Until 20 years ago, expatriates were a relatively rare species. Expatriates were transferred abroad mostly to provide particular technical or management skills that were not locally available. Along with the international transfer usually came a generous reward package.
Times have changed. Most multinationals nowadays employ sizeable mobile employee populations. With the globalisation of economies and companies, came the need for multi-culturally skilled managers and companies now have different types of mobile employees to meet different business needs. In particular:
o the traditional temporary assignee needed to perform a particular role or carry out a specific task for a specified period of time and then return to ‘home’ country;
o young high potential employees sent abroad at an early stage in their careers to provide international experience for developmental purposes thus creating a pool of future globalists;
o permanent transfers, who either for personal reasons or at company request, relocate on a permanent basis with no intention to return to ‘home’ country;
o frequently mobile globalists (often senior managers) who transfer from country to country several times and expect to have international careers .
A recent survey by Towers Perrin shows that these globalists now account for 22% of mobile employee workforce, traditional transferees for 74% and permanent transferees for the remaining 4%.
The provision of benefits for each of these categories is now becoming a critical issue for companies and their employees. In the past, head quarter or home country mirror benefits were typically provided, regardless of the type of transfer. It is now being recognised that the ‘one-size fits all’ approach is no longer appropriate and a more tailor-made approach to benefits is needed. This is especially so with the increasing number of globalists no longer predominantly headquarter country nationals. They may come from a variety of different countries and business units and may choose not to retire or spend much time in their home country.
It is not only the mobile employee population which has changed. Globalisation has coincided with a trend towards a more business focussed reward approach, not just for the mobile population but generally across the workforce. This trend addresses the different needs of employees themselves who are taking more ownership of their careers, their lifestyle and their financial security. Employers meanwhile are becoming increasingly concerned of the rising costs associated with running a benefit programme, in particular for mobile employees.
Many employers – 58% of participating companies in the survey – have responded to these trends by setting up separate benefit plans for their frequently mobile employees. Employers often restrict the eligibility of these plans to specific categories of mobile employees, mostly globalists (which, according to the survey accounted for 65% of membership), recognising the need for a different benefit approach for this category of employees.
In the past, international plans typically provided an umbrella framework, taking account of all local state and company benefits earned during the career and supplementing to a certain target benefit level. However, companies are increasingly finding this type of design complex to administer, difficult to finance and practically impossible to understand or explain.
Responding to these issues and those of employees has resulted in a much more tailored approach, one which balances both the business and individual needs and offers greater flexibility.
Multinational organisations that wish to consider (or reconsider) their international benefit provisions may find the flowchart below useful, outlining the key considerations to address when establishing an international plan.
The limited number of providers in the market for international plans, typically based in offshore locations, has, in the past, deterred multinationals from setting up more sophisticated international benefit arrangements, outsourcing delivery and funding the liabilities. Funded plans are generally more attractive from an employees’ perspective offering more financial security and allowing for more flexibility in the plan design.
However, responding to the needs of global organisations and the demands of the mobile executives, many more providers are now entering the market for offering international plan services. And providers are now becoming much more sophisticated and flexible in their services, as well as competitive in their pricing structures.
With the increasingly diverse population of mobile employees participating in international plans, both geographically and well as individually in terms of needs and profiles,
o providers are now developing capabilities for delivering web-enabled services, including web-based enrolment, communication and selection of investment choices;
o providers are offering highly flexible administration solutions, taking account of different legal, tax and social security environments of participants and different individual and risk profiles (mortality, health);
o providers are now willing to deliver either bundled or unbundled administration, insurance, investment management, custodian and trustee services thus better meeting the demands of companies with a growing awareness of international benefit costs, and of employees who wish to have more tailored solutions.
The increasing market for international benefits is attracting the interest of jurisdictions that are competing as financial services centres, each with their own particular strengths:
o Luxembourg has adopted a new law allowing the creation of international pension funds. Some Luxembourg providers offer multi-employer pension funds where multinationals with relatively small mobile employee populations can benefit from economies of scale under these arrangements. Luxembourg is building on its strong position as a location for investment funds with low dividend withholding taxes due to its extensive network of international tax treaties.
o The IDA of Ireland released a report in 2001 to promote Ireland as a location for pan-European pension plans. Ireland, with a well developed life assurance industry, is claimed to be a suitable single distribution location for pan European insured plans.
o The Isle of Man has, earlier this year, adopted new legislation for international pension plans provided from the island. The objective of the new legislation is to create a more regulated environment, provide better protection for plan members and increase the attractiveness of the Isle of Man as provider centre.
o Malta has recently introduced the ‘Malta Retirement Funds Bill’. The bill, amongst other aspects, outlines the appointment and registration process of administrators and asset mangers. Similar to the Isle of Man, Malta aspires to attract more international companies to set up international retirement plans on the island.
The growing use of captive insurance companies to fund and manage risks associated with employee benefits has some key advantages for internationally mobile employee benefits. More specifically:
o providing annuities or flexible options under an international plan is relatively expensive due to the fact that mortality, disability and health experience data is typically collected on a country by country basis. Insurance companies therefore tend to use conservative assumptions when providing annuities and flexible options in an international plan context because of the unknown risks associated with this. Captives allow for the use of more realistic assumptions,, smoothing of rates and allow the parent company control over reserves and their investment returns .
o insurance companies will normally only pay a claim if the criteria specified in the contract have been strictly met. Disability criteria, for example, typically differ across different countries ‘ contracts. The use of a captive gives the multinational flexibility to apply uniform criteria, regardless of nationality or country of employment
Val Vardy is a principal in Towers Perrin’s international practice in London. The article is co-authored by Bjorn Thijssen, senior consultant in the international practice