Gail Moss reports on ways to provide pensions for mobile expatriates
Over the past three years, the number of internationally mobile employees (IMEs) has doubled, according to a recent survey by Mercer. The report says 47% of the companies surveyed had increased the number of expatriate employees on assignments of between one and five years, while 28% had increased the number of ‘global nomads’ (employees moving from country to country on multiple assignments).
Ensuring that these employees enjoy a generous level of retirement provision is important, says Heleen Vaandrager, Aegon Global Pensions. “These personnel are usually a company’s most valuable employees,” she says. “If they feel they will lose benefits by moving abroad, they become harder to attract and retain. And recruiting and training replacements can be very expensive.”
However, providing the optimum benefit arrangements for such employees can be a complex process, depending on the circumstances of each individual. The main issues are the social insurance implications and the tax consequences.
If IMEs are going to a specific country for a predetermined length of time, the most straightforward option is to keep them in their home country scheme. As long as they are moving within the EU or European Economic Area (EEA), or to a country with which their home country has an appropriate social insurance treaty, they can stay on the home country payroll and remain within its social insurance system, as well as their company’s pension scheme.
In general, temporarily seconded employees who remain on the payroll of their home company can be covered by their home country pension schemes on condition that they are subject to social insurance in their home country.
The term for secondment is initially 12 months but can be extended to 24 months. If an application to the social insurance authorities in both the host and home country is approved, it can be extended to 60 months. This arrangement is obviously preferable if the host country pension scheme is less beneficial than the home country scheme, and it is easier for employees to keep track of their pension pot, since each employee’s records will all be together.
However, while the employee may be able to remain within both their home country’s social insurance system and pension scheme, employer and employee pension contributions might not be deductible for tax in the host country, although investment income may be tax-free.
One way to deal with the problem is by pre or post-funding of the scheme, according to Robert Hodkinson, partner, global employer services, Deloitte. “Pre-funding means that the company pays into the scheme ahead of time and, depending on the pension scheme, may need to claw back some contributions by the employee when he returns home,” says Hodkinson. “Although this may be tax-efficient in the home country, it is difficult for companies and their actuaries to determine what the pre-funding level should be. In all situations there would need to be some adjustment after the assignment. Additionally, companies need to be aware of the risks should the employee leave the company early.”
With post-funding, there is a similar exercise when the employee goes home. Here, the risk for the employee is that there is no guarantee the funding will occur until it happens.
However, in some countries there is flexibility with respect to extending the period of tax exemption for pension contributions. “Countries such as the Netherlands and the UK are now willing to grant tax exemption to contributions paid to the pension scheme in the home country, as long as the scheme continues to be approved in that country,” says Ron van Harten, senior consultant expatriate services with Aon Consulting. “But it is by no means the case for all EU countries.”
And there is another potential problem for DB schemes which include active members posted abroad within the EU: under EU legislation, they could be regarded as cross-border plans. In particular, DB schemes based in the UK and Ireland (where domestically they are not required to be fully funded) and which include an employee based abroad, could find they are dragged into the fully funded net in their entirety.
The second option for an employee moving abroad is to be enrolled in the company’s local pension scheme. This may become a consideration when the E101 Certificate or Certificate of Coverage expires and the posting continues.
If the local scheme is more generous than the home scheme, it will be better for the employee, as long as it is still tax-efficient; if it is not as generous, additional measures might be necessary.
Nevertheless, there can be drawbacks. First, moving between different countries might fragment an employee’s arrangements. There may also be practical problems in getting money out of certain countries on retirement, while contribution records might be hard to access.
However, in certain circumstances the sponsoring company can resolve any imbalance between the local scheme and the home country scheme by topping up contributions, or having so-called ‘pension promises’.
The same considerations apply for postings outside the EU, especially if the host country has no bilateral social security treaty with the home country, in which case the employee might not be able to claim disability or permanent health benefits, or tax relief on contributions. Moreover, the level of benefits and currency rates might be a risk factor as well.
Again, companies need to consider making up their total package to equate to the benefits available had the employee stayed in their home country. The exact nature of the arrangement will depend on whether or not the employee intends to return home.
Rather than (or as well as) topping-up pension contributions, companies can take out income protection insurance policies in order to fund disability, sickness and permanent health benefits for employees.
If inclusion in home or host country plans is not feasible, the employer may set up a designated single plan, either on a pan-European or global basis. This will be easier if the scheme is based in a country which has a double-taxation agreement with the employee’s home country.
This kind of plan is offered by insurance companies including Generali Worldwide, Zurich International Life and Swiss Life. For instance, the Luxembourg-based International Retirement Plan from Aegon Global Pensions offers not only a wide investment choice, including passive and SRI funds, but also a range of different risk profiles and lifestyle options, currencies, and reports in several languages. Guaranteed options are also available in three different currencies - for instance, a 2.25% guarantee in euros.
A more wide-reaching solution is a plan which is established and approved in the EEA (an IORP). These funded schemes, predominantly DC, can be set up so that the same tax treatment applies as would be available within a home country plan. Normally, this will mean that tax relief is available on both employer and employee contributions, and that investments will grow tax-free, although the income paid out is taxable.
“From a tax perspective, cross-border plans are likely to be more attractive than ‘offshore’ plans, with Luxembourg and Ireland amongst the front-running domiciles of choice, along with Belgium and the Netherlands ” says Gavin Watkins, principal, Towers Perrin, which has already set up an IORP domiciled in Ireland for IMEs of a US-based company.
“The IORP model simplifies governance from the company’s point of view, because the pension scheme is governed by a single regulator and a single set of regulatory requirements,” says Watkins. “A company could set up an IORP with separate segments for its IMEs working in different EEA countries.”
However, while the directive establishing IORPs was implemented in 2005, there has not been a rush to set them up, because of the extended requirements of the pension legislation and of the supervisory authorities in the different countries where affiliated companies are located. So offshore arrangements may still be appropriate for some IMEs. And there are those for whom an IORP would not be appropriate anyway.
For instance, US nationals are taxed on their worldwide income, so might not benefit from a scheme based in Europe. Conversely, citizens of EU countries may be working outside Europe in countries where there is little taxation and poor social security arrangements, or they might intend to stay outside the EU when they retire.
In such situations, tax efficiency is not the company’s top priority - the aim is more to force their employees to save for income in retirement.
Furthermore, some highly-paid IMEs working within Europe might be nationals of a country - such as the UK, at present - where higher earners have been targeted by the taxman. Offshore pension insurance can help here by enabling pension income to be deferred. But in most countries, contributions are not tax exempt, although where they are not, it would often be the case that future payments would be free from income tax in the country of payment. If it is an employer-sponsored plan, the employer could consider paying the tax on behalf of the employee.
But wherever a sponsoring company decides to locate pension plans for its IMEs, specialist professional advice is a must. Many companies take this further by including tax consultancy for the employee as part of their benefits package.