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- Multinational organisations can use offshore employee benefits arrangements to provide perks such as group income protection, death in service, life insurance and pensions.
- Multinational pooling arrangements, which can be used to provide insurance-based benefits, operate like a profit-share arrangement and can result in savings for employers.
- A captive is an insurance company set up by its owners, mainly to insure its own risks.
- Cultural specificities must be taken into account for benefits in each location.
Case study: Thomson Reuters uses multinational pooling for risk benefits
Thomson Reuters operates five multinational pooling arrangements for risk benefits such as life insurance, disability cover and, where viable, medical insurance. It has operated this arrangement, where possible, across the 90 countries in which it has a presence for at least nine years.
Mohammed Valjy, international benefits manager at Thomson Reuters, says: “We pool wherever we can. There are some countries in which we cannot pool. For example, in India we have about 8,000 employees but we cannot pool because of the legal situation there. However, we make sure to pass some of the savings back.”
The media company does not dictate that local HR teams must use the pooling arrangements, provided by Insurope, to buy insurance benefits, but explains the advantages of doing so. Valjy says: “Sometimes we have local HR, who are quite comfortable using the same insurer every time without really looking into the situation. Sometimes it’s not the right thing because we don’t know what the costs are going to be going forward.”
Valjy keeps in regular contact with representatives from the pools, which has a number of advantages for the organisation.
“Sometimes you do not get information coming through from countries,” he says. “It is a good means of finding out what’s happening in some of those countries you do not hear much from sometimes. It is a good means of getting information back to corporate HR.”
In most cases, dividends are paid to central corporate HR, which it may use to fund projects in particular countries.
Valjy says pooling has a number of advantages. “It gives me more control and more idea of what is happening locally,” he says. “I use it as a compliance, governance tool where I know what is happening, what is coming up for renewal and at the same time making sure we use the right insurers and have some kind of control. It gives me more control and more idea of what is happening locally.
“If it is a good year with good claims experience and we get a dividend, that is a bonus.”
Case study: Julius Baer banks on international pension plan
Swiss private banking group Bank Julius Baer offers an international pension plan for 70 employees in locations such as Singapore, Egypt and Latin America. A further 60 staff are covered by a subplan in Dubai and Abu Dhabi.
The scheme, which has been in place for four years, is administered in the Isle of Man by Zurich. It is divided into two sections – savings and a risk portfolio. Contributions are paid on an age-related scale, so all employees are treated the same, and staff can choose to invest in different currencies.
Christian Frener, head of international benefits/global mobility at Bank Julius Baer, says: “It is perceived very well that [staff] have a choice when it comes to currency and investment.”
When implementing the scheme, the organisation was careful to ensure that the arrangement met regulatory requirements in each location.
“Corporate governance is extremely important when having such an arrangement,” says Frener. “We have checked thoroughly with the local tax authorities that they will accept this arrangement.”
Death in service and disability benefits are managed out of Switzerland. “We can follow the Swiss approach,” explains Frener. “If a misfortune were to arise, we have a clear heritage guideline about what would happen according to Swiss law.”
Multinational employers can use offshore arrangements to provide employee benefits, but must allow for local cultural differences, says Debbie Lovewell
Offshore locations such as the Channel Islands and the Isle of Man have traditionally been viewed as exclusive tax havens for the wealthy. But as French president Nicolas Sarkozy once pointed out: “Globalisation requires us to reinvent everything.” So it is not surprising that nowadays such havens are just as likely to host offshore benefits schemes for multinational employers.
Offshore benefits plans enable multinationals to offer pensions and/or insurance benefits to staff across a variety of locations, and, in some instances, enable them to make savings compared with using local providers. Pete Regan, regional director at multinational pooling network Insurope, says: “More organisations are focused on governance or management control, where they can get an understanding of the spend in different countries and what they need to do.”
Before selecting which type of offshore vehicle to use, employers must take cultural differences into account because these can affect how employees view and engage with their benefits. Tim Reay, principal at Aon Hewitt and secretary of the International Employee Benefits Association, says: “For example, in Spain it is illegal to offer someone investment choice. In many countries, particularly in southern Europe, where there has not been so much of a culture of investing in stocks, in equities, they would not necessarily understand the pros and cons of making the various choices.”
In some regions, such as the Middle East, the concept of retirement provision outside of the family or state is not well understood, and may be viewed with suspicion in the workplace. Ian Sturgeon, global partnerships manager at Friends Provident International, says: “Culturally, employees were not familiar with their organisation providing retirement arrangements. That came up when employee communications managers were presenting to the workforce. On the investment side, those from [these] markets just wanted guarantees that their money was safe. A lot look for reassurance from their employer.”
Also, financial decisions in the Middle East are typically undertaken by men, so female staff may not always be comfortable with deciding whether to join a scheme.
Similar cultural differences exist in the Far East, for example because of the tradition of familial piety, where people have an obligation to look after their elders. Paul Colley, head of customer relationship management, corporate life and pensions international at Zurich International Life, says: “China is a good example of that and Hong Kong to a lesser extent. [Historically], parents had a business, passed it to their children and then the parents had an income from this. Chinese commerce means this is no longer the case. This is going to be an issue in the future. [People] think they can save up enough and dabble on the stock market to provide an income for themselves in retirement. They do not believe in pensions.”
What is required of employers will also differ between regions. For example, multinationals with employees in the United Arab Emirates are obliged to fund end-ofservice gratuity payments. Staff based in this region are entitled to a gratuity of a fixed number of days’ pay a year based on their basic salary, up to a maximum payment equivalent to two years’ salary.
Get this wrong and any potential cost savings can be undermined. Alan Hewitt, international benefits director at JLT Benefits Solutions, says: “A lot of errors have been made in the past by multinational companies that have not necessarily taken culture into account. [They] ended up causing more harm than good when all they had been trying to do is provide more from the centre and help by using the companies’ global purchasing power to get local subsidiaries a better deal.”
Offshore benefits schemes can be set up in a number of ways, from multinational pooling of insurances to pension trusts.
Multinational pooling works like a profitshare arrangement between employers with staff in two or more countries, and a network of insurers. Hewitt explains: “It is really a tool for companies to try to generate savings in their international arrangements, because when you look at premium setting in different locations, a number of countries’ local insurance control authorities insist local insurance companies comply with common rating structures. The margins that are built into those premium rates are very generous and the only way to share those margins back with the multinational is through pooling.”
Pooling is best suited to employers with at least 1,000 eligible staff and at least five overseas subsidiaries. Colin Vening, a senior consultant in Mercer’s international health and benefits team, says: “The maxim is, the bigger the better. The more premium, the more countries you can get into the pool, the more you can spread the risk. The potential dividends are greater the bigger the pool.”
Pooling also enables larger employers to retain their buying power when negotiating premiums, which may be lost if smaller subsidiaries source benefits independently. Smaller employers can join a multipleemployer pool. Alan Thacker, senior consultant at Buck Consultants, says: “Employers have got the leverage of the network to get more favourable terms.”
Free cover limits
Aon Hewitt’s Reay adds: “[Employers] get other advantages, like free cover limits. If they have a small subsidiary for, say, five to 10 insured people, [the insurer] will want to give them medical tests. Now, if an employer has five people in one country and 1,000 in another, that is considered one group of 1,005 people, which probably will not need medical testing, which makes it attractive.”
At the end of each year, all the premiums paid for each of the local insurance contracts in the pool are added up, and claims, charges, administration and expenses deducted. Any surplus is then returned to the employer as a dividend payment.
But employers should bear in mind that the very nature of risk-based insurance benefits means they may also suffer a loss in years with high claims. “Multinational pooling does not really cost anything,” says Reay. “The only possible cost is the fact that in each country, [employers] may end up paying more in terms of local premiums compared with the cheapest local solution because the network insurance provider in each country cannot be the cheapest everywhere. It is not mathematically possible. So employers end up paying more locally. There is obviously a risk that their profit-sharing is less than the difference.”
Adrian Swarbrick, director-corporate advisory at Heath Lambert Employee Benefits, adds: “A pool is not a panacea. An organisation setting up an insurance pool has to be cognisant of the underlying risk. If it has a bad year globally and that triggers a negative in the pool, that negative is going to roll into the following year.”
Employers can insure against the risk of losses. For example, stop-loss or partial stoploss insurance can limit the level of risk they are exposed to. Employers can also make provisions to carry the cost of loss forward, to be spread over a coming period of time.
So multinational employers should consider whether pooling will suit them. Paul Avis, sales and marketing director at Canada Life, says: “Don’t pool for the sake of it. There has to be an evident financial case.”
In some cases, a pooling arrangement can help employers to identify potential problems in overseas subsidiaries. “Multinational pooling networks produce an annual report showing which contracts are bought, what line of cover, the number of employees and even the premiums and claims experience,” says JLT Benefits Solutions’ Hewitt. “The quality of the report varies from network to network, but the information produced out of these pooling reports is invaluable to multinational employers. It helps them to identify more easily at headquarter level if there is a particular contract and a particular country that is causing problems in terms of claims experience, which could lead them into investigating, for example, why they are having very high disability claims or very high medical claims, which ultimately affect the premium they are paying.”
A newer addition to the market is the use of captives to provide insurance benefits. A captive is an insurance company set up by its owners with the aim of insuring its own risks. Hewitt explains: “A captive is essentially an insurance company owned by the multinational company which has been used for insuring things like property, casualty and liability risks. But some multinationals are now looking at using their captive for employee benefits. There is still a local insurance contract with a multinational pooling network, it will go through the same process of collecting premiums and paying claims, but it feeds those premiums through the organisation’s captive.”
Generally speaking, captives are best suited to big multinationals with a high premium volume. “In the world, there are probably around 60 multinationals that use a captive for employee benefits,” says Hewitt.
“Not all multinational pooling networks have the ability to reinsure the business through to the captive companies. Only about four or five are actively doing that at the moment.
“But if a multinational was a small company with 2,000 lives worldwide, it would not be worth its while doing that. It would be much better off sticking with traditional pooling.”
Captives can also be used to cut the cost of group risk benefits and improve control over the risk of rising premiums. Mercer’s Vening says: “If you go to a captive programme and the captive takes 100% of the employee risk back into its own control, in theory it can set its own premiums. There will always be a local insurer fronting it and charging an administration fee, about 10%, to administer the plan and pay the claims initially, but then there will be an agreement reinsuring the risk back to the captive. There is an advantage in driving down local premiums and saving on bottom-line costs in each local country.”
Employers could charge the same level of premium within their captive as a normal insurer and keep any profit within the captive. “As long as it is done at arm’s length, the captive could lend money back to its own parent company for cash flow,” says Vening.
Just like pooling arrangements, a captive may also buy some form of stop-loss insurance to ensure its losses are not too excessive or more than it wants them to be.
How much of the premiums employers can reinsure back to their captive depends on the countries covered. JLT’s Hewitt says: “Some countries allow 100% of the premiums paid to the local insurance company to be reinsured through to the captive. Others will prohibit that and there may be a limit – it could be 50%, it could be 80%. It very much depends on what local laws stipulate.
“Some of the pooling networks might impose certain limits as well. A captive company that exists in an offshore location is not an insurance company in [the countries where the multinational is based], so it does not necessarily understand what the local market trends are, or how to price global insurance programmes in different countries around the world, so insurance companies will often want to still have some part of the risk in-house so they can use their expertise to say what the correct pricing should be.”
Multinational organisations can also use offshore arrangements for international pension benefits. These are particularly suited to globally mobile staff who are not in a host country long enough to obtain meaningful retirement benefits; employees who cannot take part in a home country plan and whose host country has no benefit arrangement; and local expatriate staff in locations that do not have an established practice of providing local retirement benefits.
Friends Provident International’s Sturgeon says: “Employers are looking to ensure they are consistent across a global structure, ensuring it is appropriate for the workforce.”
Staff in these groups are likely to come from many locations, so may not engage with a UK-style plan. Sturgeon adds: “Have a more international range of funds and address cultural differences as far as possible. If employers do not do that, they will not get engagement because an employee will not join something they do not relate to.”
But one disadvantage of offering pensions in this way is a lack of tax efficiencies. Aon Hewitt’s Reay says: “You do not get tax relief on the contributions. The employer generally puts in a bit extra or gross [staff] up for tax. It is an expensive way of doing it, but because it is flexible, the person can get the cash out at retirement and it is attractive to mobile employees, particularly outside the European Union in far-flung countries where they maybe do not have much tax legislation.”
Employers can also use a benefits trust to run offshore pensions. Sturgeon says: “Some are underwritten by trust arrangements in the Isle of Man or Channel Islands.”
An employee benefits trust is a discretionary trust and a legal arrangement by which one person owns assets on behalf of another. As well as pensions, they can also be used to run share schemes and insurance benefits on an offshore basis. But Buck Consultants’ Thacker says these tend to be very specialised and are rarely implemented.
As employers’ globalisation grows, it might be worth watching this space.
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- 29% of US employers with international operations utilise multinational pooling.
- 23% of those that use multinational pooling have fewer than 500 lives worldwide.
- 32% have more than 500 lives worldwide.
- 44% have 10,000 or more employees worldwide.
Source: the seventh annual MetLife Study of Employee Benefits Trends