What’s Happening With International Benefits?
By: Gregory R. Patterson
The last 30 years of international benefits have witnessed tremendous change in the underpinning of social security systems, insurance company products, the role of the consultant, technology, and the evolution of a more complete human resources professional.
The First Pillar Historically, social security systems in Europe started out as a cradle to grave answer to providing retirement, death, disability, and medical care for workers and their families. Retirement benefits in many countries had old age pensions with Defined Benefit formulas calculated on earnings and years of participation in the system.
Today, these social systems – along with the U.S., Asia, and Latin America – are feeling the effects of aging populations and a declining ratio of active contributors to retirees. Better medical treatment is resulting in longer life expectancies. Job shifting is affecting the fiscal soundness of worldwide social systems.
The fall-out from these changing demographics has resulted in social security systems trying to maintain a fiscal balance by increasing the normal retirement age, setting contribution and contribution ceilings, reducing accrual rates, lengthening contribution periods for eligibility for full benefits, and taking a surprisingly slow approach to equalizing male and female retirement ages.
Employer Plans: The Second Pillar
Even before the First Pillar (State Schemes) started to crumble, employersponsored plans played an important role in supplementing state schemes. The concept of a social security system providing a foundation for old age pensions has been a noble solution, especially for the majority of workers in many countries whose earnings were, and are today, near or below the benefit ceiling. On the other hand, the more highly compensated employees always benefited far less as the income replacement ratios decreased in relation to their higher earnings. The solution was the integration of employer-sponsored DB plans to bring about a more equitable retirement benefit, regardless of earnings.
DB plans have proven to be costly to maintain and to administer for employers. Coupled with social security systems needing sustained solvency, more and more was expected of the employer-sponsored plans. After years of social systems and employer-sponsored plans caving in under mounting fiscal pressures, there has been a shift on two fronts:
- a profound change from employersponsored DB plans to Defined Contribution plans
- a shift in emphasis from Pillars I and II to Pillar III, the employee
The shift to DC plans started in the U.S. and gradually spread outside its borders.
In Europe, we have seen the transition occur in traditional DB markets including the U.K., Belgium, Germany, and the Netherlands.
The U.K. has money purchase schemes and a stakeholder’s pension that requires offering pensions at a minimum number of five employees. There is currently no requirement for employers to fund these plans, but many people believe that requirement will follow.
In Germany, recent pension reforms directed at employer-sponsored pension plans and individual retirement savings plans will play a greater role in employee retirement planning than ever before. Several of these plans are DC in nature including plans financed through direct insurance (Direktversicherung) and Pensionsfonds; two of the five existing pension financing vehicles in Germany. One objective of the reform is a gradual reduction in the taxable portion of employer and employee contributions and a gradual increase in the taxable portion of pension benefits from all employer-sponsored pension plans, to be completed by 2040.
Asia has a history of government mandated DC systems known as provident funds and superannuation plans. Countries like Singapore and Malaysia have their Central Provident Fund and Employee Provident Fund respectively, which have mandatory requirements for both employers and employees to contribute a defined percentage of the employee’s earnings into a government managed retirement fund. Hong Kong introduced its MPF in December 2002 requiring employer and employee contributions and Australia has its Superannuantion fund compelling employers to contribute according to an annually indexed ceiling.
In Japan, there has been a true shift away from DB plans where DB plans have been legislated off the books by 2010. And the trend has continued in Latin America where Mexico has not only followed the Chilean model to privatize social security, but it has introduced privately managed, individual accounts which employers and employees contribute to.
Individual Plans: The Third Pillar
The shift within the Second Pillar to DC plans is still not sufficient to stem the financial erosion of state schemes and the high expense of funding DB schemes. Governments are looking more and more to the Third Pillar, the employee, to solve the replacement income gap.
In response, governments have been introducing tax favoured legislation ranging from the U.S. 401(k) plan to Germany’s Pensionsfond to encourage employees to make employee-funded plans a part of their retirement financial planning. Singapore, which has long avoided employer tax qualified plans – or any type of tax favoured pension legislation – introduced the employee-funded Supplementary Retirement Scheme (SRS). All of these vehicles are tax driven to provide individual tax relief going into the plan and/or tax advantaged distributions.
The Emerging Multi-national And Today’s Market
What does this mean to multi-nationals in today’s economy? Whether a company is new and emerging or mature and looking to plant new flags, companies are faced with similar challenges to provide international benefit programs. Companies strive to do more with less and the HR professional is right in the middle of this. Today’s HR professional is very business savvy, but wears numerous hats. They have less time and internal support with which to perform their functions and face keeping pace with a changing world.
How do today’s professionals face the challenges of establishing international benefit plans? They must start with understanding their company’s objectives, understanding their role within the organization, and how they can impact those objectives.
Let’s look at a company that is going international for the very first time. It plans to hire sales and customer service people in the U.K., but the start-up has fewer than five employees. It needs benefits, payroll, accounting, banking, and more. It needs a strategy that starts with identifying internal and, very probably, external resources to help them secure these services.
Once the HR person has identified their resources, it has to manage its activities under a given time line. The first priority is to identify the appropriate legal entity to allow it to conduct business in a given country. In order to do business legally and ethically overseas, multi-nationals need to abide by the local laws of the countries in which they do business. In most countries, it’s necessary to use locally licensed and admitted carriers to provide insurance benefits.
Paying employees locally may not have the same legal requirements, but it contributes to overall compliance to the same degree by assuring proper tax withholding. Companies need to take the extra time to establish legal and compliant programs for three reasons:
- To make sure local operations are not put in jeopardy and to avoid fines and sanctions for improper business practices
- To protect the good name and integrity of the organization
- To be consistent with the values established in the parent organization via mission statements, ethics policies, and employee handbooks
Once the entity is set up, other services can follow. Tax identification numbers can be obtained. Payroll providers can request the necessary documents and employee information to set up payroll. Corporate bank accounts can be established and insurance companies can request census data and provide quotations. Employers can choose the insurance carrier and proceed with the implementation.
There is a lot to think about and a lot to manage. Understanding the fiscal pressures surrounding the First Pillar – the shift from DB to DC plans – and the introduction of employee savings plans gives the HR manager a foundation for a benefits strategy. Identifying and managing internal and external resources will lead to a strategy to achieve HR goals. But a large part of the challenge is how to implement the strategy within the budget and time constraints imposed within its own corporate structure.
As we can see, so many external and internal changes are normally out of the HR person’s control. But with a clear understanding of the company’s objectives and a clear understanding of the resources available to them, the HR professional can significantly enhance their role within the organization and impact the philosophy and strategy in setting up benefit programs worldwide.
Gregory R. Patterson is managing director of globalCAN.
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