Business in all industries is increasingly being transacted on an international scale in markets that span not just countries but whole continents. But to what extent are pensions in step with this trend?
Mobile labour calls for mobile pensions. The ultimate goal is pension arrangements that concentrate individuals’ funds in one place, enabling them to contribute from gross income from wherever they are and to draw the benefits, again wherever they may be, without penalty. This is the spirit behind the moves to harmonise pensions across the EU, encouraging the provision occupational schemes and creating a single market for supplementary pensions, opening up the possibility of pan-European schemes. But there are big obstacles in the way of such extensive integration. At the very least there needs to be agreement on issues such as taxation in respect of contributions and benefits, and the many aspects of prudential regulation. More significant are the practicalities of making the transition, particularly in member states without a strong tradition of private provision or where pensions are in crisis owing to the demographic bulge and other pressures on public spending. Here, tax incentives or even compulsion may be needed to achieve the desired goals.
Pensions specialists have been getting on with the job of catering for modern-day mobile workers, steadily developing a market based on the various offshore financial services centres. Moreover, Jersey, Guernsey and the Isle of Man are working to shake off the old tax haven tag, with the accompanying perceived image of questionable security and rich, maybe slightly dodgy, clients. They now regard themselves as being firmly aligned with modern employee benefit needs and are marketing themselves accordingly. Historically, offshore pensions were typically simple life assurance-based individual plans, but over the last 10 years, the market has matured into one offering more efficient, better value plans based on formalised group or individual pensions frameworks.
The bulk of this international pensions business is classic occupational schemes, arranged either by independent intermediaries or set up by specialist consultants and administrators. Traditionally, clients have been large international firms (especially those of US origin) which have tended to be more at pains to look after the retirement benefits interests of their globetrotting staff. But as the nature of business changes, with the might of big multinationals now challenged and markets diversifying more, the surge in the numbers of small and medium-sized businesses operating at an international level has changed the mix of international pensions clients. Moreover, the trend to self-employment and the mobility of individuals between employers is stimulating a market for personal pensions.
Risk benefits are frequently a part of the benefit package, tailored to the conditions of the employment location and maybe to the needs of individual employees. Strong protection coverage is seen as particularly desirable where less developed countries are concerned. Death in service and waiver of contributions in the event of disability are common. Medical cover is popular too, especially for UK nationals and others used to high levels of state coverage, and incapacity benefits like income protection and critical illness are increasingly finding favour.
It is difficult, if not impossible, to quantify this market because it is so fragmented: organisations and individuals located all around the world doing business with a diverse range of intermediaries and providers also spread among a number of locations. The difficulty is compounded by the range of instruments that can be used to provide retirement benefits. Despite the benefits to employees of formalised structures, in its simplest form a plan needs only to invest pre-tax contributions in a fund with gross roll-up and pay benefits tax-free. Straightforward investment plans are still being used as retirement benefit vehicles in some cases.
Few are more frustrated by this piecemeal market and the lack of international political co-operation than the offshore pensions practitioners. Offering compelling products and services, they can see the potential for international business but are unable to develop it more quickly owing to legislative restrictions that not only tie their hands but also, to some extent, condition HR policy within organisations. The Isle of Man has recently taken steps with a view to breaking this log jam, and is endeavouring to develop a secure, competitive pensions environment that attracts business and, indeed, makes it the centre of choice. In April the Tynwald passed the Retirement Benefit Scheme Bill which should receive Royal assent this summer.
This bill naturally applies to Isle of Man domestic schemes, but is aimed firmly at the international market, creating an environment offering quality regulation via a prudent overall framework: approved trustees and administrators, and tight monitoring that together give security and transparency for both employers and employees alike. The intention is to attract business from international firms, especially those based in territories where the quality of financial regulation is poor. Also, in the longer term, it is hoped that it will obtain business from Europe via formal recognition and reciprocal tax arrangements for contributions and benefits – initially with individual countries in the absence of longer-term pan-EU agreement.
Looked at logically, it seems almost inconceivable that, in today’s world of global business and markets, pensions provision should be so fragmented. There is growing awareness of the issues and the difficulties among international employers large and small, who recognise their mobile workers’ need for flexible, portable retirement benefits. Good benefit packages that include help towards long-term financial provision attract and retain good staff. There is recognition, too, at an international political level, at least in the EU, although the barriers to harmonisation right now look almost insuperable in the short to medium term. Meanwhile, the financial services industry tends to base its structure on discrete national markets, apparently paying little regard to the internationalisation of labour and the growing need for a vigorous, competitive market for cross-border pensions.
This market is, in relative terms – at least for the time being – a somewhat niche market, but one with long-term growth potential. It is not too difficult to envisage international pensions brands marketing specialist skills across the globe, leveraging a concentration of skills and economies of scale. A focused organisation, as well, would help solve the problem of underwriting risk benefits. For most companies at present, these are a distraction from core business and the diverse nature of the risks and the limited experience mean that profitability is a very hit-and-miss affair. International pensions suggest a need to approach providing them on a similar scale. But for the time being the market remains a fragmented one.
Even experts admit that international pensions can be quite a minefield. For this reason, independent intermediaries and specialist consultants are key to the setting up and maintenance of plans. In time, when perhaps the situation is clearer and more straightforward – enabling individuals to make their own arrangements – remote channels including the internet should have a significant role to play. Perhaps remote access will have to wait until there is a lot more international pensions harmony.
If the EU does get its act together, then Dublin, with its International Financial Services Centre, and maybe Luxembourg too, look like being well placed to capitalise on the huge opportunities of a pan-European pensions market place.
In the meantime, though, it is left to the specialists in the offshore centres to look after the international market. And it may be that bold, positive steps by offshore centres (for example, recently those by the Isle of Man) to establish a credible, secure pensions environment, might lead to their having a very prominent role a bigger, more unified world pensions market. But the current specialists need to tread warily and be prepared to adapt: the bigger, more harmonised market they want to see created would threaten their position, risking them losing business to the emerging global players.

Topics