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IPE special report May 2018

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Keeping 'em moving

The Shell group’s approach to pensions worldwide, whether through state, company provision or a combination of both, should be appropriate to the country in which the company is operating, Willem Handels of the Shell Pension Fund in the Hague said when looking at the topic of overcoming the barriers to pension provision to multinational employees at the Multi Pensions 2000 conference. He added: “They should reflect company policy and be in accordance with best practice.”
For periods of expatriation, pension schemes should continue to allow accrual of benefits in the home country. “Our experience is that some 80% of the internationally mobile staff retire in their own country,” he said. The accrual should be on the basis of developments in the home country.
Shell group-wide employs some 5,000 expatriates, coming from 50 different countries, in more than 100 countries. “Quite a task to get all that sorted on the pensions side,” he noted..The bulk come from the UK (1,700) and the Netherlands (1,500), but other areas are growing such as the US Australia and Canada, as well as African and Asian countries.
Considerable expatriate staff are employed in the UK(800) and the Netherlands (1,030) and the length of the period is typically three to four years. “But specialists and senior management may move from one expatriate assignment to another, with just short stints in the Netherlands and the UK.” Those in exploration and production activities could spend two thirds of their entire career abroad, said Handels. “Of the 11,000 active members of our Dutch pension fund, 2,500 have had service abroad. So cross-border membership has been a fact of life in Shell for a long time.”
Overall, the group had funded pension assets of $48bn, against $31bn in obligations, while the Dutch fund had E14.4 in assets, with around E8bn in liabilities, and the UK scheme had assets of E23.6bn and E20.4bn in liabilities. “Both the European funds are on contribution holiday for the sponsors and partly for the staff as well.” The return on investment has been good due to international equity diversification strategy.
So of the 1,500 Dutch working abroad, 500 are in Europe (390 in UK) and the rest spread across the globe. The Dutch scheme aims to provide 70% of final pay after 35 years service, at a normal retirement age of 60, but taking into account the state pensions.
In relation to expatriates, the scheme provides coverage for non-insured years in the state scheme, as they get a reduced state pension for these periods outside the Netherlands. If the expatriate accrues state or employer pension benefit while on assignment, that is deducted from the final pension.
“Up to two and a half years ago, before the contribution holiday, the scheme required a sponsor’s contribution of 20% and employees’ of 8% of full pensionable salary. The overall actuarial contribution rate is 26%, so it is not a cheap scheme, but that has a lot to do with a pensionable age of 60!”
So what happens when a person leaves the Netherlands to work in another country? In addition to transferring the payroll to the employing company overseas, changing the employee over to expatriate terms of employment, remuneration is based on a “balance sheet approach so basically a net basis, grossed up for local tax and social security arrangements”; there is a continuation of membership and accrual of the Dutch pension plan in order to prevent breaks in the pension build up, but the employee leaves the home social security and joins obligatory host country security schemes; so usually the employee leaves the Dutch and enters the host country system.
While out of Dutch social security system, the employee, any partner and children over 15, lose 2% per annum of the state old age benefit and lose survivor’s benefit on death in service, nor would there be any state benefit in the event of incapacity.
“For a long time we have fully neutralised the impact, by compensating for the loss of the state old age pension.” The employee can buy some cover from the social insurance authorities. This, he said, duplicates the coverage, but some employees do buy it, while most don’t. The death benefit of the scheme is designed to pick up non payment of the state social security benefits. The disability benefit is independent of the state payments and geared to retirement levels based on pensionable service. “We think this is a very nice arrangement that fully protects the employee from any discrepancies.” If the employee can claim any benefit from the host country’s systems at the due time, this is offset against the Shell scheme’s payments.
It works well in the case of the UK and France, but not so well in others, observed Handels. “But all this requires considerable administrative support to keep track.” It also means considerable communication efforts with pensioners, especially when you are making offsetting deductions. “The tolerance about this decreases as age increases!”
The Netherlands uses the EET system and it “offers ways of getting approvals from tax authorities if the host scheme is based in a partner country of a taxation agreement. You have to manage to demonstrate that the type and character of the scheme qualifies in the Netherlands and that you are using that. We have been using this possibility for some time for expatriates and it reduces the payroll costs of expatriates in this country quite considerably. Unfortunately it is not the standard solution across Europe and this of course remains the most expensive barrier to cross border mobility.”
Shell had studied the EC directive allowing members to stay in the home country security social scheme and optimisation of Dutch double taxation agreements for some years, and is now embarking on a project. “The aim is to reduce the cost of expatriation in 25 key countries. The directive gives the opportunity to state in the home country social security scheme for up to five years, if we can achieve this, the need for compensatory arrangements by the fund will be reduced. It is expected that considerable cost savings can be achieved,” he said.
He also mentioned other savings that might be available on a ‘tax reciprocated basis’. Handels said, “We are confident that significant progress can be made in the year ahead, but it is too early to give details on the arrangements being made.” Outside consultants were being used for the study as it was very complicated, he added.

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