Are We Creating a Serious Retirement Issue in Mobility?

This article originally appeared in the September 2018 edition of Mobility Magazine.

Examining the effects of localization on long-term planning.

When I moved from an in-house function to a role in mobility search, one of my questions was, “How do I ensure my knowledge of the industry stays current?”

Fortunately, my present colleagues and I have partners, candidates, and clients with whom we discuss trends within mobility. Sitting on a number of committees and boards at the forefront of the future of our industry also provides a different view of mobility, and we are regular speakers at events and with client teams.

Since my career in mobility started more than 20 years ago, one theme has stayed constant—the desire to reduce costs. From the feedback we have received, this continues to be the case. In this regard, one very clear theme is the push toward local-to-local moves.

Some organizations have moved away from the idea of long-term assignments altogether, and others are using them far less often. The world is getting smaller, and work in its traditional sense is changing. The idea of a borderless workforce is definitely moving forward. However, in some cases, corporations and governments have a very different thought process and are at a different point in this regard. This is and will continue to be a real challenge to our industry.

When moving from one location to another on a local basis, how close the two countries are in regard to employment position and social benefits obviously makes a huge difference. Take medical insurance, for example: A person moving from a state-provided system to something similar will struggle less than a person moving from a state-provided to an insured system. However, provided the information is clear and the mobility and benefit departments work closely together, the transition period should be minimal.

Pensions and retirement provisions are a different matter altogether. Firstly, these considerations involve an event or events much further down the line, and due to that, I believe more attention needs to be given to this subject.

Related: Financial Checklist for Relocating Employees

More Complex Than Ever

In the main, pensions are designed for people who work and retire in the same country. Defined benefit or final salary schemes have all but disappeared, meaning most employees have access to a defined contribution or money purchase scheme. Mostly these can be viewed as a long-term tax-efficient savings plan. We also know that legislation, taxation, regulation, and compliance change, and will continue to change, for pensions.

This is not anything new, and the mobility position with regard to pensions has always been complex. Certain questions have always created issues: “Can the contributions be tax-free in another location via corresponding approval or treaty relief?” “Should contributions be equalized? If so, what—standard contributions, additional contributions, growth?” “What happens when there is a change to the home-country position?” However, the general position under long-term policies was that every effort would be made to allow the assignee to remain in the home-country plan, or in some rare cases, a cash alternative was offered.

Under the push toward localization, things are now very different. If the world of work is going to continue to change, then it will become more common for people to work in multiple countries with multiple pension arrangements throughout their career. Take the example of an individual who has worked in five countries—their home country, which they retire in, and four others. The long-term potential issues are easy to see: five pensions that may pay out in different ways (annuity, lump sum, or a choice of both); four immediate and ongoing foreign exchange risks (assuming annuity); four additional potential tax-filing requirements; four overseas bank accounts with potential monthly transfer costs.

There are other risks that are less obvious, and some will depend on the future career and moves of the employee. For example, the U.S. is the biggest economy in the world, and in many industries and professions it would be fair to say that a large number of globally mobile people will work there at some point in their career. What if they have been assigned, on a local basis, to a country where the pension scheme does not receive the same protection and tax-preferred treatment as in the U.S. and growth in the scheme is then taxed for the time a person is resident there?

As noted earlier, a pension scheme is a long-term tax-efficient investment. But if you take the tax benefit away, it can become very unattractive. What about investment strategy? Does the new country’s scheme strategy or fund selection complement what has already been done elsewhere? Finally, although rare, there are some locations where one has to be an active member of a pension plan for a number of years before any “right” to the pension is earned. What is the position if the minimum period is not reached in this situation?

Related: U.S. State Conformity to Tax Reform Moving Expense Change

The Standard Answers

When I have spoken to mobility professionals about this, the initial answers cover four main points:

  1. Employees should be treated as adults, and they always have a choice to accept an assignment or not.
  2. The above should be covered in the tax arrivals meeting.
  3. As with any employee, we would always recommend they take independent financial advice.
  4. The localization approach is aimed at millennials, and pensions are not so important to them.

The first point is quite true—people do have a choice. However, as with anything, an individual can make a good choice only if enough information is provided for it to be an informed and understood choice. There are plenty of examples in which sufficient information has not been given, resulting in a negative outcome.

Read the rest of this article in the September 2018 edition of Mobility Magazine.

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