As expats, we all have different reasons for moving away from the UK. In the main, these are likely to be for career progression or a complete change in lifestyle.
For those that move abroad in order to work , they may wish to consider some of the employee benefits that they left behind and to replicate or substitute these whilst on a foreign assigment, whether that assignment be permanent or otherwise.
What are “Employee Benefits“
Benefits are a form of compensation paid by employers to employees over and above the amount of pay specified as a base salary or hourly rate of pay. Benefits are a portion of a total compensation package for employees.
In many countries employee benefits have become an expectation for employees in the 21st century and a requirement for employers who wish to be competitive in terms of attracting and retaining qualified workers. A wide range of benefits-monetary and non-monetary-may be offered. Employers that take steps to learn what is most important to their employees can ensure that their benefit mix is valued.
Whilst some firms do provide good employee benefits, many do not. So employees need to ask about them at the recruitment stage or speak to an employee benefit specialist and make their own arrangements privately.
Whilst many would see some of these employee benefits as perks of the job, they are also a financial necessity, whether provided by the employer or not.
These benefits provide security during employment and security in retirement.
Let’s look at some of the most valued benefits.
A Transamerica Center survey in 2010 indicated that 47 percent of employees say they’d accept a lower salary if a job offered excellent retirement benefits. This is probably not surprising given the graying of America. As employees get older, they become more concerned with life after work. Employers that are able to provide attractive retirement plans can compete effectively for skilled workers.
In the UK, the “gold standard” schemes provide up to 2/3rds of salary at retirement. Very few now attain anything like this level of security in retirement.
For expats with dependents, this is seen as a valuable benefit. Typically in the UK, employers that offer this benefit normally provide up to 4 times the annual salary of the employee as life cover during employment.
Covering the employees’ wages in the event of long term sickness or disability, rather than leaving employees reliant on state benefits.
Private Health Insurance
In most countries, employers will have to contribute towards the provision of health insurance from the state, but private health cover clearly allows employees to “jump the queue” and get back to work quicker to everyone’s mutual benefit.
Benefits in kind
Additionally, there are the traditional “benefits in kind” which include company cars, company credit cards, mobile phones, laptop and petrol allowance. Arguably, these are required to undertake the job itself, but of course they have additional personal benefits. Employee benefits are not necessarily needed by employees to perform their duties, but are more of a necessity to attract, retain and reward staff.
In summary, looking forward, expats need to ensure their long term financial objectives and shorter term obligations for income and life cover are maintained. Critical to the longer term is a review of their existing pension arrangements.
For those that have accrued pension benefits in the UK, these would need to be reviewed to see what benefits are projected to retirement. With this information, expats can look at any income shortfall at retirement that they could suffer and put in place a financial plan to bridge this shortfall.
Preserved UK Pension Benefits
Part of this review should be to analyse the pension benefits accrued in the UK. Generally speaking these will fall into two categories, defined benefits (final salary) schemes and defined contribution (money purchase) schemes.
Let’s look at both schemes in slightly more detail-
Defined Contribution Schemes
These are schemes that accept contributions from both individuals and employers that are paid into a readily identifiable fund that is for the specific benefit of the pension member. The fund will be invested and will fluctuate with the market and the ultimate pension payable will be directly dependent upon how large that individual pension pot is at retirement. Therefore, the investment risk is clearly on the shoulders of the pension member. Poor investments returns will mean a poorer retirement.
Should a member wish to transfer this to an alternative pension provider, the fund is easily identifiable as the transfer value (which, depending on the scheme, may have some transfer penalty applied).
Defined Benefits Schemes
These fall into two categories – public and private sector schemes. Both schemes provide defined benefits. These benefits are a function of the years of service and the salary at date of leaving or retirement, potentially providing up to 2/3rds of salary at retirement as a pension (or a lower pension plus a cash lump sum). The definition of salary will be included in the scheme rules. There is no identifiable pension member’s fund. It is important to point out that a transfer value bears no relation to any specific individual pension pot that is earmarked for the member and, for that reason, it is called the “Cash Equivalent Transfer Value”.
Public sector schemes are funded from the public purse and from contributions by existing members. The individual does not bear any personal investment risk as the benefits are defined in the rules. Once in payment, these pension benefits increase in line with the Consumer Price Index. For those that have deferred pensions (ie left employment prior to retirement) the preserved benefits are also increased in line with the Consumer Price Index, offering some protection against inflation in the future.
For people that wish to ensure the best income in retirement, there is often little justification for transferring such schemes into private pension arrangements that rely on future investment performance. However, it is important to point out that there will always be exceptions and each case should be decided on its own merits.
Due to the cost to the sponsoring employer, such schemes have traditionally only been offered by large organisations which are typically public limited companies. Many such employers now are closing membership of such schemes to new employees because of this cost.
Nevertheless, for those that have accrued benefits in such schemes the defined benefits are valuable and all the investment risk is on the scheme and the employer and not on the individual.
In fact, earlier this year, the Financial Service Authority in the UK issued a stark warning that some financial advisers were giving “unsuitable advice” about these transfer deals. It warned that in the vast majority of cases it was not in an individual’s interest to transfer out of a guaranteed pension scheme.
Much space in the press has focused on the deficits that some of these final salary schemes have at the moment. It is important to point out that a scheme in deficit is not necessarily a problem, it is the ability of the sponsoring employer to service this deficit that is the issue.
Let’s look at an oversimplified analogy of a mortgage and compare that with a deficit.
If someone has a large mortgage on a house, then the creditor (in this case the lender) will want to know that the individual can service the debt repayments over the specified term. Provided the individual can do this, then there is no problem. If, however, the lender decided to ask for the full debt to be repaid early it is likely that there will be a problem to repay the debt.
In the case of the final salary pension scheme, if the scheme is in deficit then it is important to read the members’ annual pension report with specific regard to the actuarial report. This will highlight whether the fund is in deficit, the level of that deficit and what steps the employer needs to undertake to cover all liabilities. It would be useful to get hold of the sponsoring employer’s accounts to look at the level of indebtedness that it has to the scheme so that a judgement can be made on the ability to service this deficit.
If we use the mortgage analogy, above, then if all the members retired at the same time then there would likely be insufficient funds to pay full pensions to the members. As this is highly unlikely to occur, it then depends on the ability of the scheme and employer to service the ongoing and future obligations of the pension scheme. So each case needs consideration on its own merits.
Cash equivalent transfer values (CETV)
Both public and private sector schemes will offer deferred members a CETV. Effectively, the schemes are offering to buy back the guarantees of a pension from the member by calculating the value of those guarantees to give rise to the CETV. The member can then transfer this CETV to another pension arrangement and this then discharges the previous scheme of their responsibility to provide a pension.
Unlike money purchase scheme transfer values, it is not that easy to work out if the offer from the previous scheme for the guarantees being given up is in the best interests of the pension member. Therefore, and this is compulsory within the UK, it would be important to undertake a transfer analysis.
Using the analogy of house purchase, who would commit a substantial part of their life’s saving to buy a house without a survey? For those that require a mortgage, it would be a bank condition.
Upon receipt of a surveyor’s report, that values the property lower than the purchase price, the potential buyer is left with three options-
1. Renegotiate the purchase price to get better terms.
2. Buy the property at the asking price in the full knowledge that the property is not good value for money.
3. Not proceed with the purchase.
A transfer analysis provides similar options, it will show how hard the CETV will have to work to provide a similar pension that was offered by the pension scheme. If the CETV needs to provide consistently high levels of returns until retirement (for example: in excess of 10% pa compound after charges), it may give grounds to question the way in which the CETV figure was reached (usually with the help of an actuary), to see if better terms are available.
Not many people would go blindly into a house purchase with their life’s savings, just as people should not transfer their lifetime’s retirement provision without an independent transfer analysis report. The cost of the reports are similar to survey reports. Should someone get a survey report that is negative, in all likelihood, the purchase will not go ahead and the client will view the survey as money well spent. The same should be applied to transfer analysis reports.
If the transfer does not stack up financially, then the member may decide not to proceed with the transfer or accept that the ultimate pension payable at retirement will be lower than that offered by the original scheme. Sometimes, there are other considerations that need to be taken into account that may not be purely based on the pension payable at retirement.
In the cases where it looks like there could be benefits in transferring the pension, there is the question of to where the pension should be transferred, to what retirement product and to which tax jurisdiction. That, in itself, is a large subject.
About the Author:
Christopher Lean is a consultant at Square Mile Financial Services and an Associate of the Personal Finance Society (Chartered Insurance Institute).