Pensions cross borders
Gail Moss assesses the issue of pension provision for international workforces
Record numbers of employees are now moving abroad on assignments that might last for anything from a few months to the rest of their careers.
These individuals are often a company’s most valuable employees, so ensuring that they do not lose any retirement benefits by moving abroad is of crucial importance.
However, providing the optimum benefit arrangements can be a complex process, depending on the circumstances of each individual. Key issues are the social insurance implications and the tax consequences for retirement plans.
Increasingly, the balance between state pension schemes and occupational schemes is becoming important, says Rosemary Martin, director, global employment services, Deloitte.
“Employees normally pay tax in the country where they are working, but depending on facts and circumstances, the EU Social Security Agreement may allow them to continue to pay social security contributions in their home country,” she says.
The choice between paying for social benefits either at home or abroad is important, says Martin, because there are wide differences between the levels of state benefits in different countries. State pensions in France, Spain and Italy, for instance, are relatively generous, while the UK’s is not.
The EU Social Security Agreement was modified from 1 May 2010 and there are adjustments governing an individual’s eligibility for paying social insurance in their home country while working elsewhere.
“But any decision as to which country’s social security system the employee is going to pay into should be tempered by the knowledge that government cutbacks are likely to force reductions in state benefits,” says Martin. “This means employers may need to think about how they bridge that gap.”
However, for most employees working abroad, the implications for their occupational pension scheme coverage will be at least as, if not more, important.
Internationally mobile employees (IMEs) fall into two broad groups: those who transfer abroad intending to return home within the foreseeable future, and those who move abroad - either to one country or on a series of different postings - with no intention of coming back.
For individuals in the first group, the employer’s main consideration will be how to keep them in their home country plan to ensure continuity of service.
If 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, these employees are generally able to stay on the home country payroll and remain within its social security system, as well as their company’s pension scheme, provided they remain subject to social insurance in their home country, by obtaining a Form A1 Certificate of Continuing Coverage (previously an E101).
This applies for secondments of up to 24 months, or if an application to the social insurance authorities in both the host and home countries is approved for a longer period (at least up to 60 months). This arrangement is obviously preferable if the host country social security or pension scheme - or both - are less beneficial than the home country schemes; it is also easier for individual employees to keep track of their pension pots.
These rules, and those applicable to retirement benefit plans, also open up the possibility of some tax relief over the period concerned, following European Court of Justice (ECJ) case law such as the Danner and the more recent Skandia/Ramstedt rulings.
All EU countries are required to offer tax relief on contributions to a pension scheme established in other member states, to the same extent that they would grant tax relief on domestic schemes.
For example, a UK-domiciled employee (John) is working in Germany alongside his German colleague Hans, who saves in a German Riester pension and gets tax relief. John is resident in Germany for tax purposes but still wants to contribute to his UK pension.
John is entitled to tax relief in Germany, subject to the rules for tax relief in Germany.
Some member states, either through concerns with protecting domestic pension arrangements (Denmark) or because they have little experience of occupational plans (Czech Republic) have lagged behind in dealing with the tax and regulatory consequences, but the European Commission has issued a number of edicts telling them to align their rules with these ECJ judgements.
However, this still leaves the problem of how to deal with differences in tax rates between countries, which may not make retention as attractive while on assignment.
One way for companies to make up for the difference in rates is by pre or post-funding contributions to the scheme outside the assignment period.
With pre-funding, the company takes the risk that the employee could leave the scheme early.
With post-funding, the risk for the employee is that there is no guarantee the funding will occur until it happens. However, the employee could insist on this being made a contractual condition of their employment.
Bob Sperl, senior international consultant, Towers Watson, says: “In general, pre- and post-funding is not the most suitable structure to compensate IMEs, as the cost of doing this is then borne in the wrong country of operation, therefore not reflecting the true cost of the assignment. Tax-effectiveness ought not to be the main concern in many of these assignments.”
He says: “Alternatively, if retention is not possible, the company could consider giving the employee extra cash, or enhancing the package as a whole, say by deferred compensation in the form of shares or other equity-based arrangements.”
And he adds: “Companies have to comply with the pension rules, but they can use whatever flexibility is available to compensate employees for any loss of benefits. However, given that many employees are posted abroad as part of a long-term career progression, it may well be the case that they are prepared to accept a short-term loss of benefits if they perceive a long-term advantage.”
For employees moving indefinitely to a particular country, one option would be to enrol in the company’s local pension scheme from the outset. This may become a consideration where the A1 (or similar Certificate) expires, and the posting continues.
If the local scheme is more generous than the home scheme, or less costly or more tax-efficient, the employee may be better off; if it is not as generous, additional compensation measures might be necessary.
Nevertheless, there can be drawbacks. First, moving between different countries may well fragment an employee’s total arrangements. There may also be practical problems as to differing currencies and indeed in getting money out of certain countries on retirement, while contribution records might be hard to access.
However, in certain circumstances the company can resolve any imbalance between the local scheme and the home country scheme by topping up contributions, or by 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. Making claims for current benefits — unemployment, disability, medical — may become more difficult, or obtaining tax relief on contributions impossible.
Again, companies should consider making up their total package to equate to the benefits available had the employee stayed in their home country. They can also take out income protection insurance policies in order to fund disability, sickness and permanent health benefits for employees.
In spite of recent legislation encouraging the growth of IORPs, there has been little real progress in terms of new launches, although countries such as Luxembourg, Belgium and Ireland are jostling to become domiciles of choice.
“IORP legislation and process means that the IORP structure does not really work in practice,” says John Lawson, head of pensions policy, Standard Life. “You cannot set up a truly pan-European scheme because the rules are too difficult to negotiate. So there are no real IORPs yet.”
In any case, IORPs are not intended so much for specific individuals moving within Europe, but rather entire groups of workers in different countries who can all participate in a single pan-European scheme which will enjoy economies of scale and administrative benefits.