Expat Benefits: Update and Trends Introduction Benefits are a crucial part of the overall compensation package for employees on international assignment. Getting them right can make a very positive contribution to an overseas deployment, but balancing employee expectation with rising costs is proving a challenge for many organizations. This article looks at three of the most pressing benefits-related issues for expatriate workers, highlighting a number of trends that are currently impacting many multinationals. International medical plans Medical plans are a hot-button issue for both multinationals and their expat workforce. Employees on international assignments in countries with very different or inferior medical care to their home locations need access to good-quality health and medical benefits. As premiums soar across various locations, however, organizations have no choice but to carefully scrutinize and potentially revise existing policies and practices. In doing so, they face four key challenges. First is benefit design. This issue is always complex for expat programs, where the population is typically spread over several continents and many countries, each of which has fundamentally different structures in social security systems, healthcare sectors, and insurance markets. Mercer has found that three-quarters of its client base have just one medical plan that is supposed to cover all bases. Multinationals are, however, increasingly recognizing that more than one expat medical plan design or provider is needed to effectively deliver benefits to employees operating across different regions and countries with varied medical environments and infrastructures. A far more comprehensive and specialized plan may be needed for employees operating in the Arabian Gulf region, for example, where very limited social provisions exist for non-nationals and private insurance is essential for practically all levels of medical care, compared to that required in countries such as the United Kingdom, where the widely accessible National Health Service provides emergency and core coverage for all residents. In many parts of the world – including the Middle East, a popular expat destination – compliance issues are on the increase. National health budgets are under pressure and, as a result, governments are tightening access to healthcare for foreign workers. (Across the Arabian Gulf, minimum medical requirements are being linked to the issuing of visas; in short, foreign employees will not be able to enter certain countries without the appropriate level of healthcare coverage.) It is crucial that international businesses keep on top of these issues – checking that carriers are appropriately licensed and that their networks are of a good standard in the specific countries concerned – in order to avoid fines or other reputational damage. While employers will always aim to improve employees’ satisfaction, they face an uphill task given the subjective nature of it and the complexities inherent in dealing with a high-touch expat population. The reality is that many international assignees have become used to a gold-standard level of medical benefits (certainly in comparison to colleagues on local contracts), and often interpret attempts to introduce some kind of control over access to care, in order to both cut costs and make sure that patients are seen by the right doctor, as “poor service.” Employers will need to partner with providers and play a role in helping to manage employee expectations if they are to achieve a successful transition to more moderate plan provisions or exercise greater control over network access in the longer term. A considerable opportunity for cost management exists in the area of network reviews and control. In many emerging markets, certain medical providers have attractive brand names that draw the majority of expat utilization at a premium price. In countries where the medical infrastructure has seen rapid modernization in recent years, there may be opportunities to utilize other very good quality providers at lower cost; excluding certain brand name hospitals or clinics from the network available to employees has allowed medical costs to be reduced by a third or more in some cases. Employers will obviously have to tread lightly as they try to streamline processes, however: expat workers often have an emotional attachment to benefits and to certain brands in healthcare provision, and trying to wean them off too briskly could contribute in assignment failure. A strong communication strategy is therefore essential in helping achieve successful change. Perhaps most challenging is that employers face the difficult task of reconciling efforts to support employee health and motivation with double-digit cost increases in some locations, especially in emerging markets. Moreover, businesses have to be fit for the future: while they need existing international assignments to be successful, they also have to build a sustainable program for the future. Many multinationals are caught on the horns of this dilemma, as results of the Mercer Benefits Survey for Expatriates and Internationally Mobile Employees demonstrate: 65% cite employee engagement and satisfaction as a key priority, but 55% are also concerned about cost control. Evidently, finding a solution that enables them to reduce premiums without harming expats’ perceived level of service is top of their agenda. Some initial steps have been made. For example, roughly half of total claims expenses can be ascribed to primary care (such as consultations and diagnostic tests). Implementing deductibles and cost-sharing, either through co-payments or co-insurance, will have a tangible positive effect on overall cost. We have also seen some employers take on considerable cost liabilities when moving employees or their dependents who turn out to have un-insurable pre-existing conditions that would have been covered under existing insurance in the home country. Prescreening, which allows companies to gain a fuller picture of the total liability that may be incurred by sending a particular individual or family on a long-term assignment, is on the rise as a result. Another area that may provide room for maneuver without impacting employees is working with carriers to understand exactly how they are formulating their premium increases. For example, medical inflation is currently far higher than general inflation – in the UK, for example, it is 8–10% v. 2.7%; in Malaysia, an astonishing 10–15% v. 2.4% – but the higher number is often used as the basis for carriers to increase both their medical insurance premium and plan administration fees. Negotiating with them in order to apply lower general inflation increases to plan administration fees is likely to result in significant savings. International pension plans Pensions are another thorny issue for an expat workforce, and again, experience shows that a one-size-fits-all method is less than ideal. Having employees on assignment across multiple locations means dealing with a plethora of different national regulations regarding minimum requirements, taxation, and social security. A flexible model is clearly the best option, and to that end organizations are working through myriad options regarding location and length of stay in order to create the best and most consistent plans for their employees. Mobility is still increasing generally, but the demographic of the mobile population is changing considerably: taken together, the numbers of long-term expats (those abroad for more than three years) and global nomads (those on constant overseas assignments) have doubled in just four years and now account for 50% international assignees.* Unsurprisingly, the home countries benefits approach has come under increasing pressure, even though it remains popular due to ease of administration, assignees’ understandable attachment to their home base, and their perception that the “correct’” level of pension is the one they can receive at home. In most cases, multinationals’ approach to pension management is driven by assignment length. Home country programs are preferred for shorter stays, but if employees are likely to be abroad for more than five years, they will usually be moved onto a host country program. Both have their disadvantages: on the one hand, the home country option tends to be expensive; on the other, employees rarely retire to their host country and it can be extremely difficult to shift the pension funds internationally when they relocate to their ultimate retirement destination. In response, a third option, the international plan, is beginning to gain traction. In the last five years the main providers of these plans have been investing significantly in their offshore investment platforms and administration systems as well as introducing sophisticated online member communications to allow employees to access best-in-class investment funds from anywhere in the world. Particularly appropriate for global nomads (or local nationals in regions where provision is otherwise poor or non-existent), these plans are also an increasingly popular vehicle for delivering retirement benefits in locations such as the Middle East and Africa where there are few or no local providers. International plans are flexible from a design standpoint and can be established as savings plans, allowing withdrawals for key life events; they can also be provided to global nomads on an ongoing basis as they move between countries. The plans are usually based off-shore in locations such as the Isle of Man, Bermuda, and the Cayman Islands. Each has its own set of requirements and regulations and most have an intergovernmental agreement in place with the United States, which can be important for tax and reporting requirements where US multinationals or US taxpayers are involved. International plans typically operate on a defined contribution basis, with the average employer contribution being roughly 8.5%, and final payments are usually in the form of a lump sum. The main drawback to international plans, however, is the lack of tax deductibility associated with contributions, as they are not tax-approved in the host location of the expatriate. This tax impact on expats is the reason why employer contribution levels are typically higher for these plans than for many local host country plans. But for an increasing number of multinationals, this potential cost is secondary to the need to deliver an effective and high-quality retirement service to an increasingly important section of their workforce. Twelve percent of the respondents to Mercer’s survey offer an offshore retirement plan to expatriates, and, in our experience, the use of these plans is an increasing trend.* There are a number of considerations that need to be taken into account in determining the right approach to retirement benefit provision to expatriates, including the home and host country benefit regulations and requirements and any tax or social security treaties between the countries. The international plan is a valuable tool in a number of cases, however, and we see the companies most successful at managing expat benefits adopt process maps to guide the benefits manager to the right approach for each expatriate. Following the process provides consistency to employees, yet being open to using a home, host or international approach facilitates the flexibility necessary to cover the multiple factors that need to be taken into account in each case. Foreign Account Tax Compliance Act (FATCA) Multinationals commonly have to comply with a raft of complex international laws and regulations, and FATCA is one of the most recent and has global implications. Designed to provide the United States Internal Revenue Service (IRS) with information about US taxpayers’ foreign investments, under its terms financial institutions based outside the United States must report to the IRS on their American customers or risk significant financial penalties – namely a 30% withholding tax on US-sourced income. From a benefits perspective, the definition of “foreign finance institutions” includes non-US pension and incentives programs and organizations should ensure that their carriers and any third-party providers are FATCA-ready/compliant. The Act does allow for many exemptions – relating to Intergovernmental Agreements, exempt non-US savings accounts and exempt beneficial owners – but supporting data and/or documentation will be required to justify them. Your company’s benefits advisers and global tax advisor should contribute to, and monitor, the general process being followed. Conclusion In many respects, expat benefit programs are in a perfect storm. Their members tend be well-remunerated senior employees and their dependents (often the most frequent utilizers of benefits); costs are rocketing, particularly in emerging markets; and multinationals need to be competitive enough with their offer to retain existing staff but savvy enough about cost to attract the next generation of talent. Juggling these aspects successfully is no mean feat, but by being flexible, exploring emerging solutions, and communicating effectively with employees, multinationals should be in a better position to offer benefits that meet the needs of all parties.