The manner in which corporations around the world help their staff plan for their retirement is fundamentally changing.
Historically, employees would reach a pre-determined retirement age agreed in their employment contract and the company’s pension fund would then look after them for the rest of their life. This would provide a monthly income calculated on a combination of the value of their salary at the date of retirement and the years of good service they gave to their employer.
So all the employee had to do was to do their job to the best of their ability and secure as many promotions as possible in order to bag the highest possible pension at their retirement date. Absolutely no consideration had to be given by the employee to the economic climate, stock market performance or geopolitical issues such as, dare I mention, Brexit.
How times have changed. The cost and risk to companies to provide such generous pensions has led to a rapid demise in this type of employee benefit, resulting in some cases with no provision at all for employees or, at best, the provision of a defined contribution or savings scheme.
These alternative schemes are ‘pots’ of investment funds, individually designated, which then become available to the employee, at a date determined by the rules of the scheme, for their use in creating income in retirement.
What is important to note is that these alternative schemes ring-fence the employer from all future investment risk, which is now borne by the employee - the employee’s income in retirement is determined by the performance of their funds.
What is more, that investment risk continues for the life of the individual throughout their retirement, unless they choose use their designated funds to purchase an insurance product known as an annuity (an annuity is an income stream guaranteed for life by an insurance company, in return for an initial capital sum).
What are the challenges?
There are three key issues:
First and fundamentally, the numbers don’t add up. The ‘numbers’ being the value of the capital sums accumulated by these alternative schemes which are then used by individuals to create the income required throughout retirement, are generally not sufficient to sustain the retiree throughout their retirement.
Second, for multinational firms, the complexity of providing alternative schemes across the myriad of jurisdictions in which they operate, all of which are subject to differing legislation, is a real challenge.
Lastly, the availability of fit-for-purpose products and access to the expertise required to structure appropriate solutions is relatively scarce.
What can international corporations do to address these issues?
Most companies are busy day-to-day engaging in their respective areas of expertise and rarely have the in-house expertise to establish the types of arrangements that will help to address the issues listed above. Therefore, the engagement of qualified, independent expertise is essential, in order to ensure that the solution is appropriate for the company’s and the employees’ requirements.
What solutions are out there?
The international market in pensions and savings schemes is dominated by insurance company products. These products, while generally adequate, are ‘packaged’, where little flexibility is afforded to companies wishing to tailor scheme rules and investment models, to their specific requirements.
More recently, trust-based solutions with independent investment fund platforms have emerged and have the potential to significantly disrupt the existing order. These technology-led solutions bring material efficiency to this evolving sector and are highly attractive to international companies.
The Government of Jersey has worked hard in recent years, in close collaboration with industry, to position Jersey as the jurisdiction of choice for multinational companies to base their international pension, savings and incentive schemes for their global staff. There are three key factors which have driven this:
- Reputation - Reputation is paramount. Jersey has been at the forefront of international finance for over 50 years and as such, has developed a world-leading regulatory framework, along with the implementation of numerous laws and processes designed to combat Money Laundering and the Financing of Terrorism. The island’s reputation has been further enhanced by the credible recognition that has been given by the key international organisations, such as the OECD, MONEYVAL, the EU Code of Conduct Group and the IMF.
- Accountability - Companies want to know that their Jersey service provider is being held to account, not just by themselves, as client, but also by the institutions of Jersey that are responsible for the supervision of our island’s finance industry. In addition to a well-regarded financial regulator, over 800 years of independence has created a robust and well regarded judicial system, which in modern times has evolved with the financial industry. This in turn has led to the creation of innovative, fit-for-purpose laws that are well suited to the promotion and protection of pension and investment business.
A recent example of this is the creation of Jersey’s new International Savings Plan (“ISP”) law, Article 118D of the Income Tax (Jersey) Law 1961, which now gives formal recognition to these alternative, more flexible, pension-type arrangements. Jersey has for many years formally recognised International Pension Plans (“IPP”) under Article 131A of the same law, but with the emergence of the requirement for Jersey providers to service the ever-evolving needs of international companies, it now also recognises that global businesses operate in countries where their employees do not have traditional ‘retirement dates’ and as such, need more flexible employee-savings solutions.
- Expertise – Very few jurisdictions in the world have the concentration or volume of highly qualified experts in this area of finance with, importantly, the proven track record of advising on, delivering and servicing these types of pension and savings arrangements.
Jersey providers already administer the pension assets of approximately 60 million people around the world. It is clear that much more needs to be done and the global community needs Jersey’s expertise more than ever for it to enjoy a comfortable retirement.