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The Man’s pension plan
This article first appeared in Legal Week issue 13 February 2006.
Offshore: Retirement options for the globally mobile are becoming more of an issue, as companies relocate staff in order to remain competitive. Philip Games reports on what the Isle of Man has been doing to attract international pension schemes
The world is a smaller place than it seemed 10 years ago. Thanks to the technological improvements that have made this happen, businesses are finding it increasingly necessary to send employees overseas in order to develop new services, products and sales opportunities.
Undertaking an overseas assignment creates a range of issues for both employer and employee, particularly in relation to pension planning, and in respect of pensions, some of the main problems and issues involved in establishing suitable pension structures for global assignees are addressed within this article.
Employers who send staff on international assignments can find the logistics daunting — but to be competitive in a global market, it is essential that any business remains capable of recruiting and retaining the right employees. As a result, with any overseas assignment, the employer is faced with the challenge of delivering an employee benefits package that fits the expectations of the employee, but which also falls within acceptable business parameters.
Having the right pension or retirement plan can be a very effective way of motivating those on global assignments, and retaining key employees within competitive new markets. Pension provision for the globally mobile is a very complex area, made even more so due to a general lack of synergy between the domestic pension, tax and social security systems in different countries. This often results in the globally mobile assignee leaving a trail of pension and social security plans behind them as they move from one country to another. This can lead to a very disjointed retirement planning process.
Employers are increasingly looking towards international pension arrangements established in good quality, flexible international centres such as the Isle of Man, as a way of providing a valuable, and motivating, employee benefit scheme. The Isle of Man has never been slow to respond to emerging market trends, and upon assuming responsibility for pensions regulation, the Insurance and Pensions Authority (IPA) set about developing pensions legislation that not only catered for the requirements of Isle of Man residents within domestic schemes, but also provided a broader framework enabling multinational or global businesses to use the Isle of Man as a centre from which to manage retirement benefits schemes for employees residing anywhere in the world. Of course, the legislation equally empowers individuals to set up their own schemes with the approval of their employers.
It is believed that this was the first time that a financial centre developed a prudent regulatory framework to cater for domestic and non-domestic pension schemes. The IPA delivered a pensions framework specifically targeted at international businesses in January 2002. International assignments generally breakdown into three main categories:
Short-term assignments: Those on short-term assignments tend to be on a placement for a fixed period of time. These people are generally moved overseas to complete a specific project or to provide a development or training experience, or to transfer a skill to another location. Often, the contracts for these individuals are simple extensions of the company’s business travel policy.
Long-term assignments: The time range here is one to five years, and these individuals tend to take up a specific role within the overseas country and effectively become a normal member of the overseas workforce of that particular business. These individuals often return to a post in the home country at the end of assignment. Employment packages in this category are often structured to ensure that the assignee is no worse off in net terms than if they had remained at home, and calculating this can often involve a complex equalisation process. However, an incentive package may also be added to encourage the individual to move to the new location.
Globally-mobile employees and third country nationals (TCNs): Globally-mobile employees might be seconded for similar periods of time as those on short- and long-term arrangements, but rather than undertaking one overseas assignment they will offer to make a series of moves during their careers, and as a result lose their home country connection. Consequently, there is often absolutely no commitment on behalf of the employer to provide them with a position in the home country on their return. (TCNs) are people working for the branch or subsidiary of a foreign company who are not a citizen of the country in which they are employed, and not a citizen of the employer’s home country. Again, this status creates a need for a mechanism to enable the build up pension benefits independently of any home or host location.
Whether an employer or employee benefits from participation in an international plan largely depends on the category of employee being sent overseas. If a business tends to rely on short-term assignees to fulfil overseas roles, then the benefit of a free-standing international arrangement may be minimal — particularly if the business is a UK-based business, as short-term non-UK residents have generally always been able to remain in the main UK plan.
Equally, if all the long-term assignees end up in the same overseas country and that country has a robust pension and social security system, then using a scheme in that particular country might be the most appropriate solution.
However, if a business is sending staff on longer assignments, if it has employees based in more than one country, or if it regularly recruits or assigns those who are in the globally-mobile or TCN categories, an international scheme can be most appropriate.
While the benefits of a longer overseas assignment, in terms of career progression and experience, may be highly attractive for employees, any gap in retirement provision is often viewed as putting them at a disad-vantage to their home country equivalents. Therefore, to motivate and retain these individuals, a robust pension plan is an important part of the package
From the employers’ perspective, there is always the option to simply utilise a pension solution within the country of assignment; although clearly where a business operates across several jurisdictions, this creates additional costs in obtaining advice relating to separate plans, ongoing scheme compliance, tax matters and the duplication of administration costs. Equally, the scheme may be seen in some areas as being inferior to that available in the employee’s home country. For instance it may be based in a weak currency, or have very restrictive post-retirement transfer provisions, all of which may serve to reinforce employees’ feelings of general disadvantage.
If a business does operate over a number of jurisdictions, establishing a free-standing plan and central-ising core pension functions within one jurisdiction can be very effective. From a cost perspective, operating only one scheme as opposed to several smaller schemes within each jurisdiction removes a large amount of duplication in core processes. It can also mean that pension provision can continue uninterrupted when an assignee moves countries, whereas transfers from a domestic scheme in one country to one in another country can often be both costly and time-consuming (if indeed it is actually possible).
Consequently, an international plan makes particular sense where your workers are globally mobile and may be working in a country for only a few years and do not wish their accrued benefits to remain ‘landlocked’ after their departure, to ensure long-term savings goals are met.
The regulatory framework in operation on the Isle of Man focuses on the creation of a governance template for every scheme. This template creates a core to the arrangement by ensuring it is operated by licensed professionals, adopts strong internal governance, and that member rights are enshrined in law. However once this central core has been established, the legislation confers substantial flexibility regarding specific benefits design, leaving scheme designers free to create a bespoke benefit structure that can be fully adapted to suit the objectives of an international business, or incorporate multi-jurisdictional requirements.
For instance, Isle of Man international schemes:
- can cater for the payment of benefits in lump sum or income form;
- are not required to purchase an annuity;
- are not restricted to a maximum percentage of salary an employer or employee may contribute;
- are not restricted by any limits on the maximum amount of benefits that can be taken.
This ‘open architecture’ approach means that while flexibility of scheme design is maintained, an international business may be assured that the structure they use is a completely robust arrangement managed by a government registered administrator, and employees can take comfort from the fact that the scheme is fully regulated by a proactive regulatory authority, and that certain member rights are protected by law.
In the two-and-a-half years in which the island’s international pensions framework has been in place, 40 international schemes have been registered with the IPA and ten specialist pension administration companies have been established to handle the management and administration of international schemes. The schemes established have been on behalf of a diverse range of international businesses, including leading global employers such as Emirates Airlines.
It has to be noted that whatever corporate benefits policy has been agreed upon, there still may be a desire on behalf of the employee to fund additional retirement provision.
Where there is a need to make this additional provision, it is often the case that an employee will seek to establish a personal ‘top-up’ plan to absorb additional contributions. There are arrangements which the globally mobile can utilise to make additional contributions. They might elect to utilise a tax-effective savings or top-up pension plan in their host country, use a flexible insurance-based offshore pension plan, or simply establish a portfolio of offshore funds.
Source: Legal Week
Issue: 13 February 2006
Author: Philip Games
