The Benefits of an International Pension Plan for Global Employers
Corporates who continue to expand their operations in lucrative emerging markets such as Africa, Asia, Eastern Europe, Middle East and South America now need to consider how best to establish and maintain pension plans in these locations. They are increasingly looking at IPP’s to help fulfil this need.
Over the last 30 years Guernsey has been at the forefront of International Pensions. During this time various types of plans have evolved because of different legislation and through innovation in the market place. Guernsey has a substantial number of pensions plans and its international pension and benefits offering, continues to expand.
The Benefits of International Pension Plans for Global Employers
International Pension Plans are often much more appropriate and flexible for the internationally mobile employee. These individuals can establish one pension, often consolidate existing pensions and have greater flexibility in how their assets are invested.
The more traditional local pension scheme only allow access to a very limited range of insurance based funds denominated in USD, others are expensive or rigid products. Foreign exchange fluctuations are sometimes not taken into account and it is highly likely that employees could be subject to unwanted foreign exchange risk. Multi-currency investment choices, and Sharia complaint and socially responsible investments are only offered in a very limited few locations.
Corporates’ are starting to move away from the historic ‘local pension’ mentality to a more modern, international pension and benefits system, rolled out from their head offices. Incorporating IPP’s reduces risk and offer administrative synergies and streamlining operations for certain groups of employees and jurisdictions particularly those working in a global market place.
Global Employers and Pension Plans
Although “International Pension Plan” is a generic term it encompasses many different types of offshore pension. These include QROPS, QNUPS, s615’s and IPPS (40 (o) and 40 (ee’s) in Guernsey).
The most flexible and popular for the globally mobile and international tend to be the 40 (o), for corporations, and the 40 (ee’s), for individuals. QNUPS are popular too as supplementary pension plans for executives.
As corporates expand overseas, they find that implementing international pensions and employee benefits can become increasingly difficult. Life assurance, medical cover and a lack of pension schemes in local jurisdictions present huge challenges and can hide highly complex administrative puzzles.
Environment and local stability also need to be taken into account, in particular events such as the Arab Spring uprisings and the difficult political situations of countries such as Tunisia, Yemen, Bahrain, Egypt, Syria and Ukraine.
Closer to home there has been the recent Spanish Gibraltar clash and the Cypriot repatriation of banking funds, including pension money. The rising tensions in Argentina over the Falkland Islands has also resulted in the repatriation of entire pensions funds from local schemes.
All these external influences in different countries have been adding to corporate woes and anxiety when it comes to running pension provisions for their employees.
The Traditional Local Pension Route or a Flexible IPP?
Local pensions do play a valid role in the overall corporate pension structure. There are many areas where excellent pension regulation and providers exist around the world. For some nations including those in Europe, USA, Australia, and Hong Kong, local schemes would be better suited than an IPP.
But there are certainly many areas where the IPP comes into its own for the globally mobile employee or the expat making a new home, particularly in a developing nation or emerging market.
Guernsey International Pension Plans
In Guernsey’s case, the IPP is a trust based scheme founded on local income tax legislation. The trust can be established as an occupational, individual or multi member scheme and would normally be irrevocable in nature.
As the pensions are trust based, they are highly flexible and can be adapted to individual needs. They can be used as a stable pension for the globally mobile and overseas employees either as a consolidation tool, incentive scheme or can be adopted as a clean savings scheme.
Further enhancements can be added that improve the overall attractiveness. For example, life assurance, death in service benefits or critical medical cover can add meat to the bones. Even local domestic employees in area such as Africa, Eastern Europe, and Middle East can have a tailored provision with trust based schemes.
In Guernsey, as there is no tax relief on contributions, there is no tax on drawdown either, making these highly conservative schemes. Of course, members could be subject to a tax charge in the country of their residence as they would any other pension schemes.
There are two main criteria to qualify for this tax neutrality:
- That the employer and employees are non resident in the Bailiwick of Guernsey.
- That the minimum age for computation is 50 years.
At this age full computation can be taken, as it provides additional flexibility for those termed globally mobile or international nomads. Saving schemes wouldn’t however be subject to this latter provision and would provide the ultimate in flexibility.
How Active are Corporates in this Area?
Some corporates do already having various types of IPP in place and the majority of these seem to be happy with their arrangements. The barriers for establishing an IPP have tended to be the lack of knowledge outside of the pension department’s sphere of experience and the information that is actually available.
Trustees or specialists who can guide one through the implementation and options for an IPP are currently few and far between. Highly informed knowledge of these plans within the international arena also hampers implementation as specialist legal and tax advice needs to be taken to minimise any issues for the actual employee.
Highlights
Once implemented across the group, IPPs provide an array of benefits for both the employer and the employee. Risk within this area is mitigated with lower currency fluctuations, lower administration, and more synergy, all in a well-regulated and stable jurisdiction.
- There has been increased corporate governance over international pension schemes.
- Standardisation of company pension policy across the group increases admin efficiency, lowering costs and creating equality with overseas employee base
- Eliminating or substantially reducing currency risk with access to multi currency investment solutions.
- Open investment architecture that is not tied to standard insurance solutions.
- Reduces counterparty risk by not using an insurance wrapper.
- Cater to religious investment criteria such as Sharia, ethical or green compliant investments.
- Potential of consolidating mobile employee pension pots, rather than having local schemes scattered across the globe resulting in better administration and reduced country specific risk.
- Easier and more efficient to establish than different local schemes
- Quick and easy to implement a new sub scheme, geographical location, or subsidiary
- Safer than local pension schemes in the majority of emerging market jurisdictions
