Multinationals often find that local regulations will impinge on the operation of pension schemes. However, this need not be a bad thing and sometimes works to the advantage of both employer and employee
We often talk about how the new UK pension rules will affect clients planning for retirement abroad but sometimes forget to mention the substantial international pensions market for those who work in various countries during their career.
Of course, this is not just one market, either in terms of value and client needs. It can be stratified into various levels and segments. At one end you might find a sporadically self-employed yacht crew who are looking for a personal pension and savings solution - well enough paid but not always consistently working. At the opposite end you might find the multinational company executive, expecting to have a reasonably long and well-remunerated career with the firm and, perhaps, locked in to a formal contract where the employer makes a pension commitment in return for long service and flexibility.
At the corporate end of the spectrum, pension commitments can cause a host of problems for multinational companies. They have staff in a variety of locations working under different grades of contract that are subject to a variety of differing jurisdictional regulations. In this situation, it often makes sense to use an international retirement scheme. At a high level, it offers the simplicity of a unified structure governed by one set of rules. But is this always the case?
Nothing is ever simple - especially in the world of pensions. Companies do need to make themselves aware by taking good professional advice on their multi-jurisdiction staff pension arrangements. Often local regulations will impinge on the operation of the scheme and individual members' pensions plans. This need not be a bad thing and sometimes works to the advantage of both employer and employee.
In the UK, for example, schemes that can qualify as 'corresponding' to a UK scheme which provide for non-UK domiciled individuals can provide valuable benefits. Also, jurisdictions such as Jersey will normally allow insurance premium relief for resident members of international pension schemes.
So far, so good. But the position does need to be monitored if an arrangement is subject to specific local rules.
Things do not stay the same for long. It would be nice to think that, from the outset, the advice from a costly consultant would be enough to be able to find the right solution for a group of permanent staff. But we know from recent experience in the UK that changes can affect financial planning in a host of areas: pre-owned asset tax, tax avoidance schemes disclosure, the EU Savings Directive, capital redemption bonds and pensions - including the corresponding approval schemes mentioned before.
Looking at the corresponding schemes, the route to UK tax relief after A-Day will be by claiming Member Migrant Relief (MMR). The qualifying conditions for MMR are slightly different from those in the current regime. For example, tax relief on contributions or benefits must have been granted by the tax authority in which the overseas scheme is established.
This particular technicality sparked some discussion with the Revenue during consultation on the simplification of pensions. There are jurisdictions that attract internationally-mobile employees that have no tax to relieve, such as Dubai. Other jurisdictions, such as Jersey, do not provide relief but exempt from tax contributions and benefits.
The Revenue was quite flexible in considering these exceptions to the proposed rules, and in the latter case, tax exemption was explicitly written into the new rules. But the lesson here is that planning involving specific tax relief in a major jurisdiction needs constant attention and a good technical understanding of the issues involved. This relates to a fairly limited part of the overall market for cross-border pensions applying in a narrow set of circumstances.
So, in practice, how does a company with staff in various locations honour its commitments to provide pensions as part of its remuneration package? Let us look at some typical circumstances in a case study.
A global manufacturer with substantial subsidiaries in south-east Asia, Europe and Africa has a policy that all employees, in all locations, should be part of the local social security arrangement, at least to the statutory minimum.
On top of this, the company sees a need for pensions for a number of key executives and considers them central to the development and maintenance of their regional business units. These senior employees all have expatriate contracts and are drawn from different nationalities.
The main considerations the company had in looking at its options were that the employer-sponsored arrangement provides an income in retirement or when the individual leaves the firm, the ability to save on at least tax neutral terms and the ability to stay within the arrangement if the individual transfers between countries while employed.
These features are designed to attract and retain staff, but the company also has its requirements when buying into a pension arrangement to ensure it is getting value for money. These include central administration; the ability to move staff between subsidiary companies; that the arrangement is seen as a separate legal entity; and that it has minimal lock-in charges.
The company followed the advice of a consulting actuary which recommended an international retirement benefits policy set up in trust (Zurich Trust Limited) with an insurance policy (Zurich International Life). A deed of adherence to the trust permitted employees of any of the group companies to be members. The scheme rules also specifically covered the transfer of members between different employing entities with the group. The company contributed 5% of members' salary to earmarked policies within the arrangement, with each member able to contribute to an employee plan under the trust. A vesting clause in the trust meant employers' contributions did not become beneficially entitled to the full policy proceeds for 10 years or retirement (or death).
As the underlying pension plans were insurance policies, they provided members with tax planning advantages in some jurisdictions. Both the member and employer had the option to invest in a variety of funds covering all major sectors and fund types.
Zurich International Life, as the insurer, was able to provide an online administration system as part of the retirement benefits policy enabling the company's staff and HR department to access and manage the retirement account from anywhere in the world. The system offers a range of reports and transaction abilities such as viewing current account details, valuations, investment choices and bulk payment processing.
A number of other factors will be considered by companies in these circumstances, alongside the jurisdictional and product detail before committing to an international arrangement. These might include the credit rating and brand image of the insurer and the stability and reputation of the insurer's home jurisdiction. However, this case study shows how an international pension arrangement provided by an insurer, written under a suitable trust, can be more suitable in many situations than attempting to provide a number of domestic schemes tailored to local pension rules and perhaps tied to a local currency.
Companies with staff in several countries will usually look to several different types of solutions before choosing the best for their circumstances. This may not always be the most suitable for all the jurisdictions involved, or even the cheapest alternative. But it will satisfy most of the company and staff's requirements and may involve an international scheme.
Pension commitments can cause a host of problems for multinational companies. They have staff in a variety of locations subject to a variety of differing jurisdictional regulations.
In the UK, schemes that can qualify as 'corresponding' to a UK scheme which provide for non-UK domiciled individuals can provide valuable benefits.
Companies with staff in several countries will usually look to several different types of solutions before choosing the best for their circumstances.
Partner Insight: Dennis Hall, director and CEO of Yellowtail Financial Planning, Julia Dreblow, founder of SRI Financial Services and Frank Potaczek, head of UK proposition at Architas met in London to discuss different types of investor attitudes towards...
MSCI and Hermes research
Benefit calculators, tools and guides
‘In the know’
Answers by 3 December