International Pension Plans: An alternative form of a retirement vehicle

5 December 2024

Multinationals with successful expatriate retirement benefits adopt process maps to guide their internal teams to the best solution for each expatriate.

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Author: Ben Cumming

It goes without saying, but I’m going to say it any way: Employees need to be saving for their future retirement needs.

Companies have been tackling this issue at a local level however, the issue is rather more complex to solve for their globally mobile employees. Employees on home-based contracts may be able to continue to participate in their home retirement plan, but some circumstances mean this option may not provide adequate retirement savings or may have tax disadvantages.

In these situations, and others, such as when a globally mobile employee has no “home base”, it may be appropriate to use another form of retirement vehicle such as an International Pension Plan. An International Pension Plan (IPP) is a pension vehicle set up to accommodate a company’s employees in many different jurisdictions.

An International Savings Plan (ISP) is like an IPP but provides more flexibility and allows for early withdrawal of funds. Both plan types are usually structured with assets ring-fenced for the employee. They can form an essential part of a company’s broader solution towards ensuring they provide all employees with a retirement benefit. Other solutions often used by multinationals are home plan participation as mentioned above, and host plan participation, where the expat joins the “local” retirement plan.

In this piece, we’ll focus on IPPs and ISPs and provide discussions around when other solutions might be more appropriate.

Ultimately, the solution that’s most appropriate for each employer will depend on the factors such as assignment length, home and host country provision, legislation and tax and social security treaties. IPPs and ISPs are set up for several reasons and this is in recognition of the fact that international legislation in the pensions arena is hard to navigate, with practice and regulations varying widely between countries and often in conflict with one another. They can also be used to supplement local provision in “local plus” type arrangements for mobile employees, recognising that plans on assignment can be very different to what they are used to.

Issues for employees

Moving between different countries can cause several issues for employees of a multinational organisation, including:

Lack of local retirement benefits
Fragmented retirement provision
Foreign exchanges risks
Cross border taxation issues, potentially impacting the final fund value that has been built up.

ISPs and IPPs can offer significant benefits for expatriate and globally mobile employees. Having a single centralised retirement pot can simplify administration and go towards mitigating some of the risks and challenges outlined above. Some plans are very flexible and can be tailored to suit the needs of a company and its employees and are often customised to mirror existing company pension plans, or established stand-alone pensions or savings plans, as needed.

The plans are often trust-based and are set up in offshore in locations such as the British Crown Dependency of the Isle of Man, the Channel Islands, Bermuda and the Cayman Islands. Each of these locations will have its own set of requirements and regulations and, importantly, most have tax information sharing agreements in place with the United States, to support FACTA reporting requirements where US multinationals or US taxpayers are involved.

Master trust savings plans enable multiple sponsoring employers to be included under one centrally administered trust, which significantly reduces the plan governance burden and cost on sponsoring employers, but still provides professional trustee services and support. Contract based plans are mostly domiciled in Luxembourg and tend to be sponsored by European based multinationals.

All the leading providers in the IPP and ISP market recognise that an effective, secure and user-friendly technology platform is an important bedrock of any plan operation – both from an employer and a member perspective. The providers therefore provide corporate access to an instance of their platform, which will fulfill several functions from an ongoing stewardship and management information perspective.

Setting up an IPP can take between three and five months.

Considering the pros and cons

In deciding what’s the best solution to provide retirement benefits to a mobile employee, an organisation should consider the pros and cons of each solution.

For an IPP, the pros can be:

Increased corporate governance over international pension provision
Increase in administrative efficiency and creation of equality with overseas employee base
Eliminating or substantially reducing currency risk, via access to multi-currency investment solutions
Open investment architecture that’s not tied to standard insurance solutions
Reduction in counterparty risk by not using an insurance wrapper
Ability to cater religious investment criteria such as Sharia, as well as meeting ESG requirements when it comes to investment mix
Potential of consolidating mobile employees’ pension pots, rather than having local plans scattered across the globe
More efficient to establish than different local plans
Quick and easy to implement a new sub scheme, geographical location, or subsidiary
Asset safety when compared to local pension plans in the majority of emerging market jurisdictions
Often subject to lesser taxation in payment as contributions have not received favorable tax breaks when paid in.

However, some cons of IPPs are:

IPPs aren’t recognised by local legislation and so there is no tax deductibility of contributions for employers and employees
IPPs cannot satisfy mandatory requirements, such as auto-enrolment in the United Kingdom (although in low tax regions such as the Middle East and Far East, this is less of an issue)
Resulting from the above, contribution rates may need to be higher than for local tax- approved plans
There are sometimes restrictions when it comes to consolidating into an IPP pension plans previously built up in other countries
IPPs are typically more expensive to operate than a local pension plan of similar nature
Limited choice in the market with only a handful of major providers dominating.

In summary, an IPP or ISP is a useful tool for multinationals with mobile employees to have as an option to provide retirement benefits to expatriates. While they’re robust and attractive to many, they’re not always the best fit for all mobile employees—so a decision tree process is essential in understanding what solution is best for each mobile employee.