Global Pension Plans on the Rise

By Roy Maurer Jan 17, 2014

The number of companies using international pension plans (IPPs) continued to grow in 2013, according to a Towers Watson survey of multinational employers, with the total number of plans having increased 10 percent to 438, since 2012.

The survey results also indicated an increase in the number of employer-managed international savings plans.

The 2013 Towers Watson International Pension Plan Survey included 406 large and midsize multinational employers across a variety of industry sectors that employ expatriate and local workforces participating in IPPs. The findings include data on IPP membership criteria (plan size and location), plan design (such as defined contribution, defined benefit or hybrid plans), funding, vesting criteria, employer and employee contribution amounts, investment funds and retirement distribution options.

According to the survey, the primary reason companies offer IPPs is to provide expatriate employees with a retirement benefit (as a replacement for not being able to remain in a home-country or host-country retirement plan).

IPPs are also used to extend plan participation to local workforces where their local retirement or savings solutions are either not available or not satisfactory due to poor market conditions.

“More companies are creating a mobile workforce, which brings the challenge of what to do for their benefits offering,” said Michael Brough, senior international consultant at Towers Watson. “Expatriates can often only stay in home-country pension arrangements for limited periods. When there is no host-country plan or this plan is inadequate, the expatriate can easily end up with a gap in their retirement savings. Employers will have to address this problem or otherwise could find their expatriate employees knocking on doors at the end of their career for some last minute top-up pension funding.”

Catching On in the Middle East

Similar to prior years, the largest percentage of plans (67 percent) was described as “global,” meaning that the participant could be based anywhere in the world and of any nationality. The single region with the most IPPs (52) was Europe, with 13 percent of the total.

The Middle East is an increasingly popular region for IPPs with six of the 15 new plans in 2013 being set up for local Middle-Eastern based workforces.

Plan Design

Defined contribution (DC) plans (87 percent) remain the most prevalent design, according to the survey, with defined benefit (DB) plans (10 percent) typically closed to new members and dwindling in numbers. Hybrid plans (3 percent) were found to be less common than either DC or DB plans.

The survey found that nearly all DC plans and about half of DB plans were funded. Most hybrid plans also were found to be funded.

Waiting Periods and Vesting Criteria

The majority of IPPs offer access immediately without any waiting period for eligible employees to join the plan. Most plans that do incorporate waiting periods require employees to wait for one year or less before being eligible to join. “Waiting periods before being able to join plans is not a typical practice for expatriate employees, however, a waiting period could be appropriate for the plans that are set up for local workforces, as it is more likely that the savings accounts will be smaller and potentially have higher turnover, resulting in an administrative burden for HR to maintain,” according to Towers Watson.

Around 40 percent of IPPs incorporate vesting provisions within the plan rules. Most commonly, the employer’s contributions vested completely within three to five years of a member joining the plan. Where vesting rules exist, a flat vesting schedule, where a worker is vested at once after a certain length of service, continues to be more popular than phased vesting, the survey found.

Contribution Amounts Vary

The employer and employee contribution amounts were found to vary widely by plan. The highest concentration of plans reported having a flat contribution scale as opposed to service or age-related scales.

“Generally, the newer plans are moving away from service and age-related scales and report either a flat rate for all employees or different flat rates for different groups of employees, for example, local employees would have one rate and executives another,” the report said.

Pensionable salary was most prevalently defined as “base salary only” (50 percent).

Employer matching is a common feature when the plan is contributory and by and large 1:1 matching is more prevalent than 1:2 matching, the results showed. The minimum amount of employer contributions most commonly reported (excepting no contributions at all) was less than 5 percent of pensionable salary.

Most commonly reported maximum employer contributions were between 5 to 9 percent of pensionable salary.

For employee contributions, the majority of IPPs are completely voluntary and the most common minimum employee contribution was 0 percent. The most commonly reported maximum employee contributions amount was no cap followed by between 6 to 10 percent.

Lump Sum Preferred

A lump sum continues to be the most popular form of distribution at retirement, with 61 percent of IPPs offering only lump-sum benefits. Over a third (36 percent) of IPPs offer the choice of lump sum or annuity. Very few (3 percent) offer annuities only.

Rise in International Savings Vehicles

Towers Watson expects international savings plans (ISPs) will continue to grow significantly over the next few years. “The ISP is essentially the same vehicle, but with a more flexible delivery around the distribution to reflect the fact that it is more a savings vehicle with a shorter time horizon than an IPP that might target retirement,” said Brough. “This is particularly evident in the Middle East and Latin America for local employee groups, but also for expatriate groups with shorter expected service periods as expatriates,” he said.

Younger workers may be turned off by retirement funding, according to Towers Watson, and instead be attracted to the idea of a low-cost shorter-term savings plan, perhaps supported by employer contributions or established on a group basis by their employer, who might cover the administration costs. “For most expatriates, an ISP can offer an efficient, low-cost employer and employee funded savings facility, which offers them when not working in their home country an excellent opportunity to build up some savings through a group arrangement for when their international assignment ends,” said Brough.

Roy Maurer is an online editor/manager for SHRM.

Follow him at @SHRMRoy

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