International Benefits Network - Newsletter

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CONTENTS

• International - Multinational Pooling – Reduced Costs For Employers
  
  
• United Kingdom - December 2007 - Pensions Bill Introduced To Parliament
  
  
• International - Multinational Companies: How To Optimise International Employee Benefits
  
  
• China - Competition Rules In The Market Place
  
  
• France - The Coming Age Wave – Challenges for French Employers
  
  
• USA - Doing Business Across The World
  
  
• Ireland - The Irish Finance Act 2006 – Similar But Different
  
  
• United Kingdom - Pensions White Paper – Government to Legislate
  
  
• Germany - Outsourcing of Pension Liabilities
  
  
• USA - Health Care Consumerism In The United States

INTERNATIONAL

MULTINATIONAL POOLING – REDUCED COSTS FOR EMPLOYERS
By HSBC Actuaries & Consultants Limited, UK

Many companies now have employees in more than one country, with their employee benefit programmes arranged locally. For these companies there will often be considerable expenditure and effort involved in setting up these arrangements in relation to the risk based element. There may be opportunities to reduce costs and administrative time through Multinational Pooling.

What is Multinational Pooling?

Employee benefit plans around the world are financed in various ways, with even the largest of multinational companies often using insurance products to lay off risk. Multinational Pooling is essentially a second stage accounting facility for insured benefit plans, potentially providing companies operating in more than one country with the benefit of favourable insurance claims experience when compared to arranging programmes individually by country.

With a conventional insurance contract, any profit generated (broadly premiums less expenses and claims) is retained by the local insurer. With a Multinational Pool, the parent company will benefit from any profit through the payment of "dividends" and can then decide how to share the benefits with its associated companies.

Multinational Pooling arrangements can cover all types of employee benefit insurances including life assurance, medical insurance, income protection and, in some instances, pension arrangements.  More sophisticated accounting features can also be incorporated such as Stop-Loss, Loss-Carry Forward and use can be made of the employer's "Captive" capabilities.

Advantages of Multinational Pooling

The main benefits of Multinational Pooling arrangements fall into three areas: Financial, Service and Information. Key aspects of each are set out below:

Financial

• Dividends from the positive claims experience of insurances in place around the world.
• Premium savings from negotiated discounts with insurance providers.
• Management costs can be deducted from any surplus generated by the global experience of the pool.
• No additional insurance premiums relating to the establishment of the pooling arrangement.

Service

• Participating in a pool will elevate clients to "Global Status", which will be reflected in service levels for all employers.
• Availability of insurance that may not exist on a standalone basis.
• Proactive claims management of the pooling network to reduce losses and increase potential for dividends.
• Favourable underwriting terms (for example improved "free cover") can significantly reduce administration and management time.

Information

• Annual profit and loss accounts providing valuable management information on all pooled contracts.
• Annual updates on world-wide legislation and regulation.
• Information on typical employee benefit programmes to enable benchmarking and comparison with competitors.

Requirements for setting up a Multinational Pool

Most providers will establish a Multinational Pool for companies that insure at least 200 lives across two or more countries. The types of contract offered, the minimum lives and minimum annual premiums vary between providers. The most common contracts available are life assurance, short and long-term disability cover, accidental death, medical benefits and retirement pensions.

Where pooling is not offered or not possible, a provider may offer "program reporting". This means that although a contract may not be included in the calculation of potential dividends, the insurer will report to the parent company on that contract. This facility may also be useful where an employer decides not to pool a particular country's contract, perhaps due to poor claims experience.

Providers do not normally pool individual insurances, voluntary risk plans, separable accident benefits and plans where local dividends are incompatible with Multinational Pooling (e.g. local experience rating).

The pooling agreement will normally be documented by a simple letter of agreement between the provider and the parent company covering the basis of the agreement and pooling year.

The Multinational Pooling Market

HSBC Actuaries and Consultants Limited has long-term relationships with senior personnel at all of the organisations currently offering Multinational Pooling. These are:

AIG	Allianz	Generali
Gerling	IGP	ING
Insurope	Swiss Life	Zurich

For more information on this subject, please contact David Lackenby at HSBC Actuaries & Consultants Limited, UK, on +44 (0) 161 253 1101 or at  david.lackenby@hsbc.com

UNITED KINGDOM

DECEMBER 2007 - PENSIONS BILL INTRODUCED TO PARLIAMENT
By HSBC Actuaries & Consultants Limited, UK

The Secretary of State for Work and Pensions, Peter Hain, has introduced the Pensions Bill to Parliament, and said that millions more people will benefit from a good workplace pension as a result of reforms in the Bill.

The Bill proposes automatic enrolment for all employees aged over 22, earning more than £5,000 a year, into a qualifying workplace pension scheme or personal accounts.  Workers would contribute a minimum of 4 per cent, employers a minimum of 3 per cent with around 1 per cent in tax relief from the Government.

Secretary of State for Work and Pensions, Peter Hain, said: "Automatic enrolment and the introduction of a compulsory employer contribution would be a huge social change - resulting in millions more savers, and billions of pounds more being saved towards retirement.

"It's good news that people are living longer, healthier lives - but unless people plan and save they could find themselves with less income in retirement than they'd want.  Around 7m still aren't saving enough.  These reforms will help people to meet their aspirations for later life.   Between six and nine million people will be newly saving in a workplace pension or saving more as a result of these reforms. This will transform the savings culture in the UK - boosting overall annual pension contributions by up to around £10bn by 2015."

The Pensions Bill 2007 proposes:
• Automatic enrolment into a qualifying workplace scheme from 2012.
• The introduction of the new personal accounts scheme designed for those employers who do not currently run a pension scheme.
• Executive powers for the Personal Accounts Delivery Authority, allowing the authority to design this scheme at arm's length from Government.
• A role for the Pensions Regulator as the compliance body for these reforms, ensuring employers meet their new obligations.
• Further simplification to the Additional State Pension by consolidating the rights people have built up under Graduated Retirement Benefit, SERPs and State Second Pensions into a single cash sum.
• Measures to ease the burden of regulation on employers, including a reduction in the cap on revaluation of deferred pensions from 5 per cent to 2.5 per cent – for future accruals only.

Commenting on the deregulatory measures, Minister for Pensions Reform Mike O'Brien said: "We want to encourage employers who provide Defined Benefit pension schemes while ensuring that members' benefits are protected. "There is no magic bullet solution but we believe that the reduction of the revaluation cap achieves a balance, saving employers around £250m a year on average in the longer term and helping to keep defined benefit schemes open for the benefit of workers.  "I want to send a clear message to employers with good DB schemes - we want you to continue."

Responses to Pensions Bill.

Pensions Bill Must Add To Saving, Says ABI
Following the publication of the latest Pensions Bill, the Association of British Insurers says it supports personal accounts, providing they add to saving rather than undermining existing pension provision.

ACA Says More Is Needed In Pensions Bill
The Association of Consulting Actuaries says that the Pensions Bill offers the opportunity to boost workplace pensions, but warns that reform measures will have to be improved upon if the Bill is to achieve its objective of stemming the decline of good workplace pensions.

NAPF Comments on Deregulation and Personal Accounts
In response to the publication of the Pensions Bill today, the National Association of Pension Funds (NAPF) Chief Executive, Joanne Segars, said: "The measures to ease the regulatory burden on occupational pensions are an important first step in helping to secure the future of this vital part of retirement provision.   The Government's approach sends a clear signal that it supports good pension scheme provision and plots a sensible middle course between safeguarding members' benefits and encouraging employers to provide good quality occupational pensions."   On Personal Accounts, Ms Segars, said: "The further progress on Personal Accounts will be crucial in providing an effective way of helping low to medium income employees who do not currently have access to a good workplace pension.  The pensions industry must work hard with the Government to instil confidence in Personal Accounts whilst making sure they do not replace existing occupational pension provision.   When they are launched in 2012, they should have a more far reaching effect on millions of people than the London Olympics. There is much work to do on the detail of the Bill to ensure it does not damage existing good quality workplace pensions. This should include a level playing field when it comes to auto-enrolment into workplace personal pensions."

For more information on this subject, please contact David Lackenby at HSBC Actuaries & Consultants Limited, UK, on +44 (0) 161 253 1101 or at  david.lackenby@hsbc.com

INTERNATIONAL

MULTINATIONAL COMPANIES: HOW TO OPTIMISE INTERNATIONAL EMPLOYEE BENEFITS
By Dominique Edmé of Assurances et Conseils Saint-Honoré, France

Large international groups are increasingly facing problems caused by the way they manage their global employee benefit policy. This raises a number of questions for them: How can they control risks when the head office must take a decision on a subsidiary in Singapore, Romania or South Africa? How can they choose the best local coverage, and with what can they compare it? How can their programme be more attractive than those of their competitors if they don't know the local market? When choice is possible, which countries should they favour to develop and expand their group's activities in order to make economies of scale? How can they successfully implement the employee benefit strategy decided at the head office, in all subsidiaries?

If they want to find answers to these questions, they will need to master information from outside the borders of their home country.

Information on different possible plans

The first step will be to gather information on local plans in all of the countries where subsidiaries are located.  In order to compare plans, multinationals must understand the systems implemented in each of those countries.  These may work in a very different way to the home country system.

Even if employee benefits systems are based on three pillars, they will usually vary from one country to another. The first pillar relates to public plans, the second to occupational plans, the third to individual plans.  There may be a fourth pillar in some countries, covering for example earnings in retirement or benefits financed by family members who take care of parents or grandparents who have not contributed enough during their working careers.

The second step will be to determine and control the level of coverage provided by local plans.  These can include:

• mandatory plans, i.e. contributory systems based on income and aimed at partially replacing the earned income of insured persons;
• occupational plans relating to collective agreements and occupational sectors, where each country has its own agreements and regulations; and to complete the employee benefits overview,
• private complementary plans following the practice in each local market.

It is relatively easy to access information on public systems. However, it takes a specialist international consultant or a local market player to determine the detailed requirements of a collective agreement or an occupational sector, or of current practice in the complementary private plan market.  The consultant will often belong to a network helping them to cover those countries which are particularly relevant to employee benefit managers of multinational companies.

Methods available for large groups
A) Auditing

There are two possible options for multinationals who wish to establish an operation in an overseas country or who have an existing presence there.   In both cases, it will be necessary to establish the basic parameters for a successful strategy and check that they are fulfilled:

Controlling international risks	Knowing local systems and the local market
Optimising current programs	Harmonising employee benefits
Enhancing the value of the chosen location	Country- and market-specific employee benefits packages

The first step is to thoroughly audit each subsidiary's plans and make an inventory to check that the plans comply with local regulations and agreements in force. There then needs to follow an analysis of benefits in the local market and, in line with this, benchmarking of each plan in accordance with local market practice so that the group can establish its position relative to its competitors.

It will then be possible to apply the global strategy determined by the head office, depending on where the company wishes to position its own plans in the employment market.   For instance, a group may decide to position itself 15 per cent above the market for all executive managers and three per cent for workers, because this is justified in this branch of its industry.

Taking another example, an automotive industry group employing specialised staff for whom it has invested in terms of training. This group wants to prevent its competitors from hiring away its specialised workforce.  Therefore it will make every effort to develop its staff loyalty and motivate its employees, first through its compensation policy – fixed according to the average local salary – but also through its complementary employee benefits policy.  It will then use local benchmarking to find the level of complementary coverage it wishes to provide.  For this purpose, the market can be divided into quartiles.  To be attractive, the group should maintain a policy slightly above the median, say about 10% of the third quartile.  If it wants to hire away its competitors' staff, it should be closer to the top quartile.   On the other hand, in a saturated market, an employer may want to maintain a position below the median.

Other criteria can also influence the positioning: the company's renown, the employees' mean age, the need to attract new talents or retain certain know-how with an older staff.

B) Pooling

Multinationals can use a second option, easier in some respects but more technical: "pooling" is an international financial arrangement involving subsidiaries without interfering in their employee benefits local policy.   It can be defined as:

• a financial consolidation, bringing together all complementary employee benefits plans of a multinational company;
• an "experience-rating" system allowing an adjustment at the end of the fiscal year to bring the plans’ costs – thanks to the dividend generated – down to the level of premiums necessary to cover only incurred claims, their provision, and corresponding expenses and costs;
• a worldwide information tool allowing a complete overview of policies and a global strategy management.

There are a number of prerequisites to an international pooling arrangement:

Choosing a single insurer	Consolidation of financial results of local plans for all subsidiaries, economies of scale on expenses and administration costs, less strict underwriting conditions
Types of coverage	Risks: Death, Disability, Accident, Retirement with risk part, medical expenses for information
Balance between plans	Dividend generated by total consolidation of local accounts
Involved participants	Strong support of parent company to make communication with subsidiaries easier Approval from subsidiaries, once they understand operations

When implementing a pooling strategy, multinationals can choose between different options, depending on the total number of pooled employees, the nature of the risks and the strategy adopted.

Larger companies can choose between two options:

• "Stop Loss", under which any profit or loss generated is realised at the end of each fiscal year, in return of a higher risk premium;
• "Loss Carry Forward", under which any losses are transferred forward for a specified period (three or five years) or for an unspecified period.

With Loss Carry Forward insurers can better manage the risk of a recurring deficit, and multinationals may save money. On the other hand, they will no longer benefit from their full profits during each fiscal year, because these will be partly used to absorb losses generated in previous years, subject to any limit on the chosen period.

At the end of the fiscal year, all companies receive an Annual Report allowing them to fulfill the following targets:

Information feed-back	Summary of major issues in each country, the local market, environment or future reforms
Comprehensive overview	Details of every local account, premiums for the various plans, claims, balance, profit participation
Economies of scale	Better negotiation of mobility or underwriting conditions, transfer of mathematical reserves
Financial optimising	Dividend paid if a positive total balance, and in accordance with the option selected

It is also possible to start with a first level of international reinsurance.  A "multi-pool", or "multi-employers" pool, may be suitable for smaller companies and consolidates the results from several employers; however, they cannot benefit from their own specific results.

There are less than 10 pooling networks; the oldest have been on the market for almost 20 years.  How can multinationals clearly understand the market or make a selection among these networks?   It is important to involve a consultant who can identify the most appropriate network or networks, who can analyse all the companies' parameters, question the various networks about current available plans, and recommend the best arrangement and options for the desired strategy.

Whether through auditing – possibly leading to consolidation through an international pooling program - or with financial consolidation only, these two approaches offer answers to the needs of multinationals, using a consultant who can manage their interests in the best possible way – implementing their requirements, with an economy of scale generated through a comprehensive strategy applied to all employees in the selected group.

Controlling information remains the best way to confirm, refine and direct a company’s international employee benefits strategy.

For more information on this topic, please contact Dominique Edmé: dedme@acshgroup.com
(June 2007)

CHINA

COMPETITION RULES IN THE MARKET PLACE
By Roger Barnett, Regional Actuary at HSBC Insurance Brokers (Asia-Pacific) Limited in Hong Kong

China is such a large country that any generalisation should be applied with caution.   Wage levels vary greatly by location, and employees working in a city are often significantly higher paid than those in surrounding areas. The demand for quality employees exceeds the supply, and such employees are aware of the opportunities available in a market keenly searching for talent.  As the Chinese economy develops, employers are facing increasing difficulty in recruiting and retaining the best staff.

The employment market in China is quite mobile, with the better employees making the most of their bargaining power to increase salaries or switch employers. It is also common for employees to make the most of training opportunities (particularly overseas training) to enhance their marketability. As a result, employers are seeking ways of retaining employees in whom they have invested, such as requiring indemnities from them in respect of their training costs.

Many foreign-owned start-ups use FESCO, the Foreign Enterprise Services Corporation, or a similar Foreign Services Corporation to provide HR services to foreign and domestic organizations. If they do, the FSC or FESCO will actually employ the staff and the costs of providing social security and any supplementary benefits are determined by the FSC or FESCO and charged accordingly. If the staff are directly employed, the international employer is expected to introduce supplementary medical and life insurance plans.

Local employers may not provide supplementary medical benefits, life insurance or retirement plans other than those included under the social security system, but the great majority of international companies do provide insured medical benefits.  Supplementary pension plans are less common, but these are growing in popularity as employers realise that such benefits may assist in retaining staff. The emphasis, though, is still on direct remuneration.

The Social Security System usually consists of three component funds:

• Medical (Social Medical Insurance)
• Unemployment
• Pension

The Social Medical Insurance coverage is normally based on full reimbursement of costs for outpatient treatment by approved practitioners.  Some medications - foreign made drugs, for example - may not be covered. For in-patient treatment, a deductible will usually be borne by the employee - for example, 10% of the average annual salary as last published by the city or province, and there may also be a co-payment, perhaps 15%, on the balance up to a ceiling, of, say, four times the published average annual wage.  For claims in excess of this amount, there would be a higher co-payment, perhaps, 25%.

Employers and employees may be required to contribute to a housing fund managed by a specified bank. Employees may withdraw the accrued amount to purchase or renovate homes or on retirement.

An employer may provide group life insurance and personal accident cover. A savings plan may also be provided. For example, an employee could choose a contribution rate, say 5% or 10% of basic monthly salary and the employer would match this.  The employer’s contributions could be subject to a vesting period, perhaps three years, and would be deemed taxable income, so the employer would generally bear the tax on these.

Other benefits offered by an employer may include the provision of transport to and from a factory and company housing, depending on location.

Insurance Products
There are two main types of insurance to supplement the Social Medical Insurance (SMI).

One type covers the costs of treatment not covered by SMI. This would mean that the patient would follow the SMI requirements for approved medical service providers and the insurer would cover the deductible, the co-payment and the higher excess co-payment.

The other type involves the insurer in covering the full cost, where the patient could use a medical service provider not approved by SMI. Alternatively, the patient could claim against the insurer instead of the SMI (although this would be unlikely if the medical service provider were approved by the SMI). The supplementary insurance plan would be on a reimbursement basis, so the patient would be required to pay first and claim later. If the patient used the SMI card, there would be no immediate outlay for the patient.

Dependant Coverage
SMI covers employees only, but supplemental insurance plans may be extended to cover dependants, with benefits limited to 50% of the costs. Even if the dependants were covered under SMI through another employer, there would be a shortfall, as the 50% would apply to the amounts no shortfall, as the 50% would apply to the amounts not covered by SMI. Thus, the amount at risk for the insurer in covering dependants varies significantly depending on whether the dependants are covered under SMI.

Medical insurance in China does not carry guaranteed renewal. If the claims are unduly high for a particular person, the insurer may offer renewal for the other employees/dependants under the plan, but decline to cover someone with high claims.

Some medical plans offered by insurers in China will cover treatment only in China, so travel insurance would be necessary for employees travelling overseas. Recently, some insurers have introduced medical plans to cover treatment both in and outside China.

China’s Pension Problem
China’s one-child policy has produced an unusual demographic situation. Apart from the prospect of substantially more men than women, the ratio of retirees to workers will increase. A “1-2-4” pattern in households is emerging, with one child, two parents and four grandparents.

Some insurers now offer corporate annuities and group pension plans. The corporate annuities are established under trust and have a trustee and custodian, and are subject to various regulatory controls. In contrast, group pension plans are provided under insurance policies and regulated solely by the China Insurance Regulatory Committee.

Under both arrangements employees’ contributions are not tax deductible and the employer contributions are deemed to be assessable income to the employee.  With group pension plans, the benefits (including investment income) are not assessable when received by the employee. The tax treatment of benefits under corporate annuities is currently unclear.

For more information on this topic, please contact Roger Barnett at rogerbarnett@hsbc.com.hk.
( May 2007)

FRANCE

THE COMING AGE WAVE – CHALLENGES FOR FRENCH EMPLOYERS
By Assurances et Conseils Saint-Honoré, France

The bébé-boomers in France are approaching retirement just as they are in other countries.     The consequences of the mass retirement of baby-boomers for the funding of compulsory pensions have been identified, quantified and communicated to employees.   Important measures have been taken in recent years to cope with the ageing of the French population and the consequent pension and healthcare deficits.

One of these measures involves the partial prefunding of expected post-2020 deficits in some pension schemes. The Pension Provision Fund (FRR) was created in 1999, financed by new taxation.  Today the Fund totals €28 billion, and aims to reach €150 billion in 2020.   The pension reform (the Loi Fillon) of 2003, following the reforms of 1993, sets incentives for occupational savings and individual supplementary contributions, and will lead to a reduction in social security retirement provision. The reforms introduce new scheme governance rules based on five-year periods, a revision of funding parameters, and indexed contributions. But these measures will not be sufficient by themselves to solve the problems posed by the age profile of the French population.   The reforms also aim to slow down the growth of healthcare deficits, creating a coordinated care approach, the replacement of some drugs by less expensive ones, and the non reimbursement of some others. As a result of these changes to the law, the costs of complementary schemes have been transferred to consumers, the majority of whom are retirees.

For more information, please contact Dominique Edmé dedme@acshgroup.com

Organisational challenges for French employers

The large number of retirees will force employers to reorganise and restructure workforces. Some companies will have to incentivise older employees not to retire by:

• Adapting conditions and periods of work, recognising the value of experience, and arranging for the transmission of the knowledge of such employees
• Introducing improvements to their deferred pensions.

Retaining older workers will require employers to adapt working hours by introducing:

• Progressive early retirement arrangements from age 55
• Partial retirement activity for workers aged at least 60
• Part-time employment, with rights maintained and calculated as though on a full-time basis.

Other companies are facing opposite issues such as early leaving for economic reasons or health problems. Solutions include:

• Pre-retirement arrangements for those in physically demanding work (allowed in specific cases by the Loi Fillon)
• Special benefits for those with long service (also allowed under Loi Fillon), facilitating retirement before 60
• Early retirement arrangements, taxed under Loi Fillon, but socially acceptable and under the employer’s control.

Employee benefits challenges for French employers

A large number of retirements may jeopardise the fragile balance in a company’s healthcare account.   The main problem is that the cost for employees and retirees is based on a claims ratio calculated by reference to the total beneficiary population. With an unbalanced ratio, the cost is supported by the employer and the active workers.

To address this problem there are two possibilities – an additional cost of 50% for retirees, allowed by law, or a separate plan for retirees set-up within a pooled insurance company account, with the company monitoring its claims ratio.

Many companies face funding deficits in their healthcare arrangements. Some are already reviewing their contributions to finance the retirees’ schemes, anticipating a situation that will become more and more unfavourable.

On the other hand, it is possible that the large number of retirements will significantly reduce the number of death claims, and also reduce short term disability claims, leading to some relief from increasing contributions.

Eventually, employers will have to face the funding of supplementary occupational pensions. Although optional and not specified in collective agreements, surveys show that employees want contributions from their employers. New collective plans set under the Loi Fillon should in the medium term lead to additional retirement funding costs for companies.

As foreseen in the new measures, keeping employees of the baby boom generation at work for as long as possible will help to ameliorate the financial and organisational strains. But will this be the strategy of the majority of companies? And is this what workers want?   A recent survey discloses the contrary, as according to 90% of workers, the best age for retirement is 60 at the latest.

For more information, please contact Dominique Edmé dedme@acshgroup.com

 

INTERNATIONAL

DOING BUSINESS ACROSS THE WORLD
By Hilb Rogal & Hobbs, USA.

For those of our clients who transact business outside their own country – or who have ambitions to do so – information on target markets is obviously key to success.    The internet has become the automatic first choice for much of the information we need, but finding the right web-page can be time consuming.

However, help is at hand.   The World Bank website www.doingbusiness.org provides a whole range of information on 155 countries. For example, those considering exporting to Mongolia may wish to know that the per capita gross national income is US$590, which contrasts, for example, with that of Norway where it is US$52,030.

Much useful information is available on the website, with an indication of the best and worst in a series of categories from starting to closing a business. For example the UK is ranked 9th highest for the ease of starting a business and ranked 10th for the ease of closing it down. About the only item under the ‘ease of doing business’ heading where the UK is below average is for ‘paying taxes’. (This is based upon an index constructed from the total number of taxes paid, the time it takes to prepare and file returns and the amount payable, and is exclusive of labour-related taxes.) Perhaps surprisingly, France ranks at 35 on this category, although in most other areas it would appear to be more difficult to do business in France compared with the UK.

For more information, please contact Start Brown stuart.brown@hrh.com

 

IRELAND

THE IRISH FINANCE ACT 2006 – SIMILAR BUT DIFFERENT
By Des McGarry, Invesco Pension & Investment Consultants, Ireland

For years, Irish pensions legislation was very similar to that of the UK. But in the last two decades or so, the Irish and UK approaches have diverged considerably. Yet, both countries remain committed to the principle of (in Western European terms) relatively low state benefits overlaid with a thriving private, funded pensions sector.

Many of the challenges facing the state-private pensions structure are similar in both countries. It is always interesting to see how the Irish approach to these challenges is sometimes similar to ours, and at other times different. The pensions aspects of the Dublin Government’s Finance Act 2006 illustrate this “similar but different” character. Among the proposals are:

• An increase in tax-relieved personal contributions for individuals aged over fifty-five from 30% to 35% of earnings, and for those over sixty from 30% to 40%. These are based on an annually-indexed earnings ceiling of €254,000.   In the UK, of course, the annual allowance has replaced all other contribution limits.

• Higher maximum pension accrual rates for employees with less than ten years to retirement. Again, the UK no longer has maximum accrual rates, with the lifetime allowance having replaced them.

• A maximum value to each person’s tax-privileged pension fund of €5 million. This has echoes of the UK’s lifetime allowance, though is considerably more generous. However, unlike the UK, this new limit is an addition to, rather than a replacement for, previous limits.

• A maximum permitted tax-free cash sum of €1.25 million, though less if existing limits apply.

For more information, please contact Des McGarry dmcgarry@invesco.ie

 

UNITED KINGDOM

PENSIONS WHITE PAPER – GOVERNMENT TO LEGISLATE
By HSBC Actuaries & Consultants Limited, UK

The Government intends to implement most of the Turner proposals. Although some of the details in May’s White Paper vary from those in the Pensions Commission’s 2005 Report, the essential elements of the proposals look like being enshrined in legislation.

Between six and seven million workers could be covered by the new-style pension personal accounts, even after allowing for opt-outs, according to Government estimates. It is intended to introduce these in 2012, with a minimum required level of contributions from both employers and employees.

The revaluation link to average earnings increases will be reintroduced to the Basic State Pension – something which the Government has long resisted, but which is now a fundamental part of the package of reforms. The Second State Pension will become a (relatively) simple flat-rate top-up to the Basic State Pension, and contracting-out will be abolished for defined contribution schemes.  There will be further reform of state pensions to ensure that an increased proportion of retirees will qualify for the full Basic State Pension, which, it is estimated, will, by 2050, more than double in value compared with present projections.

An increase in state pensionable age – the aspect of the original Turner proposals which caused most press comment – is proposed. However, the Government asserts that nobody aged more than forty-seven today would be affected by this.

There is also a promise in the White Paper of a rolling deregulatory review of pensions, the objective being to ease the burden on employers who provide good pension schemes.

The Government wants to build an all-party consensus on pensions. Considering that these proposals originally came from a non-party political source, this looks achievable, and we can probably assume that a future change of Government would not fundamentally alter the new regime.   The implementation dates of some aspects of the proposals are flexible, and the expensive re-linking of state pension increases to average earnings will be introduced “subject to affordability and the fiscal position”, though 2012 is the target date.

For more information, please contact David Lackenby david.lackenby@hsbc.com

 

GERMANY

OUTSOURCING OF PENSION LIABILITIES IN GERMANY
By Gerling Pensions-Management, Germany

The view on pension liabilities in Germany has changed in the last couple of years. It is now acknowledged that such liabilities represent a future payment obligation of the company and therefore have an impact upon the company’s balance sheet.
Also, in small and medium-sized companies pension liabilities can amount to more than twenty percent of the balance sheet total, and can consequently lead to a significant liquidity burden. However, the fact that employee benefit plans have an effect on the balance sheet need not necessarily be interpreted as a flaw. Indeed, there are a number of criteria which determine whether a pension plan is best placed within or outside the balance sheet.
 
There is a great demand in Germany for solutions to relieve companies from their pension liabilities.  In the past, the vast majority of German occupational plans were established as book-reserve plans.  A number of those plans are now closed to new entrants and are thus burdened by a continuously growing proportion of pensioners. Many companies are, as a consequence, confronted with serious liquidity and profitability problems.

Reasons for outsourcing liabilities

There are various triggers for the decision to remove pension liabilities from the company balance sheet.  However, some common threads can be identified:

• Banks increasingly pay attention to pension liabilities when assessing the credit rating of a company.

• The way that pension liabilities are assessed depends on actuarial tables which can change from time to time. Thus, the liabilities can increase for reasons beyond the company’s control.

• The valuation of pension liabilities under the German accounting standards is often set at the minimum required level (e.g. without consideration of future salary increases). The use of international accounting standards may then produce different and normally higher valuations of pension liabilities.

• Pension liabilities are often an important and much discussed issue in mergers and acquisitions

• If pension liabilities are transferred off the company balance sheet it can aid the succession planning in family companies as the new management often has no interest in continuing the pension plan.

Possible outsourcing solutions

In Germany there are a number of ways to outsource pension liabilities. These can be grouped under two headings – those approaches in which the company is legally released of its pension liabilities, and those in which only funding or administration are outsourced to a third party. The former is possible by the way of a termination pay arrangement or, in the case of a liquidation of the company, by the transfer of the liabilities to a pension trust or an insurance company (“liquidation insurance” in the German pension jargon). In the latter cases, the company remains liable in case the funds provided to the third party are insufficient.

Legal release of liabilities

In case of termination pay arrangements (i.e. where a lump sum is payable on termination of employment or retirement), an agreement is made with beneficiaries about the discontinuation of the pension plan. In lieu, the beneficiary receives a cash benefit or perhaps an asset such as a reinsurance contract. The termination pay is regulated under the Occupational Pensions Act (Betriebsrentengesetz). However, with the introduction of the Retirement Income Act (Alterseinkünftegesetz) this approach has been significantly limited to very small entitlements. Certain groups of people (like managing partners) do not fall under the Occupational Pensions Act and the termination pay from their pension plans is not restricted.

If a company is to go into liquidation, the Occupational Pensions Act allows its pension liabilities to be transferred to an insurance company or to a pension trust (Pensionskasse), with the effect that the company is completely relieved of debt.

The advantage of this procedure is that the single premium paid to the insurance company is tax-free, as long as the conditions of the Act are met.   Therefore the “liquidation insurance” route is of particular interest to dormant companies. It is also of interest to family companies where there are no successors.

Funding without legal release of liability

In many cases external funding of the pension plan, for example through the change of the funding vehicle, is the most appropriate option.  The transfer to a direct insurance or a pension trust (Pensionskasse) is often impossible for tax reasons.

Typically, to remove pension liabilities from the balance sheet would require single premiums which exceed the tax-free contribution limits under the relevant tax law. However, a transfer to a support fund (Unterstützungskasse) or a pension fund (Pensionsfonds) is possible without any income tax burden.

The pension fund (Pensionsfonds) vehicle has become more attractive as at present there are two calculation methods for the contributions (with and without benefit guarantee by the pension fund). This option is particularly relevant to executive pension promises.

International accounting standards (IFRS) also provide the opportunity to reduce pension reserves without changing the funding vehicle, for example, by the means of a reinsurance contract pledged to the beneficiary or by funding a trust in order to create plan assets (Contractual Trust Agreement).

Summary

As there are many possible triggers for a balance sheet outsourcing of pension liabilities and as many possible solutions, every single option should be examined in detail and considered against the company’s financial circumstances in order to find the best possible approach.  In order to explore every possibility – including the “do nothing” option which leaves the pension liabilities and assets on the balance sheet – it is advisable to rely on a specialist consultant’s expertise.

For more information, please contact Robert Heiligers: robert.heiligers@hdi-gerling.de.

USA

HEALTH CARE CONSUMERISM IN THE UNITED STATES
By Kenneth Drummer, SvP Woodruff-Sawyer & Co

Kenneth Drummer, a senior vice president and thought-leader in Woodruff-Sawyer’s health & welfare benefits practice provides an overview of developments in Healthcare in the US.

Most health policy experts agree that the American health care system is broken. However, there is no shortage of pundits claiming to have a solution. The latest revolutionary idea that is sweeping the nation is “consumerism.” Advocates claim that individuals need a greater financial stake in health care buying decisions to be better consumers, while critics argue that financial hurdles are a barrier to proper care. After several years of experience by employers who were early adopters of so-called consumer-directed health plans or CDHPs, many employers are now seeking a second opinion.

Unlike most industrialized countries with national health systems of one sort or another, the United States health care system is employer-based. Unfortunately, the number of employers providing health benefits has been declining in recent years (from 69% in 2000 to 61% in 2006). Nevertheless, nearly two-thirds of the more than 250 million non-elderly Americans get their health insurance through their employer.  Federal and State Government programs provide coverage to millions more Americans but the ranks of the uninsured continue to swell with 17.9% of the under age 65 population without health insurance in 2005.

Employer medical insurance costs continue to trend upward due to inflationary pressures, new costly technologies, and increases in utilization. In 1991 national health care costs of $785 billion accounted for 13.1% of GDP. In 2004 the expenditure had climbed to $1,878 billion and 16.0% of GDP. In a global economy, this significant health insurance cost burden places US employers at a distinct competitive disadvantage. However, competition to attract and retain quality workers acts as a deterrent to reduction of benefits or implementation of more complex healthcare arrangements.

During the last few years the term “consumerism” has found its way into the employee benefits vernacular. As far back as the 1960s, researchers at the Rand Corporation found, not surprisingly, that the greater the share of medical costs born by the individual, the fewer medical services were purchased. Based on this simple principle, the Consumer Driven Health Plan (CDHP) was born. Employers generally welcomed this new approach in theory, but there were very few early adopters who embraced the concept as a total replacement for their traditional medical plans. A number of CDHP vendors entered the insurance market several years ago but there has been market consolidation. It is anticipated that any remaining independent programs will either be acquired or fade away.

The key objectives of the CDHP are:

• Manage costs and mitigate trend
• Provide unlimited provider choice
• Introduce marketplace economics into the health care buying decision
• Provide tools and information to help individuals make informed decisions
• Encourage wellness/healthy lifestyles as a means of avoiding future health problems and their related costs
• Protect the participant from significant financial hardship due to serious illness or injury
• Allow for participants to have “equity” in the plan that grows over time as a result of prudent health care buying decisions

To meet these objectives the CDHP is designed around the following key elements:

• A reimbursement account funded with employer money (and in some cases by employees as well). Unused amounts can accumulate tax-free from year-to-year to reduce future out-of-pocket costs and/or to help pay for retiree medical benefits.
• A deductible amount funded by the employee after the reimbursement account has been used up.
• Catastrophic insurance protection for serious illness or injury.
• Decision support tools to help patients select network providers (with discounted fees-for- service), get health information about their condition (i.e., diet, exercise, pain management, etc.), and identify risk factors (through a health risk appraisal).

Preventive care services may also be provided and can be covered at 100% to encourage early detection and treatment of disease.

Many employers are rethinking their benefits strategy and the role, if any, that CDHPs will play in the future. Surveys are showing that earlier predictions may have been overly optimistic. For example, a survey conducted in 2006 by the International Society of Certified Employee Benefits Specialists (ISCEBS) showed that only 12% of the large employers actually offered a CDHP compared with a prediction of 23%. However, many employers are giving CDHPs a second look and are electing to focus on the behavioural self-interest of prevention and disease management that may even pay bigger dividends by keeping employees healthy in the first place.