Benefits and Compensation

Borderless Pension Plans

As organizations become more global, HR leaders face the challenge of how best to reward and protect certain groups of their international staff. Pensions and savings benefits are often tightly bound by local rules and restrictions that can exclude some workers or render the benefits unattractive or insecure. One option is to look at the increasingly popular “borderless” or international pension plans that exist outside of domestic frameworks.

Pension
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When the first Willis Towers Watson International Pension Plan Survey was conducted in 2009, the vast majority of plans were offered to expatriate workers who were sent overseas for assignments. The rationale was to deliver a replacement benefit for the one that was lost because they could not be retained in their “home country” plan or there was no suitable “host country” arrangement or “host” benefit.

The pension gap needed to be filled, and if a cash allowance was not viewed as appropriate for cultural reasons, an international pension plan (IPP) would be established by the employer to deliver the replacement benefit. Usually, there were small groups of expatriate workers who were catered to at the same time. According to the latest International Pension Plan Survey, some 80% of IPPs have fewer than 200 members, and the average is typically fewer than 50 members.

Fast-forward to 2021, and there are still many IPPs being set up for these international employee groups, but the market has been extended to cater to a much wider demographic. We are seeing more and more IPPs and international savings plans (ISPs) emerging. The ISP is similar to the IPP, except it typically comes with a shorter objective to pay out a benefit before retirement.

Employers want to provide a long-term savings benefit, but the nature of work is changing. Their target key employees are less interested in a retirement benefit that seems a long way in the distance and are more motivated by an efficient savings opportunity. This is now often paid out once they leave the ISP, and it might be reinvested or could be used as a home deposit or for an immediate-term financial need.

Growing Demand from Different Employee Groups

Eligibility rules are also transforming, with IPP/ISP members now coming from a wide variety of different groups yet being included within the same global IPP/ISP. In recent years, these have included:

  • Foreign workers on local contracts who are excluded from the domestic pension arrangement. For example, Singapore and its Central Provident Fund (CPF) is only offered to Singaporeans and permanent Singapore residents.
  • Foreign workers employed on local contracts participating in the local statutory and mandatory systems where they are based but who will never likely receive a benefit from that system because they aren’t vested or are ineligible. China is one example, so this group is likely to expand in the future.
  • Employees based in the Middle East who might be included in an IPP/ISP because the IPP/ISP is being used as a funding vehicle for mandatory “end of service” benefits or a “gratuity.” This is more and more common in the Gulf Co-operation Council (GCC), where these mandatory “gratuity” benefits are common. Local rules are changing and moving from unfunded to funded, driven by recent and/or likely changes to rules to ensure greater security around the provision of these benefits.
  • Executives are often capped by domestic pension regulations, and IPPs are being used to provide additional deferred pay, with vesting rules to lock them in.
  • Local employees in crisis countries have been featuring more and more in IPPs and ISPs because the local pension systems they belong to either have failed or are at an increasing risk of failure. Developing markets have become protectionist around their pension assets, and one of the common provisions is around requiring 70%–90% of the local pension monies to be invested in the local sovereign debt market (government bonds). Sadly, in 2020, at least eight countries defaulted on their sovereign debt, as they could not pay back the interest when it was due. This affected countries as far as Argentina, Belize, Ecuador, Lebanon, Suriname, Zambia, and Zimbabwe. It can be expected that, given the future impact of the pandemic, more countries will struggle to service their sovereign debt obligations.

A Single Plan Can Harbor Many Different Savers

The IPP/ISP is attractive because it can be built to cater to multiple groups and sub-groups, as both the trustees and the scheme providers have developed more flexible administration platforms. This means a single IPP/ISP might be set up to cater to global career nomads, foreign employees on local contracts in Singapore, GCC employees with gratuity obligations, and executives and local employees who might otherwise be participating in a domestic Lebanese or Argentinian plan. Sponsors can then deliver pension benefits to diverse groups, and they only need a single governance framework to be wrapped around one IPP cross-border delivery vehicle. This is inevitably when employers will look to fix the pension requirements of these and other potentially challenging groups in the future.

Michael Brough is Senior Director and Developing and Emerging Markets Leader for Global Services and Solutions at Willis Towers Watson.