‘Myth’ of cross-border IORPs sees employers turn to ‘stopgaps’: WTW
European multinational companies are choosing international pension plans (IPPs) as an interim solution for benefit provision in anticipation of further development in the cross-border pension fund market, according to Willis Towers Watson.
A record number of IPPs and international savings plans (ISPs) were set up last year, according to the consultancy’s latest global survey of such schemes.
Michael Brough, senior director in Willis Towers Watson’s global services and solutions group, said that in Europe, more employers were accepting that cross-border pension funds “remained a bit of a myth for now, with few, if any, realistically viable non-associated multi-employer vehicles on the market”.
As a result, employers had requested IPPs “as a stopgap to accumulate seed money” while the market for multi-employer Institutions for Occupational Retirement Provision (IORPs) slowly developed.
Brough said companies intended to transfer IPP assets to a ‘world’ compartment in a pan-European pension fund at a point when the market for these vehicles was more developed, which would “support better charges negotiations” at the cross-border IORP level.
Willis Towers Watson’s survey found that 43 IPPs and ISPs were established in 2017, which was a record in the nine-year history of the survey and far higher than in recent years (16 in 2016, 23 in 2015).
Assets under management for the funded plans covered in the survey were estimated to be up to $13bn (€10.5bn). Nearly all plans were defined contribution in design. The majority (62%) of the plans had global coverage, with the rest restricted to regions.
The consultancy said IPPs were originally used by companies to provide pensions for “the traditional expat” – usually a senior executive or specialist – but employers were now using them to provide benefits for a range of employee groups. These could include expats that are excluded from (or who will not obtain a benefit from) home and/or local systems, local workers in the Middle East, local staff in crisis countries, and executives whose benefits are capped under local plans.
IPPs are normally domiciled in an offshore centre and are typically set up as a trust, but can also be contract-based.
The market for IPPs was well established, with many providers, and setting one up was “a piece of cake”, according to Willis Towers Watson’s Brough.
Setting up a cross-border IORP was a more complicated exercise, he said, and something many companies wanting to provide benefits for an international workforce did not want to do.
“Clients don’t want their own cross-border IORP, they want somebody else to give them a package that they buy into,” Brough told IPE. “That’s the problem, [because] that market is barely existing and the products that are there just aren’t broad enough, and there are risks associated with them.”
The consultancy noted that, according to data from the European Insurance and Occupational Pensions Authority (EIOPA), there were 73 active cross-border IORPs at the end of 2016, down from 82 in 2015.
Brough said the majority of cross-border IORPs were company specific, rather than vehicles established by service providers for unconnected employers.
According to EIOPA’s data, at the end of 2016 assets under management in cross-border funds amounted to €63bn.