Global benefits

Just a few years ago, employees of a company based in different countries around the world were unlikely to receive the same reward packages. But a growing internationalism amongst multi-nationals means an increasing number of employers are now taking a centralised approach to their global benefits strategy.

According to Towers Perrin’s (now part of Towers Watson) Global total remuneration management survey published in July 2008, 78 per cent of multi-national organisations operate a global benefits framework. This is a rise on the 44 per cent that did so in 2004, according to the consultancy’s Worldwide Benefits Management Survey, published in November that year.

The move towards a centralised global benefits strategy has been driven by a number of factors. As well as increased efficiency and cost control or savings, by offering all employees the same benefits package employers can build a single benefits brand, which provides a link to all workers around the world. In addition, where a multi-national organisation has globally mobile employees, it means expatriates will receive a consistent package wherever their job takes them. But, on the flip side, employers may find they are paying for benefits in certain countries that employees do not value or perhaps even need.

Alan Hewitt, international benefits director at JLT Benefits Solutions says: “In the last five to six years, organisations have understood the need to ascertain what is happening [around the world]. A lot of multi-nationals are starting to look at tighter management of employee benefits programmes.”

This involves identifying what benefits are offered to employees in each location, carrying out a compliance check and benchmarking that what is offered is appropriate within each location, as well as within the industry sector.

But is a global reward strategy always the right approach for a multi-national organisation? Nigel Bateman, director of the international consulting group at Towers Watson, says employers and their advisers must weigh up whether a centralised strategy, or one which places some, or all, benefits decisions and management in the hands of local compensation and benefits teams will best suit their organisation’s needs. And this is not necessarily an easy decision.

“We take it as read that pensions are a significant part of the benefits package in the UK, but in many countries this is not the case”

“At one extreme, there is a pure local approach, where every aspect of benefits is run and executed locally,” he explains. “From a benefits perspective, each country may as well not be part of a multi-national organisation. The reverse would be a single plan that all employees in all countries participate in that is based in one location.”

Where benefits are run on a local basis, organisations are able to take advantage of local employees’ market knowledge in terms of what they need to offer to remain competitive, as well as having a good understanding of employees’ expectations.

But while local benefits provision enables multi-nationals to ensure their package in each location is competitive, it can create inequality in benefits offered across borders. This can become problematic if employees move between locations.

Spenser Gamsby, senior associate at Mercer, says: “Employees in one country may challenge local management when they discover a neighbouring country offers more generous benefits.”

A common way to structure a global benefits strategy, therefore, is to centralise some benefits schemes and leave others in the hands of local divisions. “The challenge is finding the appropriate balance between meeting corporate goals and responding to local needs and expectations,” adds Gamsby.

The complexities involved in implementing a central global strategy, even if just for some benefits, should not be underestimated. Vastly differing tax and legislative regimes, local customs and practice, significant differences in State provision particularly around pensions and healthcare, and whether there are any reciprocal taxation agreements in place that may provide tax efficiencies must all be taken into account.

“Employees in one country may challenge local management when they discover a neighbouring country offers more generous benefits”

Implementing benefits plans globally, however, is not as simple as replicating the parent country’s schemes worldwide. It is more likely to involve drawing up an international benefits strategy and, where necessary, adapting schemes to suit each location.

Karen Gamble, director of health and wellbeing at Heath Lambert Employee Benefits, says: “You can have equal spend but unequal benefits, or equal benefits but unequal spend.”

Group risk
Providing employees with benefits such as death in service, long-term disability and critical illness insurance can represent a significant cost to employers due to the risks involved. Multi-national pooling arrangements are one way of reducing these costs when offering such benefits internationally.

Pooling, which can be used by organisations with employees in more than two countries, works like a profit-share arrangement between employers and a network of insurers. Typically, pooling arrangements are most suited to organisations with a minimum of 1,000 eligible staff and at least five overseas subsidiaries, as larger organisations tend to have the strongest buying power. Smaller employers can join a multiple-employer pool. Bateman says: “Multi-national pooling has the longest history in international benefits. The savings can be very tangible.”

At the end of each year, all the premiums paid for each local insurance contract in the pool are tallied up and the administration, expenses and claims deducted. Any cash surplus is then returned to the employer.

Hewitt says: “Organisations are starting to understand they can take advantage of their buying power if they have multiple subsidiaries. It helps supply the same level of benefit at a more competitive cost.”

A newer addition to the market is the use of captives to provide insurance benefits. A captive is an insurance company set up by its owners, primarily to insure its own specific risks. Multi-nationals could use captives as a way of reducing costs and improving control over the risk of rising premiums. Tim Reay, principal in the international employee benefits practice at Hewitt Associates, explains: “One of the attractions of employee benefits insurance is it is less spiky than other types of insurance. You tend to get a smoother number of deaths and disabilities, which makes the funding more level.”

When providing group risk benefits in some countries, however, Gamble warns employers and advisers to be aware of the possibility of corruption when structuring plan design and processes. She cites the example of one client organisation that operated in Russia several years ago, which had to re-consider whether to pay death benefits locally. “Local systems were such that within half an hour of the death benefits being paid the widow would get a knock on the door and told that expenses such as funeral costs would be carried out for 20 per cent of the payout,” she explains.

Healthcare
According to Towers Watson’s 2010 study, Workforce Health Strategies: A Multinational Perspective, around a quarter (26 per cent) of respondents have a global health strategy in place. The same percentage plans to implement such a strategy by 2012. Among those that operate a global health strategy, 74 per cent apply this to 95 per cent of employees or more. The remaining 26 per cent that have this type of strategy apply it to more than half their workforce.

In addition to pooling arrangements, employers that want to provide healthcare benefits across borders can offer international private medical insurance (PMI). This is particularly useful for expatriates, for whom employers can purchase an international PMI scheme through a single provider that has access to a network of regional insurers.

However, for a multinational’s wider employee population, this isn’t always as straightforward. Gamble says: “You have got to get to grips with what the market will let you do. That is one of the reasons why multi-national pooling has taken off.”

Some countries, for example, ban offshore providers from insuring local nationals, so employers cannot provide a single scheme to cover all employees.

In others, such as China and Abu Dhabi, adequate PMI cover with a local insurer is a pre-requisite to gaining a working visa, explains Gamble. Some insurers are able to get around this by piggybacking their policies onto local providers. Gamble adds that some of these countries are also beginning to allow some international providers in.

What an international healthcare policy covers must also be taken into consideration. Under Dutch law, for example, any person resident in the country is required to hold a health insurance policy that meets certain requirements, such as covering chronic and pre-existing conditions. State healthcare provision may also influence what multi-nationals offer.

But these are not the only challenges. Towers Watson’s Workplace Health Strategies survey also found 51 per cent of respondents said cost information is not always available or reliable. In addition, 44 per cent found healthcare products or services are not available, while 39 per cent said desired healthcare vendors are not present in the marketplace.

“Medical benefits are a massive spend and part of an [organisation’s] governance issues,” adds Gamble. “I would recommend a global approach due to repatriation issues, either due to fiscal or health reasons.”

“A recent example of local oddities occurred when rolling out an international scheme in the Middle East to a largely female workforce. Decisions on financial matters are traditionally made by the male in the house, and therefore the women offered the scheme were often not comfortable making the decision on whether to join”

Pensions
When it comes to providing pensions internationally, employers have several options. Most will run separate pension schemes in each market, enabling provision to be tailored around any State benefits, as well as local tax and legislation. “We take it as read that pensions are a significant part of the benefits package in the UK, but in many countries this is not the case,” says Bateman.

According to Mercer’s Global Benefits Governance survey 2009/2010, published in August, 92 per cent of respondents sponsor defined contribution (DC) retirement plans in some, or all, geographies. However, the decision-making around DC issues remains with local management or fiduciary boards, with little involvement from the corporate head office.

Reay says: “The design is still very much driven by local environments. The objective of retirement benefits is essentially to attract and retain employees and what you need to [do so] is different [between] countries. For example, in the UK, pensions are not compulsory, whereas in many other countries, they are regarded as part of remuneration and [offered] on a collective basis. In continental Europe, you only get tax relief if you treat everyone the same.”

Multinational organisations can offer a single pension scheme, which can be adapted to suit the needs of each country. “With DC retirement plans, you pay in a contribution of x per cent of salary,” explains Reay. “The level of x can vary from one country to another. You could have a company where its UK employees are receiving 10 per cent of salary and its French employees are receiving 3 per cent of salary because the French state benefit is more generous. But there is nothing to stop it putting the contributions into the same pension plan.”

Cross-border pension schemes are a newer option for multinationals. Historically, they were unable to gain tax relief on pension contributions across European borders, but this is now possible. “You can pay those contributions into any approved pension plan within Europe,” adds Reay. “Companies need to step back and ask ’why don’t I just have one large pension plan or a few large pension plans with different formulae, or different benefit design but all going to the same pot?’”

Cultural differences will inevitably play a part in this decision. Ian Sturgeon, global partnerships manager at Friends Provident, explains: “For many nationalities, the concept and advantages of retirement provision away from the State or the family are not always well understood. There may also be suspicion around the company providing – in terms of its motives and the security of investments.

“A recent example of local oddities occurred when rolling out an international scheme in the Middle East to a largely female workforce. Decisions on financial matters are traditionally made by the male in the house and therefore the women offered the scheme were often not comfortable making the decision on whether to join.”

However, he adds employers may find local knowledge and market expertise invaluable. “A good local knowledge is needed on the level of the investment knowledge of members.”

Global HQ?
Whatever benefits multinationals offer, where they do so on a centralised basis, a key consideration will be where schemes should be run from. In many cases, this will depend on where the parent company or the organisation’s headquarters are based. Hewitt says: “Quite a few US-based multi-nationals have asked their European headquarters to take control of everything outside of the US. Other multi-nationals look at it by region.

They would look at having a regional agreement with a reporting line into headquarters.”

How suitable the UK is as a base for multi-national schemes is a matter of debate. Gamsby says: “A UK employer would set up benefits in the UK as it is tax advantageous to do so. Foreign employers would not base benefits schemes in the UK due to negative tax implications and potential administrative challenges.

“The UK has one of the most advanced regulatory regimes for benefits provision in the world, particularly with regard to pension benefits. Heavy regulation comes at a cost though, as the complexity of the legislative and regulatory requirements ultimately means a broad spectrum of adviser and providers are required to design, implement and provide ongoing support across the benefit programmes.”

However, Reay adds: “The UK has double taxation treaties with many locations that other countries do not.”

Multi-national organisations, therefore, face a multitude of complex decisions around how best to run an international benefits strategy. Advisers have a key role to play in helping them to devise a strategy to best meet the needs of the organisation. As Hewitt concludes: “Multi-national organisations are looking for a business partner rather than a broker. Some employers do not have huge HR teams, so look to advisers to act as an extension to their staff.”