Companies with international operations can experience challenges when putting into place retirement benefits for their global employees. They end up working with multiple service providers, have to navigate complex social and labour laws, unfamiliar regulation and can experience limited investment choice.
This can place strain on HR Compensation & Benefits teams as disproportionate resources are diverted from larger retirement plans, such as their 401(k).
This is where international pension plans (IPPs) and international savings plans (ISPs) can help.
IPPs and ISPs have become increasingly popular as companies become more global. Below are some of the reasons why you might want to consider them as part of your company's global benefits strategy:
- IPPs or ISPs? The main difference between an IPP and an ISP is members in an IPP need to reach a normal retirement age before they can start taking benefit. Members in an ISP, on the other hand, can normally take benefit on leaving service.
- Eligibility. Traditionally, plans were set up for mobile employees and expatriate populations. This has broadened and now includes locally contracted headcount in countries with where local plans do not exist, or are not available to foreigners or where the country has economic challenges. A single centralised retirement or savings plan can also help companies streamline their operation, reducing the number of vendor relationships and allowing the company to focus its resources elsewhere.
- Simplification. Having a single centralised retirement or savings pot - rather than fragmented provision across a number of service providers and jurisdictions - can help your internationally mobile and expat populations rationalise their long term savings, making it easier for them to manage.
- Portability. International employees may move between countries for work assignments. Whereas traditional retirement plans in one country may not be easily transferable to another country, IPPs and ISPs are designed to be portable, allowing employees to continue contributing to the same plan, even if they change jobs or move to a different country, subject to local tax advice, of course.
- Flexibility. There is far greater flexibility as to how contributions are made and in which currency assets are invested. This can be attractive to individuals who intend to return to their country of origin and take benefit in a different currency to their payroll currency. Additionally, as contributions can be converted on receipt, future FX risk can also be mitigated.
- Diversification. IPPs and ISPs offer a wide range of investment options, including both local and global investments. This is particularly attractive for employees in locations with limited investment choice or unstable local economies with higher risk of default.
- Taking benefit: IPPs and ISPs are generally more flexible than domestic equivalents on exit, as they can allow members to take 100% lump sum payment and do not require the purchase of an annuity.
- Mitigating risk. The fact that assets are held in a tax transparent International Finance Centres (IFCs) limits the risk of double taxation on distribution or drawdown. IFCs can also be more secure and politically stable than their employee's current location, further reducing potential risk.
- Tax treatment. One of the biggest differences between international and domestic plans is the tax treatment. Domestic plans may attract tax relief at contribution whereas this is not normally available for IPPs or ISPs. However, as employment taxes will have already been paid, withdrawals may be more efficient – though this will depend on the member’s personal circumstances.
- Estate planning. Member assets are held in notional accounts by a trustee of a discretionary employee benefit trust. IPPs and ISPs are therefore typically held outside the member’s estate.
Offering your employees an IPP or an ISP can make you more attractive to top talent, especially if you are operating within a sector where global mobility is common.
If you would like to learn more about how an IPPs or an ISPs could benefit your company, please contact me at [email protected].
