Keeping globe-trotters in the plan

Employee mobility is one of the main concerns for today’s multinationals. Being able to hire and keep people willing to travel from country to country is not always easy, and pensions arrangements are sometimes seen as one of the main obstacles for accepting an international assignment. Since mobility is crucial to the success of business worldwide, multinationals and pension professionals are working on the development of plans which best suit expatriates.
“Multinationals want to find a solution to avoid employees getting too worried about pensions,” says Timothy Reay, consultant at the international benefits department of Bacon & Woodrow in London. “They know they have to send people abroad and ensure they have a mobile workforce available.”
Despite increasing interest in the subject, only a few European multinational corporations have developed truly international benefit packages for their mobile employees. The design of the plans depends on whether the international assignments are short or long term. “The starting objective is very much focused on home country plans, but you have to distinguish between the various categories of expatriates,” says Reay.
On the one hand, for those going abroad for a couple of years it is quite clear that what most employers want to do is to give them home country benefit provision. “This does not necessarily imply keeping them in their home country plan but it’s what we called keeping them ‘on hold’ so when they come back it’s like they’ve never been away,” Reay explains. Long-term transfers who are away for more than five years will usually move to join host country plans.
“But the main problem is that related to what we call chronically mobile employees. These are people who never stop moving from country to country and, probably worse than that, they don’t even know where they are going to end up,” he says. The solution for this type of employee depends on what the company’s priorities are. “There is always a choice on several different issues such as security, cost and administration and it’s usually the case that those strategies which are cost and tax-efficient, involved less security and are very complicated because you have you have to look at all the issues regarding tax advantages and consider each case individually,” he says. “For instance, you can’t put money aside into independent plans like you would want because it wouldn’t work on a tax-efficient basis. So if you are really concerned about saving costs and tax you might end up with a solution which is not as secure as it might be and very difficult to administer.”

On the other hand, those wanting to create a solution with some degree of security, so that employees know that wherever they are they have a separate pension plan which is simple to administer, could end up offering very expensive arrangements. “There is always an option which is simple but expensive and another which is cheaper but more complicated and this depends on the company’s philosophy which can be more paternalist or more laissez faire,” Reay says.
Although for some the best option for mobile employees would be setting up an offshore pension plan where employers make good solid contributions and pay income tax liabilities if any extra taxes arrive, there are not many companies in Europe following this approach. Different social security and tax rules and also different expectations make it difficult to set up such plans for European expatriates. “This option is particularly attractive for those with operations in no Western countries, such as Africa and Latin America,” he says. “In these cases, where currency and taxes is less of a problem, an offshore plan is could be suitable, but for those moving around Western Europe this would be very expensive.”
What is for sure when it comes to setting up pension schemes for expatriates is that the tax issue is the key one. “If I am sent to work in Spain from the UK and my employer puts £10,000 a year in my UK pension plan, the Spanish authorities would want to tax me for that, because at the end of the day it’s as if I was putting money into an off-shore bank account.” He adds: “This is the main issue and until this problem is not sorted there won’t be any real solution to pension arrangements for expatriates.”
And indeed, the lack of a real solution is stopping people moving. “We have asked expatriates about different issues they are concerned about and pensions is very high on their list,” he says. “I think it’s also because there has been a lot of discussion on pension and the problems faced by social security recently and people are realising the enormous amount of money you need in order to provide a pension and the tremendous value that a good pension pan has,” he says.
Cultural differences across Europe also imply the need specific solutions for each local subsidiary, and in this respect achieving a better co-ordination and applying overall strategies seem to be quite a difficult task. “The design of benefits, which at the end of the day is what employees are concerned about, will always be made locally an d is linked to different approaches to state retirement provision.”
“In southern countries social security in many cases is supposed to be an individual’s entire income in retirement whereas in northern Europe has never been intended that way and is just to keep you off the streets,” Reay says. “Consequently in northern Europe employers have been much more involved in these issues because of the need to supplement the state, but this is not such a big issue in countries like Portugal or Spain where people are getting a generous benefit from the government.”
Another issue slowing down the process towards a greater co-ordination and balance for pension arrangements for expatriates is the fact that pensions are very much tax-driven and governments are very jealous of keeping the money inside their borders and having control over it. “In countries like Denmark and Sweden there is an obligation of investing a certain amount of pension fund assets in government bonds as a way to pay off the country’s deficit.” Reay adds: “All this factors means that the design of the plan and the legal structure is going to remain being done locally. But the actual investment of the assets is something it’s being centralised by more multinationals and this is something the new European directive will enable to do.” The directive won’t enable multinationals to have fewer pension plans but hopefully will allow them to manage their assets centrally.
Although the situation is gradually changing, especially driven by international accounting standards, a lot of European corporations still operate under the approach that it doesn’t matter what their subsidiaries do as long as they produce profit and stay in line with what is common practice in local provision. “In this sense, Americans corporations are much more keen on controlling the detail and setting up uniform arrangements for their mobile workforce,” Reay says.
“They always look for authorisation from headquarters when doing any change in pension arrangements because for an US companies these issues are very big. In Europe, the importance that social security has make these issues less important.” He adds: “Also, in the US defined contribution (DC) plans are widespread and because they are less aware of the difference between the various European countries they tend to use standardised solutions for all employees working at their European bases.”

Thinking about the near future, mobile employees will still have to wait until they see the best solution for their pension arrangements in place. Financing the benefits for these workers is they key issue faced by corporations and European legislation still has not found the best option for them. “Multinationals have always concentrated very hard on pensions,” says Reay. “They know is a big cost and ever since the international accounting standards forced them to look at these issues their interest has been growing,” he says. “What we are doing at the moment is monitoring developments in legislation and take opportunities when they arrive. There is never going to be a big radical change on these issues. It’s more a continuous and gradual process.”
However, mobile workforces are crucial for business growth and as more workers are taking on international assignments good solutions are urgently needed. Human resources and compensation and benefits departments are working together to guarantee that pension arrangements don’t stop employees going abroad and most of the multinationals which still haven’t a defined strategy to deal with expatriates in place are now considering to review their strategies trying to find an attractive and cost efficient solution for globe-trotters. This represents an exciting challenge for both workers and companies.
This is based on a presentation to the 2000 Compensation & Benefits Conference in Paris organised by the Conference Board

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2572

    Asset class: High Yield Bonds.
    Asset region: Global.
    Size: $200m.
    Closing date: 2019-11-27.

  • QN-2573

    Asset class: Real Estate.
    Asset region: Global.
    Size: CHF 150m.
    Closing date: 2019-12-06.

Begin Your Search Here