Michael Brough, Director in Willis Towers Watson’s International Consulting Group, said: “The main strategic intent of the IPPs/ISPs continues to be providing savings or retirement benefits for expatriates, who are often not covered by any home country plans and not participating in a local host country savings or retirement plan. However, the IPP/ISP vehicle is now also being used to deliver pensions and long term savings to local employee groups in different international locations, such as employees based in their operations in parts of the Middle East. Multinational companies tend to consider using IPPs/ISPs for markets which they do not see as having the infrastructure to support a pension offering, or in certain crisis countries suffering from economic and political uncertainty in order to provide more secure savings.”
A key driver for this trend is the sponsoring employer’s desire to limit the impacts on employees from potential local losses, e.g. due to defaults. This not only seeks to protect the assets underlying employees’ savings, but also reduces the risk of the employer having to pay a second round of contributions to make up for fund losses. Other factors fuelling the trend include use of savings in hard currencies to protect against dramatic devaluations (for example, this has happened in Ukraine and Russia recently), and the substantial differences in administration and communication capabilities offered by IPP and ISP providers compared to local providers in many developing markets (for example the Middle East and North Africa).
The research also shows that investment fund options offered by IPPs/ISPs continue to increase in number and sophistication, due to the diverse demographics and varied currency preferences of members. The survey found that 41% of IPPs/ISPs offer over 10 investment funds for members to choose from, with as many as 6% providing over 40 different funds. Automated de-risking “Lifestyle” strategies and funds also continue to increase in popularity, with 38% of plans now offering at least one “Lifestyle” option to members.
Michael Brough said, “IPPs and ISPs often have to cater to a much broader range of members than domestic plans, due to the numbers of territories and nationalities involved. For this reason, there can be member demand for a greater number and range of investment fund options to choose from than would normally be found in a domestic plan (again a feature of the Middle East, where multi-currency and Shariah can be important). However, against this, employers are also taking measures to decrease the number of investment funds and offer an appropriate selection of investment options to reduce complexity for members.”
When IPP/ISP members reach retirement or leave the employer which sponsors the plan, the survey found that over two-thirds (68%) of IPPs/ISPs provide only a distribution as a cash lump sum. However, there is a growing trend – particularly for plans set up since 2006 – to offer the additional choice of a drawdown arrangement, now offered by over a quarter (28%) of IPPs and ISPs.
Michael Brough said: “While lump sums remain the most common distribution option, we are seeing more IPPs and ISPs offering a choice between a lump sum and an internal annuity or drawdown. Drawdown can provide tax advantages for certain individuals drawing benefits from IPPs due to local personal allowances and this option has become more common among IPPs set up in the past 5 years.”
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