Running the defined contribution plans of a multinational corporation is a global juggling act: Tax treatments, investment options and regulations can vary widely from country to country.
“For a company that has 12 retirement plans around the globe, it becomes a monumental headache to keep track of the various requirements,” says Phil Shirley, who heads Mercer Human Resource Consulting’s Asia retirement business.
Recently, Mercer and several other consulting firms began offering multinational plan sponsors services to ease, if not eliminate, that migraine -- which can be severe. Experts estimate that fully integrating defined contribution plans across several countries could save 10 to 30 percent in administrative costs plus 5 to 10 percent in money management fees.
These clawbacks would come mostly from reduced back-office expenses and the volume discounts investment managers give for increased assets. The European Federation for Retirement Provision, a trade group representing pension funds and money managers, estimates that European Union pension plans could cut their costs by a combined E10 billion ($11.9 billion) a year.
Mercer is close to launching its Pan-Asia Retirement Plan for companies with multiple defined contribution plans in the region. Shirley and his colleagues have discussed Pan-Asia with more than 100 plan sponsors. He contends that Mercer’s model can eventually be extended to other regions.
New Yorkbased Buck Consultants has set up a single foreign retirement plan, with $30 million in assets, for a large manufacturing company (it won’t disclose the name) and is discussing the concept with three other multinationals.
In Mercer’s case the consulting firm will design the plan, determine which countries and employees it would work best for, make sure that it complies with those countries’ laws, administer it and recommend and monitor the money managers that run the investments. The firm will also try to integrate the sponsor’s retirement plan with any government pension plans so that there is no duplication of benefits. Mercer’s Asia plan calls for ten investment options, including lifestyle, stock and bond funds.
Companies with offices in China are especially interested, says Mercer’s Shirley, in part because that country has no equivalent of a defined contribution plan.
Buck’s program for the multinational manufacturer covers 4,000 employees in South America, Africa and Europe, out of the parent company’s 120,000. Har-dev Sandhu, Buck’s managing director of global consulting, says it works like an American 401(k). Participants make contributions to a central trust through payroll deductions and choose among five investment options: company stock, a Standard & Poor’s 500 index fund, a global stock fund, a bond fund and a money market fund.
It took Buck’s consultants two years to persuade officials of the South American country where the plan was launched in 2003 that it wasn’t a currency-manipulation scheme -- that participants would withdraw their money in local currency and pay taxes when they retired.
“The government finally realized that the intention of the company was not to take money out but to create retirement savings for the employees,” Sandhu says.
Buck had to overcome a common problem for a consulting firm setting up a centralized international plan: Countries typically do not tax the assets of domestic plans but do tax those of offshore plans.
Finally, Buck’s client received government approval to carry over the tax break on its existing local plan, despite the transfer of the plan’s administration to Luxembourg as part of the centralization. (Luxembourg does not tax the assets.) If a government won’t permit a local tax break to be relocated in this fashion, Buck will advise clients against making the shift.
Still, other consultants say they might recommend, under certain circumstances, that a plan sponsor accede to a tax hit. For a company with a small staff in a country, it might make sense, explains Christopher Mayo, a London-based senior consultant for Watson Wyatt Worldwide’s international group. “Rather than have the burdensome cost of setting up new defined contribution arrangements for the three or four people they have in France or the five they have in Germany, it might pay to take the tax hit,” he says.
Even if they don’t completely integrate their retirement plans and pool the assets, some multinationals are taking halfway measures in that direction. They’re moving toward a standard, cross-border benefits design and a shared pool of plan providers. Mayo estimates that 60 percent of Watson Wyatt’s clients do this sort of standardization when they establish new plans.
Plan coordination across countries can offer benefits to employees as well as to plan sponsors, its advocates say.
“The investment risk to participants is lower because they usually get better investment options,” compared with a one-country plan that may limit the choices to local investments, says Buck’s Sandhu, who adds, “Globalization is accelerating, and this goes with the territory.”
