Multinational corporations increasingly are looking to international defined contribution plans to cover large populations of local employees in key markets where domestic retirement plan options don't exist or offer poor value.
In addition to the traditional use of international pension plans to cover expatriate employees, IPPs as applied to local employees is a new and growing trend, said Michael Brough, senior international consultant at Towers Watson & Co., London.
The Middle East is a classic case, Mr. Brough said. About 90% of the working population in the United Arab Emirates is composed of expatriates, whose postings overseas are lengthening compared to 10 years ago and “as a result, pensions and long-term savings arrangements are becoming more important,” he added. “At the same time, you're seeing demand from employees on local contracts for some kind of a retirement or long-term savings plan.”
Local employees now account for about 16% of the total number of participants in IPPs, according to the Towers Watson IPP annual survey published in February. About 50% of the participants in IPPs are expatriates. “An example of the merit of offering IPPs to local employees is to assist with recruitment and retention purposes,” according to an analysis of the Towers Watson survey. The remainder of IPP participants fall into the executives category or "other' category.
There were 33 IPPs created globally in 2012, “which is even more significant if you consider that this was done amid a global downturn,” Mr. Brough said, citing the Towers Watson survey.
In 2012, there were a total of 403 IPPs — mostly defined contribution— sponsored by 391 companies worldwide, according to the Towers Watson survey. Total assets in such plans are not available, but several sources said they're relatively small, with the majority of IPPs holding less than $100 million. However, some of the more established IPPs have reached hundreds of millions, with a few approaching $1 billion.
Also called international retirement plans, such pension savings vehicles share some common characteristics: they're usually designed so employees can contribute from multiple countries in multiple currencies that are often converted to a home-country currency and invested in offshore tax-efficient platforms.
“Multinationals recognize the need for some kind of a common thread across the different markets in which they're operating,” said Fredrik Axsater, managing director and head of global defined contribution at State Street Global Advisors, Boston. “We're engaging in more and more conversations with clients surrounding this issue.”