Local v Centralised benefit provision for mobile employees and TCN’s
What do we really mean by centralised?
Whilst there are many variants we can identify two common models of centralisation, the truly global corporate centre lead entity and the regionalised approach, by far the most prevalent. E.g. MENA (Middle East & North Africa) or APAC (Asia Pacific).
How a business may choose to be structured will very much depend on its size and scope. This will largely determine how differentiated an approach can be justified to manage it’s mobile staff. The increased availability of mobile employee management software has meant that a more centralised approach is possible for smaller businesses.
However as a rule of thumb, the smaller the scale of the business the less likely it will be able to utilise a truly centralised approach.
However for specific benefits a centralised approach can be scalable regardless of business size so long as the right advice is sought on the most appropriate solution. On that basis this article focuses on pension benefits but you could easily relate it to healthcare, group life and other employee benefits in a similar way.
The financial crisis and generational differences – catalysts for change
The unprecedented financial conditions prevailing since 2008 coupled with the growth in emerging BRIC (Brazil, India & China) economies has lead to increased employee mobility over the period.
The emerging Gen Y workforce see working overseas as a kind of “right of passage” in both their careers and the life experiences they aspire to. So we are seeing the emergence of the once fabled career “global nomad”. For older generation X’ers freed from childcare responsibility, mobility is seen as a way to fulfil retirement lifestyle aspirations and at the same time top up shortfalls in retirement income.
So, there is a complex set of factors both socio political, environmental and economic that is influencing mobility policy, practise and activity. Whilst mobility in general is on the increase there has been a lot of change in terms of the types of mobility. The traditional expatriate assignment still exists but there is an accelerated growth in “foreign local hiring” e.g. employing a third country national on “local plus” terms, short term and commuter type assignments. In short the mobile cohort has increased and continues to grow.
Incompatibility time bombs
From a benefit perspective we have seen a rationalisation of approach and an increased focus on obtaining value. At the same time we have witnessed erosion of the tax breaks associated with local pension plans and associated life products which have changed the focus away from tax efficiency to tax compliance.
Add these factors to the socio economic factors and you conclude pretty quickly that what worked before might not work now or in the near future. Multiple local benefit plans certainly do not fit the “global nomad” model who need a benefits package that aligns to their pattern of work. As an example it would be complex and most likely non-advantageous for a mobile employee to be in multiple local pension plans. They may benefit initially from some local tax breaks but when they come to retire they potentially have a tax and currency headache of monumental proportions, for them, a real incompatibility time bomb.
This is further complicated by changing retirement patterns in terms of age at retirement and where people are choosing to retire.
Overall value, ease of administration and compliance more important than tax effectiveness
And the issues do not stop with the individual. As the tax breaks slowly erode and pension and other benefit plan compliance increases it is leading companies to question the cost benefit of operating multiple tax efficient local plans against the operation of a single global plan that is tax neutral and compliant.
As Michael Brough from Towers Watson observes; “We are seeing increasing demand for a single structure ’catch-all’ global pensions vehicle that is not necessarily driven by tax effectiveness, but rather to simplify governance and reduce costs in other ways. For example, consider the multinational company that sponsors (amongst others), say ten small local pension schemes (in the Middle East, Africa and Latin America) that deliver USD100,000 of tax relief each year, but cost USD400,000 to run. They may also have limited investment opportunities and suffer high charges. If you can instead include them all in one low cost international plan, with wide investment flexibility through ’guided or open’ architecture, although it loses the tax efficiency, with it only costing USD100,000 to run, surely it makes sense to have a single global plan, even if it means compensating employees for the lost tax breaks”.
As the globalisation of business and employees continues we must identify our own “time bombs” to ensure we have a benefits suite that is sustainable, valued and fit for purpose now and into the future.