Since the early 1990s, many multinationals have re-evaluated and made changes to their pension plans to cut increasing cost obligations. Naturally, these adjustments affect expatriate employees.

Just how much was revealed in a survey by Mercer Human Resource Consulting, which talked to 133 major companies (102 headquartered in North America, 31 in Europe) with a total of 27,500 expatriate employees among them.

Mercer defines expatriates as "third-country nationals" (TCN): employees who have transferred from their original country of employment (home country) to another country or countries (host country), neither of which is the country where the company is headquartered. For instance, a French national working in the Dutch office of a Canadian company is a TCN.

Final salary provisions for expatriates have decreased by nearly 50 percent since 1991. While 79 percent of the 130 companies surveyed offered final salary schemes 11 years ago, only 42 percent did by 2001.

Final salary schemes usually pay the employee a percentage of their final salary at that company; the percentage often depends on the length of service. Companies do not know ahead of time how much the pension will cost.

Pierre de la Croix, a principal consultant with Mercer Human Resource Consulting in the Netherlands, explains that "if a change is realised from a so-called defined benefit to defined contribution, you'll find that change reflected in the expatriate's pension arrangement - the expat pension arrangement is the mirror image of the home country."

Dutch bank ING, for example, changed its pension system to a "split system" on 1 January 2002 for its employees in the Netherlands and Dutch nationals working in ING's offices abroad.

"For the first EUR 70,374, ING applies the final pay system," says Bert Haasjes, head of international assignment management for the ING group. "For the salary above that amount, we have the defined contribution system, [therefore] a split system. And that is also applicable to Dutch-based expats - Dutch employees who have gone abroad."

Indeed, many companies have replaced final salary schemes with defined contribution (DC) plans, which both the employer and employee contribute to during the employee's tenure. DC plans are like bank accounts: the employee and employer contributions accumulate and the pension is equal to the accumulated contributions plus interest.

Mercer's survey also found that 73 percent of Europe-based companies say they offer DC plans for expatriates; only 41 percent of North American organisations make the same claim. European employers, on average, contribute 12 percent to DC plans compared to an average 5 percent contribution rate for North American employers.

The gap in the number of European and North American companies' who offer DC plans and the difference in their contribution amounts likely come down to culture.

"In many cases - and that is my experience also - an American individual first of all is interested in the amount of cash [salary], and then says, 'All right, this part I need for daily expenditures, and that part is for my savings and investment,'" says de la Croix. "A European would say, 'Savings and investment, I expect my company and my national state to care for that.' I think that's the main difference."

Regional variations aside, experts agree that expatriates should - and often do - remain in their home country's pension system.

De la Croix says that in his experience, 90 percent if not 100 percent of Americans assigned to the Netherlands stay on an American pension scheme.

"The expatriate won't accept the assignment if he/she would suffer a loss in pension," he says.

Allianz, the German global financial services and insurance giant, has a policy of keeping expatriates "in pension schemes of the home country" according to spokesperson Clas Röhl.

If an expatriate doesn't stay in the home pension plan, Allianz relies on "individual solutions", says Röhl, adding that these are "clearly in the minority".

Damien Teisseire, London-based head of compensation and benefits in Europe for US financial services group State Street Corporation, believes most expatriates "are generally better-off paying into their home-country pension fund".

However, those at the senior-executive level and above may want to consider investment alternatives because of pension tax consequences, vesting periods, etc. "Depending on their financial situation they might not be better off since they would rather spread their investments," Teisseire says.

Employees assigned temporarily to a country face an exchange rate risk if they switch from the home to the local pension plan. De la Croix offers this example: "An American comes to the Netherlands or Germany and joins a local fund. And the local fund is in euros. The expat builds up a euro entitlement, but doesn't know what the euro will be against the US dollar at the time of payment."

But what about global nomads for whom a "home country" does not really exist? An off-shore plan may be the best solution.

"As far as expatriates are concerned, I am a believer in off-shore retirement plans since it will not make sense for them to have plans all over the planet and not being able to transfer one scheme to an other," says Teisseire.

De la Croix agrees that this group needs special consideration. "For this bunch, I think it is worthwhile to create a separate fund and a very flexible fund," he says, further describing it as a DC fund "in which capital can be transferred from one country to the other without suffering tax implications".

April 2002