Major growth for international pension plan market

As a practical solution to the complex issue of offering pensions to foreign workers who reside in high-income settings such as Dubai, the international pension plan market is seeing significant growth.

According to research from Towers Watson, an international professional services firm, 36 new IPPs have been set up in the last year. The four-year old International Pension Plan survey suggests that IPPs have grown 15 percent in the last year alone, part of a five-year cycle that has seen growth in the 50 percent range.

"The rapid rise of the IPP market is being driven by more companies offering IPPs for expatriates and using these plans as a ‘catch all’ pension and savings vehicle for diverse employee groups," said Michael Brough, a senior consultant with Towers Watson.

"IPPs are particularly suitable for local expatriates in the Middle East as an end of service gratuity funding vehicle, a top-up facility and a low-cost savings plan, as opposed to a pure pensions vehicle.”

The survey includes data on IPP membership criteria (plan size and location), plan design (such as Defined Contribution, Defined Benefit or Hybrid plans), funding, vesting criteria, vehicle, employer and employee contribution amounts, investment funds and retirement distribution options.

According to the survey, funded DC remains the most prevalent design while most DB plans are now closed to new members. The research also shows that almost a third of IPPs offer the choice of lump sum or annuity, with very few (5 percent) offering annuities only, concluding that the offshore annuity market remains small and typically of poor value.

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

Other findings from the survey:

  • There has been an increase in the number of plans with minimum employee contribution rates of between 5 percent and 9 percent.
  • Most plans continue to have maximum employer contribution rates of between 5 percent and 9 percent; with the percentage of companies with minimum employee contributions of less than 5 percent continuing to be high.
  • The number of plans with contracts as the vehicle structure has increased.
  • Over half of new plans established in 2011 have a flat contribution structure, reinforcing the trend away from service and age-related contribution structures.
  • In 2011 some plans reported having nil minimum employer contributions.
  • Plans offer mainly external funds, but the percentage of plans offering internal funds has increased. During the year there was a fall in the number of lifestyle strategies offered but of those still offering lifestyle strategies, two are generally offered: currency or risk driven.

“Distribution options are changing and we are seeing not just lump sum distributions but also a growth in internal annuities, which can provide tax advantages for certain individuals drawing benefits from IPPs in this way,” Brough said.

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