Tackling needs of mobile workers
British American Tobacco is the world's most international cigarette group and currently has over 80 pension schemes worldwide, most designed to meet local market re-quirements. There have been ad-vances in implementing global standards for the management of schemes, and developing a global approach to life and risk benefits through multinational pooling ar-rangements. Pension design, however, is still largely centred on domestic requirements rather than the needs of an increasingly mobile workforce. British American Tobacco still be-lieves defined benefit (DB) arrangements most closely meet our overall objectives, enabling the delivery of consistent benefits for employees with similar careers, service and salary levels. We can align retirement benefits with employee pay and local market practice and the greater certainty of a DB arrangement, effectively communicated, assists recruitment and retention. While recognising the open-ended nature of the financial commitment presented by DB schemes we do not accept that they necessarily cost more than a defined contribution ap-proach. Careful asset allocation and investment processes can present op-portunities to reduce the cost of re-tirement benefit provision and advantages can be gained from cross-subsidies between different employees and generations of employees.
Compensation and benefits are market-driven; in broad terms our target is to offer a package competitive with comparable employers. Retirement benefit design has therefore been geared to local employment markets and the realities of local investment conditions. The result is significant diversity in pension provision.
There are differences in the ap-proach we take to pension provision for mobile employees and the solution currently adopted for the majority reflects our 'expat' history.
The pension is provided by inclusion in a traditional final salary DB plan managed from the UK. The bulk of such employees have a sterling salary base calculated by reference to a worldwide job measurement system and have therefore been included in the UK final salary pension plan. We also operates a US-based non-exempt DB plan, administered from the UK, for global employees from dollar-oriented economies or those with a dollar salary base. A guilder-based DB arrangement is also operated for a small number of Dutch nationals.
For international assignees, our ap-proach has been to leave the employee in the home country pension arrangement. With short-term assignments this has been generally appropriate but the increasing frequency and duration of secondments raises questions of continuity, with regard to both company occupational provision and local social security integration.
With the introduction of regional business units and increased intra-region mobility, we have recently be-gun to develop new regional pension solutions. A new funded plan using a third-party investment and administration product has been set up for staff recruited directly into the Far East unit. These employees have dollar-based salaries and both employer and employee contributions are made in dollars. It is a DB scheme providing a final salary related lump-sum benefit at retirement paid in dollars.
In Central America development of a regional pension scheme is nearly complete. A DC scheme invested in the US, it will be open to all employees of the region's six national businesses as an alternative to remaining in existing local occupational arrangements. Employer and employee contributions (standardised for all participating companies) will be in dollars but based on local currency salaries and converted at the rate applying at the date contributions are made. Benefits will not be integrated with local social security pensions. When the majority of our international employees were expatriate UK nationals, the use of the UK pension scheme to deliver pension provision was generally appropriate.
Increasingly, however, employees are being recruited or appointed from outside the UK. They are unlikely to work in the UK, much less retire there. A sterling-denominated salary and sterling pension promise thus become less appropriate while issues of transferability of existing pension benefits, integration with home country social security benefits and changes in UK regulations with regard to non-residents increase in importance.
Furthermore we recognise that such employees will have preferences and expectations with regard to retirement benefits that will not necessarily fit the traditional UK model. The challenge will be to develop in-ternational retirement benefit ar-rangements that are both equitable in value terms when compared to the current solution and have sufficient flexibility to make them attractive to a much more diverse employee group.
We would not anticipate changing our home country approach with re-gard to short-term assignees, as this generally operates efficiently. However the growth in the frequency and duration of international assignments is giving rise to concerns regarding the funding of the occupational pension for the period of assignment and the continuity of social security rights.
We have yet to address this area in depth but possible solutions include the establishment of appropriate vehicles for investing contributions that cannot be made directly to home country plans while the employee is on assignment. EMU clearly makes the development of a European regional scheme a more attractive option.
Our ideal plan (see box) is probably unachievable - so how will we address the issue of pensions for mobile employees in the medium term? For our global employees we will continue to provide pensions from existing hard currency domestic plans where tax and government regulations permit and the benefits are ap-propriate to the individual employee. To provide for global employees where this approach is not possible and/or appropriate we expect to in-troduce arrangements similar to the Far East regional plan using offshore investment vehicles.
For short-term international assign-ees it is unlikely that we will change our policy of retention in the home country plan. For longer term or frequent assignees unable to remain in home country arrangements during the periods of assignments we would anticipate the development of funding vehicles to provide for the purchase of home country benefits on return.
Regional 'domestic' plans such as the arrangements we are developing in Central America can provide a solution for regionally mobile employees. EMU and harmonisation of tax and employment regulations should provide such an opportunity in Europe - the only question is when! Based on a talk given at the IPE/IBC 'Meeting the Pension Needs of Multinationals' conference in Amsterdam.