Thought leaders: The year ahead: Zurich insight: Worldwide view points the way for pensions

Global pensions provision is becoming increasingly important, says Paul Colley, HR insight and key account manager, Corporate Life and Pensions, Zurich International Life

Nearly all European nations are experiencing long-term falls in birth rates. This, coupled with improved healthcare and increased life expectancy, is leading to ageing populations. Fertility rates are now below replacement level in nearly all countries. As a result, we are seeing a growing proportion of elderly dependants and a decline in the working population. This increases the pressure on state-funded retirement systems and also gives HR professionals a challenge in attracting and retaining talent from a decreasing pool.

These demographics, coupled with the economic crisis and its impact on pension investment, have moved reforms high up the political agenda. The pressures on state-funded schemes, partly due to longer life spans but also, in part, because of historical underfunding, make private pension funding more important than ever.

If we are unable to grow our ‘home’ talent fast enough, it is likely we will †need to source it from other countries. Global staff mobility will continue to grow and retirement benefits will be an important part of the package to attract and retain this mobile talent. The retirement benefit is one of the most significant parts of any total reward plan. It is strongly linked to employee engagement and retention, and this will only increase as state-funded plans diminish in significance.

Manage the risks

So, given the value of this benefit, the level of investment required and the increasing complexity of its provision, how can we effectively manage the risks and maximise the return on investment?

Historically, there were few providers of global pensions. Administration costs were considered high and there was not always great confidence in providers to deliver. In many instances, there were also local tax advantages for employer and individual pension contributions.

Over time, pension governance and legislation, along with a reduced tax benefit, have gradually eroded the advantage of local schemes. International pension plan providers have narrowed the gap in product quality and the number of international providers has increased as business globalisation generates demand.

It certainly makes a strong case financially, especially in terms of a reduced administrative burden. For global staff, too, depending on where they plan to retire, it may be a real headache and financially punitive to have multiple small pension sources linked into multiple country currencies and tax regimes.

Michael Brough, senior international consultant at Towers Watson comments: “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 a multinational company that sponsors, say, 10 small local pension schemes in the Middle East, Africa and Latin America, that deliver $100,000 of tax relief each year but cost $400,000 to run. They may also have limited investment opportunities and suffer high charges. If you can include them all in one low-cost international plan, with wide investment flexibility, although it loses the tax efficiency, if it costs only $100,000 to run, surely it makes sense to have a single global plan, even if it means compensating employees for lost tax breaks.”

In the future, company investment is likely to be increased and we need to maximise that investment. A single or reduced number of global ‘catch-all’ plans looks like the future. With the decline and availability of home-grown talent pointing to increased global staff mobility and a reater focus on employer-sponsored retirement plans, pensions will become an even bigger attraction and retention tool.

Read more articles from Thought leaders: The year ahead