Can multinationals achieve consistency in benefits?

Seventy-three per cent of multinationals say they have insufficient quality information about local benefit arrangements in order to make well-informed decisions, according to a PwC survey of 114 major multinationals from across the world in 2014.

Each jurisdiction has its own tax rules and mandatory benefit plans, so it is difficult to put in place something that appears consistent to members around the world

Jane Higgins, Allen & Overy

The report highlights the importance of having a coherent global policy for retirement benefits, one that is adaptable to multiple locations and formed with local considerations in mind.

Cross-border compliance challenges

However, this is no easy feat. It explains that “hugely complex and diverse local environments,” in terms of laws, culture, policies, and level and type of state provision, “don’t allow employers to take desired action easily”.

Jane Higgins, partner at law firm Allen & Overy, agreed that “the main issue tends to be that each jurisdiction has its own tax rules and mandatory benefit plans, so it is difficult to put in place something that appears consistent to members around the world”.

She drew attention to the high compliance burden for companies “in terms of keeping on top of changes to pension and tax regulation around the world”. This means international benefits can take up quite a lot of management time.

Higgins said that, while it tends to be difficult to merge international pension schemes, “large multinationals have managed to achieve broad consistency of their pension benefits, whilst accepting there will always be some local differences”.

Christian Lemaire is head of Amundi Retirement Solutions, a pan-European pension vehicle that provides administration and investment management for companies that have defined contribution schemes across different countries.

He explained that when companies have multiple locations and “a patchwork of diverse legacy pension schemes” they will often vary a great deal in terms of how they work, and the advisers they use.

“The way the scheme is monitored won't be uniform across the group, making monitoring difficult and exposing the parent company to risks,” he said.

Will IORP II make things easier?

Lemaire added that “the reason this patchwork still exists is that the local subsidiaries will have pointed to the need to comply with local regulations and laws. But today the IORP [Institutions for Occupational Retirement Provision] directive now allows different schemes to be hosted within the same vehicle”.

The original pensions directive, otherwise known as IORP I, was implemented in the UK through the Pensions Act 2004, and introduced a number of new rules for occupational pension schemes.

IORP II, a new European pensions directive, came into force in January 2017, and European Union member states have until January 13 2019 to incorporate it into national legislation.

Michaela Berry, partner at law firm Sackers, said “The idea of [IORP I] was to promote cross-border schemes,” but “they didn’t take off on a big scale” in the UK.

Berry said there was some interest from companies in setting up a pan-European scheme to achieve economies of scale and consistency of benefits. However, the perceived complexity of having to comply with different social and labour laws in other countries may have put them off.

“You’d need input from lawyers from the different jurisdictions, to make sure you maintain the compliance in each jurisdiction,” she said.

The second issue with IORP was that, with regard to cross-border defined benefit funds, “there was a requirement that [DB] schemes had to be fully funded”, but many UK DB schemes have deficits and recovery plans, Berry noted.

“The aim of IORP II was to try and make it easier to have a sort of pan-European pension arrangement with some more flexibilities, and slightly more flexibility around this point about being fully-funded,” she said.

However, she added that there is uncertainty as to whether this will change as a result of Brexit.

One size does not fit all

Berry noted that achieving some sort of consistency with cross-border DC arrangements may be easier because those funding problems would not be an issue.

However, “even if you were to do a multinational DC arrangement, you could get economies of scale, I think, on your investment side, but you’d still have to comply with local social and labour laws around the benefits”, she added.

Jeremy Goodwin, partner at law firm Eversheds Sutherland, agreed that “you get, across different jurisdictions, very, very different requirements in terms of the benefits that are provided by the state”.

He noted there are “lots of different things to be taking into account when you’re looking to try and provide [a] consistent benefits package”, adding that when multinationals use the same global advisers for schemes across different jurisdictions, the “adviser needs to recognise that one size doesn’t fit all”.