Most companies and executives want to take care of their workers. In fact, 90% of employers believe that an employer should play an important role in providing retirement benefits. Moreover, 91% believe it’s their job to help employees make informed decisions about their retirement. Contrast this desire to help employees through retirement with this statistic: only 50% of these employers have global pension policies that they expect their local managers to follow. This shows that half of these multinational employers do not have solid global pension requirements, which can create instability for employees. Here are some insights into understanding pension requirements for a global workforce.
Government Pension Requirements
Many countries have a social insurance pension scheme defined by law and funded through taxes:
- France’s social insurance program taxes employers and employees based on a percentage of the employee’s income to fund their defined-benefits
- The United States also funds social security by taxing both employer and employee based on a percentage of income, but they allow for several tax-advantaged, employer-sponsored retirement plans in addition to social security such as 401k or 403b programs
- India’s social insurance program is a mix of defined-benefit plans and defined-contribution plans with complex options for employers with options for exemptions by employers who provide a greater benefit
When considering a global pension plan, it’s imperative to consider how the requirements and benefits for each country’s social insurance and pension schemes will affect a global workforce.
The Future of Pension Requirements
When most people hear the word “pension,” they think of a defined-benefit retirement plan. When a person retires, a defined-benefit plan calculates a monthly benefit to be paid to the employee for the rest of their life. One challenge with these plans is that they are open-ended financial commitments to a population that continues to live longer, healthier lives. While health and long life are wonderful things, it also creates uncertainty and financial risk for a defined-benefit program.
Companies no longer want to bear this risk, so they are moving away from defined-benefits plans to defined-contributions retirement plans. Only 6% of companies believe that a defined-benefits plan is the best way to provide a pension, and 90% of employers intend to use a defined-contributions plan.
Building a Global Pension Plan
It is recommended that every global pension system have three elements:
- An affordable workplace benefits provision that employees value, which means giving employees flexible options based on local circumstances
- A rigorous and nimble approach to risk management, which means that employers should be able to adroitly manage their employees’ investments, or allowing the employees to do so, without exposing them to undue risk
- Governance structures that define the goals, responsibilities, and policies of the retirement benefits scheme without undue complexity
For companies without a global plan, creating one should involve:
- Analyzing the current pension landscape
- Setting objectives and pension policy
- Identifying key risks, opportunities, and quick wins
- Reviewing governance structure to support management action
- Executing changes identified
Finance and HR executives have important roles to play in planning and implementing these benefits policies by discussing the following topics with their respective boards:
- How to manage risk from the legacy defined-benefits scheme, including a focus on risk management and transferring these obligations off the balance sheet
- Using the increased innovation in the financial market to offer more options to mitigate risk
- How to be better informed about the risk position that other multinational employers have regarding retirement investments
- How to more quickly implement opportunities to reduce risk or capitalize on growing assets
- How to have greater involvement with local fiduciaries of each major plan
HR executives should focus on these topics (among others they deem important) to improve their pension plans:
- Any potential tension between younger employees on a defined-contribution plan and older employees who may be on a defined-benefits plan
- Ensuring that the defined-contribution plans are adequate for employee retirement, focused on employee education and planning, and improving financial literacy
- Providing flexibility for diverse employee needs
- Ensuring that employer contributions are a good use of the employee reward budget compared to other options
- Securing appropriate relationships with financial providers with flexibility to account for local needs
Global employers want to ensure that their employees are not in need when they retire, but many of them do not have a comprehensive plan to ensure that this happens for their employees in each country. The steps outlined above may help you create a global pension scheme that can mitigate your company’s financial risk while giving the employees the benefits they need. If you have questions about providing benefits to your international employees, get in touch with our team of global expansion experts today.