x Abu Dhabi, UAEMonday 22 January 2018

Expatriate pension plans making their mark in the Middle East

More employers are seeing the benefits of offering long-term saving plans as part of their package to recruit and retain workers from many nationalities.

Expatriate pension vehicles can be used to deliver pensions and long-term savings to diverse groups. Mike Blake / Reuters
Expatriate pension vehicles can be used to deliver pensions and long-term savings to diverse groups. Mike Blake / Reuters

The subject of pensions in the Middle East has been one that continues to gather momentum.

Employers are quickly realising that incorporating an international pension (or savings) plan (IPP) into an employee's packageprovides a strong difference.

With such a mix of nationalities in the region, employers have had to look at the ways in which they support their staff for the long term. Although the Middle East was once regarded as an exceptionally transient market, the economic challenges of recent years has shown that the workforce is now looking at longevity in the region and a much more stable working environment.

The growth of the IPP market in the Middle East is the product of a number of factors on employers, including a desire to offer more creative reward packages for employees; a certain paternalism over the provision of a longer term benefit for workers; access to institutionally priced group investment funds; and an opportunity to differentiate themselves from competitors. It is also a response to demand from employees who have formerly been members of IPPs.

IPP demand in the region is also highly driven by more companies offering the option to international or expatriate employees, to either top up or replace home-country retirement plans. The banking and finance, oil and gas and hotel industries are the most active in this regard in the region at present. Schemes are being set up as both regional and international solutions.

Expatriate pension vehicles can also be used to deliver pensions and long-term savings to diverse groups, such as nationals living in the Middle East, parts of Asia, Africa and Latin America.

These are generally viewed as markets that may not have the developed local infrastructure to support a comparable pension offering to those found in developed markets.

IPPs are proving to be a good way for multinational companies to provide their employees with access to low-cost savings arrangements, particularly for those of their employees who might struggle to find good individual alternatives, especially in countries with immature investment markets.

Funded defined contribution plans still remain the most prevalent design for IPPs, with defined benefit plans still in operation but typically closed to new members. In addition, the number of investment funds being offered by IPPs and their sophistication continue to increase with about 40 per cent of IPPs offering up to 10 investment funds, while most of the rest offer in excess of 10 investment options, according to the Towers Watson IPP Survey 2012.

Through the use of institutional investment funds we have seen a move to lower charges for IPP products. There are new IPPs on the market that also offer Middle East members access to a wide range of institutional low-cost investment funds that are significantly cheaper than investment savings products offered in the local-individual or group-savings market. This benefit means progressive Middle East-based employers can use their own buying power, or that of their advisers, to access group terms that can generate significant enhancements to savings accounts over the term of their savings.

The most popular form of distribution at retirement continues to be a lump sum, with nearly 60 per cent of IPPs offering lump-sum benefits only.

We are seeing some change, however, with more than a third of IPPs now offering a choice between a lump sum, an internal annuity or drawdown. Internal annuities can provide tax advantages for certain individuals drawing benefits from IPPs and this option has become more common among those IPPs set up in the past five years.

When it comes to payment of distributions, many IPPs are set up to allow any age distributions, which allows workers who leave the employer and perhaps return home after short service to receive their benefit, along with the mandatory end of service benefits.

In this situation, there is no requirement to wait until retirement and members do not, therefore, have to leave behind a small savings account; to be collected at a much later date.

IPPs can also offer "open-architecture" investment solutions, in which a wide range of funds can be made available to local Middle East workforces. This can include Sharia and frontier (Middle East) market investment opportunities, meaning that local contributions can be invested in local businesses to support Middle East development. Regular monthly contributions into savings plans also benefit from dollar cost averaging, resulting in savings gaining real value over the term.

Global and local multinational companies can use the IPP to deliver a cross-border savings solution for a number of Middle East countries, meaning a single plan can be set up for many countries, but with a single administrator, a single investment fund range, a single governance framework and so on, enabling free movement of staff, yet retention in a single cross-border savings plan.

Multinationals operating in the Middle East have been rapidly adopting IPPs as a benefit that makes a difference in employees' packages and are likely to continue to do so, particularly as they become aware of the fact that the larger the IPP, the lower the fees. And the lower the fees, the higher the value of employee savings.


Michael Brough is a senior consultant with Towers Watson