Relocating an employee overseas can be a costly exercise but advisers can save clients a lot of trouble by encouraging them to prepare an appropriate benefits package that takes account of cultural differences
Pensions, sickness and disability cover are prime pitfalls for clients who accept an overseas assignment. Employees sent to a politically unstable location also need to ensure there are adequate personal security arrangements.
The high cost of oversees assignments indicates that employers take these issues very seriously. In some of the world's toughest locations, it can cost a company nine times as much to relocate an expatriate and his or her family than it does to hire a local. The big multinationals are likely to have a formal benefits and pay structure for expats and third country nationals (TCNs).
Chris MacRae, overseas HR manager for Unilever, says: 'Remuneration is based on local salaries and may be supplemented in local currency. On top of this, we pay a home element net of tax in most countries. This aims to help with home commitments, holidays and savings. At the end of the assignment, we would pay a bonus that varies according to the level of perceived hardship in the country. For example, assignees to Nigeria and Bangladesh would receive 30% of home salary net of tax. In other countries this might be 5%.'
If your client's company is expanding overseas for the first time, the value of the package will be largely down to negotiation. And this is where the adviser can help. It comes as no surprise to discover that the provision of defined benefit pensions for expats is in decline.
Paul Kelly, worldwide partner at the consultant William M Mercer, says that the number of multinationals offering a final salary pension for expatriates has almost halved over the past 10 years. For this aspect of the package, the employee may need actuarial advice to ensure the pension benefit offered is broadly equivalent to what would have been available in the UK scheme.
UK employers can retain employees in their main pension scheme for several years and this has been the first choice for most companies in the past. However, with the greater internationalisation of companies and the increased use of third country nationals, such arrangements are not always possible or suitable. TCNs are defined as employees who transfer from their original country of employment (home country) to another country (host country), neither of which is the country where the company is located.
So how do companies tackle the pension benefit? 'In some cases, the employer establishes an offshore trust to fund expatriate pensions,' says Kelly, who cites Guernsey and Jersey as the most common offshore locations for UK-headquartered multinationals.
Even with this type of arrangement, however, there can be tax issues that require compensation ' where the country of assignment treats employer contributions as the employee's income, for example.
Historically, some expatriates were allocated unfunded pensions. Through this 'book reserve' system, the employee's pension is paid out of company funds on retirement. The security of such arrangements has always been questionable and concern has intensified with the collapse of Enron.
Kelly says: 'Post-Enron, employees are understandably anxious to have a funded arrangement rather than a promise that a benefit will be paid out of company funds when they retire.'
While international medical insurance is almost always offered as an expatriate benefit, disability insurance can be a problem in certain countries where the insurer may not be able to make regular checks on the employee's health. There may be other reasons why the employee is not fully covered ' for example, if the local practice is to rely on state benefits to which the expatriate is not entitled. In these cases, advisers may need to search the market for a partial permanent disability policy that would provide a lump sum rather than income.
Advisers should also examine carefully the hardship allowance for a client who is to live and work in a country that is unstable politically. An excellent guide to this subject is William M Mercer's Quality of Living Report, which assesses the political, social, and economic conditions and medical facilities, among others, in 215 cities worldwide.
In Bangui in the Central African Republic, for example, the report found that many expatriates hire bodyguards, police are undertrained, ill-equipped and frequently request bribes to follow up a complaint.
Finally, do push for pre-departure language training and inter-cultural briefings, as it is often these soft issues that make or break an overseas assignment.
Marianne Prynne, marketing manager at Farnham Castle International Briefing and Conference Centre, says: 'The days of going around shouting loudly in English are long over. If an expatriate wants to make a good impression with colleagues and new business partners, he or she needs to learn the language before departure.'
Lack of awareness of cultural differences can be disastrous, she warns. 'Where business practices differ widely it can be very damaging for employees used to the London business environment to go into their first meeting with their usual Western confidence and aggression. Many executives who function really well in London find they cannot function in the new environment, which may require a much more conciliatory approach and a lot of patience.'
Cultural problems are not restricted to the more exotic locations. 'The biggest rate of assignment failure is among US-UK expatriates,' says Prynne. 'People are very unwise to go from London to New York expecting a similar business culture.'
BG International is one of the multinationals that uses Farnham Castle for its expat employees. Susie Inwood, international assignment manager, says: 'If an executive is going out to set up a joint venture then language training is essential.
'But the main emphasis is the spouse and family. We bring the families in for a medical and briefing. Spouses can often find the cultural change and general upheaval very stressful, so we make sure they have a pre-departure familiarisation visit and help support any work or education projects they may undertake while overseas.'
Here, we list the most important benefits and employment issues to consider in the expatriate package.
• Tax protection. The employee may be taxed on certain benefits in kind as though they were income. The employer's tax protection programme should cover these additional taxes or at the least guarantee that the expat will pay no more tax than at present on the UK package.
• Employment contract. Try to ensure that your client's position is held open on return. Some 50% of international companies do not offer this guarantee.
• Salary indexation. Check that the local salary is adjusted in line with a recognised cost of living index. However, bear in mind that the adjustment may be zero or even negative.
• Salary premium. Many companies pay a premium for additional responsibility or as an incentive to move. Typically, this could be 5% for a move to another continent, 5% for a different language, and 5% for a major change in culture.
• Hardship premium. Clients sent to a tough location ' for example, in Eastern Europe, the Middle East, South Africa or Central America ' should receive a hardship premium on top of the job premium. This could be worth up to 50% of salary.
• Pension. The ideal option may be to stay in the UK scheme, but where this is not possible an offshore trust may be best. Unfunded promises carry the risk that if the employer goes bust the promise may not be met.
• Share options. Generally, clients should avoid exercising share options while overseas. A double tax bill would not be covered by the employer's tax protection programme, as this benefit is classed as personal income.
• Rest and relaxation (R&R) benefits. Clients sent to a dry state, for example, should ask their employer to arrange transport at regular intervals to a more relaxing environment.
• Accommodation. Employers may pay for accommodation, but employees should be prepared to make a contribution. For security reasons, in politically unstable locations accommodation is likely to be provided on a compound.
• Company car. If this is not a standard benefit in the country of assignment, (for example in the US), request compensation so that the client can buy or rent.
• Medical cover. This is essential for the whole family, including emergency repatriation.
• Life assurance. Typical benefits are two times salary, so it may be necessary to top this up with private insurances.
• Sickness and disability insurance. This is a grey area. If the employer does not offer adequate cover, find an insurer who will underwrite the client in the relevant location.
• Education. The employer should pay for private education for your client's children at home or locally, depending on location.
• Security. An estimated 38% of kidnap victims are company employees. Expats in Moscow and parts of South Africa, for example, may need a driver/bodyguard.
• Pre-departure briefings. Insist on a pre-departure intensive language courses and cultural briefing. A pre-departure visit to the new location should be provided.
Further information: William M Mercer Quality of Living Report 2001, contact the Geneva office on 0041 22 869 3000. Farnham Castle covers more than 150 countries and offers tuition in virtually any language, as well as useful acclimatisation seminars. Tel 01252 720415 or visit www.farnhamcastle.com for information.
Defined benefit pensions are less likely to be offered to expatriates. Check the defined contribution rate is adequate., and avoid unfunded promises.
Disability insurance may not cover the employee in the new location.
Personal security is a key issue in certain locations where there may be political unrest.
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Entry deadline: Friday 28 September 2018
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