A) Pension Relocation
It is often merger related when executives as a group are expected by the company to move to another country and headoffice. This can also mean that the old pension coverage will have to be replaced by a new pension coverage.
What does this mean for the executives and for the company?
B) Relocation Requires Compensation?
If the new pension claim is less than the old pension claim, it seems logical to ask the question if compensation is required.
In general we see that if during a merger it turns out that a group of executives is vital for the new organization, then the compensation question will have to be answered in a correct manner.
We will now focus on the most relevant aspects of such a comparison and compensation.
C) Correct And Transparent Parameters Are Vital
The best way to prevent issues between the company and the executives is to make sure that correct and transparent parameters are used when comparing the old and new pension claims and if required the kind and amount of compensation.
The required transparency means that for each parameter it is advisable to pay attention to the following aspects:
- To explain the relevance of that parameter;
- To mention what options there are regarding interpretation and valuation;
- To mention which interpretation is in general used in these cases;
- To explain why has been chosen for a certain interpretation.
We will now mention the most relevant parameters.
D) Parameter 1: Which Claims Are Compared?
The logical first question is if all possible State/Corporate/Private Pension coverages and related Corporate Insurances are compared and thus not only the corporate coverages.
To also compare State Pension Claims is understandable as the coverages and premiums can be highly different in each country. Likewise for the benefits regarding Private Pensions.
E) Parameter 2: What Kind of Period?
There can be very different outcomes when using different kind of comparison periodes.
Thus it seems advisable to mention this aspect and explain the positive/negative elements of each kind of period for both the executives and the company.
Often two kind of periods are compared as together they give a relatively complete insight:
- The first 10 years as of relocation;
- The moment as of relocation until retirement age.
F) Parameter 3: What Kind Of Valuation?
When comparing the old and new coverages and the kind and amount of compensation, it seems advisable to in general use the regular commercial valuation as is usual in the new location.
This includes the following aspects:
- The height of the interest rate within products;
- The amount of costs and related charges in products;
- The height of the annual wages increase and possibly existing offset;
- If pension claims are to be annually indexed, the projected level thereof.
G) Parameter 4: Effect Of Personal Risk Profile/Investments
If the old and/or new claims are investment based, it is advisable to take the following aspects into account:
- Carefully establishing the Personal Risk Profile as this is relevant for the projection of the to be expected annual return on investment;
- Comparing the amount and quality of investment options and if they fit the Personal Risk Profile of the executives;
- Also check if investment funds have a correct benchmark and how they perform compared with the benchmark;
- Also relevant is if the funds are Index Trackers and if there are fine Life Cycle Funds;
- Finally it is relevant to compare the projected annual and total cost exposure.
H) Parameter 5: How To Round?
During the comparison of old and new claims and when deciding the correct kind and amount of compensation, there are often more details relevant than most people would expect.
To be able to make progress and not lose a lot of valuable time on minor details, it seems advisable to beforehand decide how such small decisions will be made by the consultant.
It seems advisable to beforehand decide whether to give the benefit to the executives or to the company and to thus round. Of course it only regards small details but in total this effect can add up.
I) Parameter 6: Tax Equalization Included In Compensation?
As the fiscal regime regarding tax rates/tax benefits/international double taxation issues can be very different and can have a huge impact, it seems advisable to beforehand address this aspect.
As pensions are in the build up phase often a gross entity and as wages are often not to that extend, it is an option to have a separate tax policy regarding each type of remuneration.
J) Parameter 7: What Kind Of Compensation?
In case compensation is required, it is advisable to compensate thus that the company has the lowest costs and the executive has the highest gain. Which among other aspects means to make optimal use of tax regimes and low cost compensation options.
Do the company and executive beforehand agree to the approach that to the extend possible compensation will be provided within the new corporate pension plan? If that plan does not already make use of all allowed options for additional coverages with tax benefits, it seems advisable to look into those options.
K) Parameter 8: Are All Executives To Be Treated Equally?
It might seem logical to treat all executives equal in such a process but that does not always have to be the case. If certain executives have a very different and much more expensive old pension coverage, then there can be a good reason to treat certain groups differently.
Needless to say that it seems required to treat all executives within the same group equal.
L) Parameter 9: Formalization
We recommend to provide one complete, correct and easy readable Relocation Memorandum which includes all facts, wishes, options and recommendations.
And a separate and very brief Management Summary which provides oversight and explains which final choices have to be made.
M) Successful Completion Requires Justified Trust
The financial implications are often substantial and most executives are not international pension experts. Therefor it is relevant that the executives must be able to trust the presented outcome and negotiate based on those facts and scenario’s.
One way to create this climate is to hire an independent, licensed and objective international pension consultant. If required the company can also provide the executives with a budget to hire their own consultant in order to check if the presented information is correct and complete.