates. Vendors are offering increasingly sophisticated products that give companies opportunities to tailor their plans to regional requirements, such as reimbursement levels or integration with local social security coverage. They also offer the opportunity to use employee cost-sharing to control the costs to the company, for example, employee contributions to share the cost of coverage and co-insurance and/or deductibles to share the cost of claims.
 
Far fewer companies provide an international plan for death benefits or for disability benefits.
 
There is a difference in approach between North American and European multinationals, especially where medical benefits are concerned (see Table 5 ). European employees do not expect to make a contribution toward the cost of coverage for themselves or their families and expect full reimbursement for the cost of any treatment. By contrast, while North Americans will normally expect a lower overall level of benefits, they prefer a wider choice – including such items as optical and dental benefits.

Balancing needs and interests

Providing expatriates with a competitive package of employee benefits is always going to be difficult. Even if a company developed the theoretically perfect benefits package, tax and compliance constraints will always limit the options available. However, it is possible to develop a benefits program that can broadly meet a company’s requirements. A company should always expect a handful of employees to slip through the net and to document how these employees are treated in order to avoid setting difficult or expensive precedents. It will be essential to long-term business success that companies rise to the challenge of providing competitive arrangements for this high-profile category of employees.