In previous articles I have looked at the many pension challenges that companies face around their internationally mobile employees; retaining them in home plans, local host country options and international pension plans (IPPs). As a general rule the best solution depends upon a range of factors, such as the company’s existing pension arrangements, the nationalities and locations in question and any local compulsory pension system. In this article I’d like to jump past the arguments for and against the various options. I will assume that, having carried out a benefit audit for your client, you’ve identified that an IPP is the right solution but you’re not too familiar with the market. Here then are some key things to consider.
The main design features of IPPs are the same as typical UK plans, such as defined contribution or defined benefit, occupational or contract (although there is a preference from providers for an occupational structure due to the added dimension of cross border membership).
An important aspect of setting up an international plan is to establish it in a tax-neutral location. This ensures that any tax liabilities are determined by the personal tax position of the members, not on the plan itself, which is a cornerstone of the plan’s ability to support global mobility. For this reason plans are usually established in an offshore location such as the Isle of Man, Jersey or Bermuda. The Organisation for Economic Cooperation and Development identifies over 50 locations as ‘offshore financial centres’, so there’s plenty of choice, but in practice it’s important to find a well-governed jurisdiction with a robust regulatory system.
Many companies decide to make payments into IPPs from a single location in a single currency. This is the simplest way to manage the plan, but for some companies the cross charging across business units and locations can be problematic, so the plan may need to be able to support numerous pay centres, across a number of countries or regions and in a number of different currencies.
Another point to consider is when and how members may withdraw their benefits from the plan. As IPPs are not bound by local legislation, the employer can determine the plan’s design. Many plans allow benefits to be withdrawn from age 55 or on leaving service, and benefits can normally be taken entirely as cash. Unlike UK plans, the employer can decide whether or not a member’s entitlement to contributions vests immediately, or whether the individual must remain in service for a time before they are fully entitled to the contributions. This golden handcuffs approach is common in industries where attracting and retaining highly skilled people is a challenge.
As with UK plans there is often a bespoke fund range that includes a default fund, perhaps a lifestyle fund or a low-risk option, plus a range of funds from which the members can self-select, including both active funds and low-cost passives.
Having designed the IPP, it goes without saying that to gain maximum benefit from it for both employer and employee, the plan needs to be appreciated and understood. IPPs have the added communication problem of a widespread geography, so emails, webinars, online access, information sites and newsletters should all form part of a comprehensive communication plan.
As you can see, many of the decisions on IPPs are similar to those for a UK-based occupational scheme but with additional considerations around jurisdiction, choice of provider, payrolls and currencies, vesting scales and benefit withdrawal options.
For further information, please contact
on Tel +44 (0)7815 637137 or
International Corporate Distribution Manager, Zurich Corporate Life & Pensions