International Pension Plans, International Savings Plans and Benefit Trends in the Middle East

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2 Agenda Concept of an International Pension Plan (IPP)/International Savings Plan (ISP) Results and key findings of the Towers Watson IPP Survey 2013 IPP and ISP case studies Trends in the Middle East The current dynamics in the Middle East HR trends Typical reward structures in the Gulf Co-operation Council Innovation and developments Market observations 2

3 Concept of an International Pension Plan Vs. International Savings Plans International Pension Plan (IPP) A plan with a long-term savings objective to deliver distributions at retirement (although often can be set up to distribute earlier than retirement) International Savings Plan (ISP) A plan with a shorter term savings objective that delivers on leaving service (although often can be set up to distribute at retirement) 3

4 Concept of an International Pension Plan or International Savings Plan 4

5 Results and key findings of the Towers Watson IPP Survey 2013 Towers Watson has conducted an annual survey of International Pension Plans (IPPs) and International Savings Plans (ISPs) since The latest 2013 survey covered 406 companies sponsoring 438 IPPs/ISPs. Just over half of the IPPs/ISPs surveyed in 2013 were noted as having been established since According to the latest IPP Survey, 15 new IPPs were reported as having been established between the 2012 and 2013 surveys. Sector The largest concentration of IPPs/ISPs continues to be from the Banking and Financial Services sector, with many IPPs/ISPs also representing Industrials, Oil and Gas and the Food and Drink sectors. Location The Middle East is becoming an increasingly popular region for IPPs/ISPs, along with Europe. IPPs/ISPs are also becoming more common in Latin America and parts of Africa for local populations, as well as crisis and/or developing countries to protect against defaults of local plans. Plan Size Varies from as small as 1 active member up to 7,000 and more members across the globe. Contributions Amount and structure varies widely. The highest concentration of plans reported a flat contribution scale, with 1:1 matching or no matching at all. 5

6 Overview of IPPs IPP size by membership Membership Size Number of Plans Percentage % % % % % % Over 1, % Total % Not disclosed 66 6

7 Overview of IPPs Membership criteria 7

8 Overview of IPPs IPPs by location 8

9 Design features DC, DB or hybrid design Plan Type Number of Plans Percentage DB 42 10% DC % Hybrid 13 3% Total % Vesting period Vesting type Number of plans Percentage Immediate % Phased 60 17% Flat/Cliff 85 24% Total % Not disclosed 88 9

10 Design features Plan vehicle 10

11 Design features Contribution design Description Number of Plans Percentage of Plans Service related, no matching 28 9% Service related, 1:1 Matching 19 6% Service related, 1:2 Matching 2 1% Age related, no matching 10 2% Age related, 1:1 Matching 10 2% Age related, 1:2 Matching 3 1% Flat, no matching 95 32% Flat, 1:1 Matching 58 17% Flat, 1:2 Matching 5 2% Closed 20 6% Other 82 22% Total % Not disclosed

12 Design features Employer minimum contribution Employer minimum contribution Number of Plans Percentage of Plans Nil 93 30% <5% 78 25% 5% - 9% 70 22% 10% - 14% 23 7% 15% - 19% 5 2% 20% or more 9 3% Closed 8 3% Other (includes DB plans) 25 8% Total % Not disclosed

13 Design features Employer maximum contribution Employer minimum contribution Number of Plans Percentage of Plans Nil 36 12% <5% 12 4% 5% - 9% 92 30% 10% - 14% 58 19% 15% - 19% 34 11% 20% or more 42 14% Closed 8 3% Other (includes DB plans) 23 7% Total % Not disclosed

14 Design features Employee minimum contribution Employee minimum contribution Number of Plans Percentage of Plans Nil (voluntary or non-contributory) % 1% - 5% 76 25% 6% - 10% 8 3% 11% - 15% 1 0% 16% - 20% 0 0% Over 20% 0 0% Closed 16 5% Other (includes DB plans) 10 3% Total % Not disclosed

15 Design features Employee maximum contribution Employee maximum contribution Number of Plans Percentage of Plans Non-contributory 79 27% 1% - 5% 34 12% 6% - 10% 38 13% 11% - 15% 20 7% 16% - 20% 5 2% Over 20% 24 8% No maximum 39 13% Closed 18 6% Other (includes DB plans) 36 12% Total % Not disclosed

16 Design features Pensionable salary definition 16

17 Overview of IPPs Nature of funds offered Funds Number of Plans Percentage of Plans Internal 88 25% External % Internal & External 8 2% N/A 16 5% Total % Not disclosed 88 Lifestyles Number of Lifestyles Number of Plans Percentage of Plans None % One 63 17% Two 15 4% Three 53 14% Four 6 2% Five or more 4 1% Total % Not disclosed 68 17

18 Design features Number of investment fund options 18

19 Design features Distribution Options 19

20 International Pension Plan Vs. International Savings Plans International Pension Plan (IPP) A plan with a long-term savings objective to deliver distributions at retirement (although often can be set up to distribute earlier than retirement) International Savings Plan (ISP) A plan with a shorter term savings objective that delivers on leaving service (although often can be set up to distribute at retirement) 20

21 Why do some companies favour International Savings Plans (ISPs)? Historically, expatriates and TCNs were offered International Pension Plans to replace lost home pension benefits or inadequate host pension benefits. These paid out a lump sum on retirement. Towers Watson estimate that currently a third of all international plans are used as a long term savings vehicle with therefore a savings as opposed to a retirement objective. Alternative ISPs have developed more recently because: Expatriate workforce requirements have changed; Demand is coming from employee groups on local contracts; Providers of ISPs have improved their administration propositions and can deliver recordkeeping and administration services to more complex savings driven structures; Institutional charges make ISPs attractive compared to alternative local savings solutions in undeveloped financial markets, particularly for short periods; Sponsors no longer wish to have to retain deferred member records for long periods; Key regions have emerged that suit the ISP model more, e.g. Middle East and Latin America. 21

22 Recent Developments with IPPs/ISPs Average contribution rates have been gradually rising; Vesting periods have been falling; Employee only ISPs are increasing in prevalence, so sponsors offering an efficient savings plan for employee monies is viewed as a differentiating benefit by many sponsors; Contract charges on IPPs/ISPs are reducing, reflecting: An improved understanding of DC globally and the way DC charges are taken and operate; Increased competition amongst Providers; Rising total assets under management; An increased use of multiple buying powers on Providers and fund managers (sponsor, investment advisor and Providers themselves) and; The discomfort of sponsors to implicit, hidden or non-disclosed costs. Provider consolidation and evolution some Providers have exited the ISP market, new Providers have emerged, others have re-launched products or are in the process of developing their products for wider usage. ISPs/IPPs are now being used within Pan-European IORPs (Institutions for Occupational Retirement Provision). Provider propositions are improving with new tools and services being developed from the more mature DC markets of the UK, US and Ireland. 22

23 Specifics around ISPs ISPs typically offer more flexible delivery around the distribution compared to IPPs to reflect the fact that it is a savings vehicle with a shorter time horizon; IPPs also often differ in investment funds offered to the members with a shorter time horizon for the investments, there is less of a demand for retirement targeted Lifestyles or Lifecycles, or Target Dates Fund, and even higher risk funds that would feature in IPPs; It is expected that the growth in ISPs will be more significant over the next few years compared to IPPs. 23

24 Case Study 1 Technology Hi-tech company: International Retirement Plan Design and Provider review (1/2) Background Client required support in designing and implementing a retirement vehicle to support the reward, recruitment and retention of international cadre and local employees in various locations that included the UAE and Middle East. DC Plan Design Towers Watson prepared an analysis of what expatriates in their industry were likely to receive as a retirement benefit. We prepared projections to help management understand costs associated with various DC designs. Provider Identification Following the DC plan design stage, we prepared a review of the market to identify a suitable Provider who would be the best fit for the client. We presented our findings to management and they agreed to invite three bundled administration Providers and two third party trustees to present at a beauty parade meeting for key management and those who would be responsible for the day to day management of the DC Plan. Towers Watson managed all aspects of the beauty parade meetings, Provider selection, Service Level Agreement negotiations and overall fees for Administration and Trusteeship. 24

25 Case Study 1 Technology Hi-tech company: International Retirement Plan Design and Provider review (2/2) Challenges The client set high expectations from their service providers and in particular where technology is involved they want their members to have the highest quality and best member experience possible. They are also very cost conscious and needed their vendors to be agile and flexible in terms of cost and scope of work. Outcomes The beauty parade meetings brought out the true spirit of the Providers, exemplifying where possible the extent of their creativity and willingness to be flexible and invest in a partner such as the client. The DC Plan was launched on time and bespoke communications were developed which were well received by the members. The DC Plan continues to grow as new regions and memberships are considered for the Plan and Towers Watson continues to work with the client to keep the DC Plan fresh and fit for purpose. 25

26 Case Study 2 Charity Charity: Consultancy services for the launch of a new International Savings Plan (1/2) Background The Charity required support to select an appropriate administrator as well as an independent third party Trustee for an ISP for Expatriates and Locals in certain crisis and war torn locations. The DC Plan (an ISP with a savings as opposed to a retirement objective) was successfully launched in phases over 18 months. Our Solution Towers Watson conducted a market review of Providers who had the potential to offer an all services ( bundled ) International Savings Plan, to include administration and recordkeeping, communications and investment services. In certain cases, the Providers could also offer Trustee services either through a Master Trust Agreement or working with a third party Trustee and so we also considered the potential Trustee options available to the ISP. Activities undertaken by Towers Watson as part of the market review included: Preparation of the Request for Proposal and accompanying Plan Specification issued to 10 short-listed Providers Initial review of responses and preliminary negotiations with some Providers Analysis of Providers offerings presented in a recommendations report which ranked their capabilities against 4 categories: Corporate background / commitment to market Administration and communication support Investment offering Contract charges 26

27 Case Study 2 Charity Charity: Consultancy services for the launch of a new International Savings Plan (2/2) Our Solution (Continues ) Following on from the Provider and Trustee selection, we organised weekly project management calls with all parties (client, Provider, Trustee) to ensure that the Plan was launched within the timeframe and specification that was agreed from the outset. Towers Watson also helped put together the communications package for members which included a suite of documents to help explain and answer questions about the Plan. Towers Watson continue to work with the Charity to ensure the Provider is performing in line with a bespoke Service Level Agreement prepared for them and to monitor and report the investment manager performance to the Pensions Board. Challenges As a global charity, the Charity is very cost conscious and wanted to find a cost effective solution wherein the costs of running the DC Plan could be passed on to members, yet offer a good value savings solution for those members. With employees based in remote regions all around the world, they wanted to have a good communications strategy which would entice employees to join the DC Plan and understand the full benefit they were receiving from the employer. Outcome The DC Plan was launched on time and within budget. All administration fees from the Provider are passed on to members though a low monthly fee (which were discounted by the Provider noting the Charitable status). As a paternalistic employer, the Charity was pleased to report that employee take up was very high and they are reporting high levels of satisfaction. 27

28 Case Study 3 Engineering Engineering: Introducing a multi-country pension plan (1/2) Background A leading engineering and technology group, employs several thousand employees across the Middle East. In order to support its attraction and retention plans over the next 10 years, the company sought to introduce a creative DC longterm savings and pension plan, into which contributions would be paid on a monthly basis by both employees and the employer. The Approach Towers Watson was appointed to support and advise on the design and implementation of the Plan covering six initial Middle East countries (GCC and Levant, included UAE). 1. Investment: Towers Watson investment consultants helped design a bespoke investment offering including best of breed funds tailored to the needs of the company workforce in the Middle East. Key elements of the offering included: An international (offshore) trust structure was set up to provide security around the assets held. The plan originally offered a range of 9 investment fund options covering asset classes including equities, bonds, diversified, Shariah equities and Shariah pre-retirement investments. Such investment funds were developed to meet the wide demographic requirements for the company in the Middle East. A choice of non-shariah and Shariah automatic de-risking lifecycling strategies were put in place to direct past and future investment holdings away from higher risk growth assets to lower risk protected assets as retirement approaches. We also negotiated institutional investment charges significantly lower than the more traditional and expensive retail charging structures that most employers and employees are charged for such local equivalent plans in the Middle East. 28

29 Case Study 3 Engineering Engineering: Introducing a multi-country pension plan (2/2) The Approach (Continues ) 2. Communication: Towers Watson provided best practice communication advice to help publicise the new DC Plan and encourage enrolment. Employees were given a suite of communication materials, including booklets, FAQ s, fund factsheets with some materials in both Arabic and English. Towers Watson helped coordinate a series of pension presentations to support and encourage member understanding and the enrolment process across the initial territories. 3. Governance: We worked with the company to develop a formal governance structure to provide on-going monitoring, performance measurement (investment performance, administration quality and development, member appreciation) and overall good management around the Plan. This structure will help ensure the Plan evolves and continues to remain relevant, appreciated, compliant and delivers on its objectives to support the attraction and retention of key employees. The Results In addition to meeting current business objectives and allowing employees to save for retirement in a low cost plan with diverse investment freedom, the Plan has a long shelf life employees across other Middle East countries can be easily added. A high take up rate is evidence of a satisfied employee population. A review of the investment funds will take place later in

30 Case Study 4 Hotel and Leisure Hotel: Investment governance review (1/2) Background Hotel chain established a long term savings vehicle for three purposes: 1.Funding vehicle for UAE End of Service Benefit (ESB) liabilities; 2.Separate funding vehicle for pending members, yet to have an entitlement to an ESB; 3.Savings option to encourage employees to save efficiently. The Approach Towers Watson appointed to look at the current design and investment funds, the pricing and to support the development of an investment governance structure around the DC Plan. Administration concerns around accumulation of numerous short service small value savings accounts minimised by including vesting rules and enabling any age distributions, so leavers took their full balances at point of exit from the company. Towers Watson recommended and supported the client in the reduction of the investment fund range from 44 options to 11. An investment fund range was introduced covering broad asset classes, currencies, investment styles and so on. The short service of employees meant there was a need to develop age-related Lifestyle strategies to de-risk to variable target dates. A new default investment strategy was developed for the members, most of whom ended up in this default. A mapping exercise was progressed resulting in the monies being diverted from the 44 expensive retail class investment funds into the 11 much lower low cost institutional class investment funds. 30

31 Case Study 4 Hotel and Leisure Hotel: Investment governance review (2/2) The Approach (Continues ) Road shows were held to sign up new members and to educate existing members, including extensive video (starring employees) resulting in a high take up rate. Investment Committee developed and established to provide on-going oversight around the DC Plan. Regular investment performance reports provided to assess performance against benchmarks The Results DC Plan was refreshed to offer more suitable investment funds considering the employee population, those investment funds were mapped across and changed from being high cost to low cost institutional investment choices. Members were educated around the aims and purpose of the DC Plan and its operation and investment options. Greater member appreciation achieved supporting the objective and retaining and attracting key employees. 31

32 Trends in the Middle East Region 32

33 Dynamics Middle East Economic factors Region with varied, but generally positive economic growth Vast natural resources particularly across the GCC, e.g., Oil and Gas Accumulated significant levels of government foreign reserves in parts of the region Skills shortages in the GCC Low to moderate inflation and unemployment in most of GCC Demographics Local nationals in GCC often in minority and tend to work in Government (except KSA) Open and high level immigration policy to support growth and skills in GCC Evolving immigration focus in GCC from Asia towards more from Eastern Europe 33

34 Dynamics Middle East Financial awareness Low level of financial sophistication Growing demand for Shariah and Takaful High dependency on property market (Dubai) and Oil and Gas (GCC) 34

35 HR Trends in the GCC Cash remains key element of reward, but developing interest in benefits. Localisation: Saudisation in Saudi and Emiratisation in the UAE etc. Government spending on major infrastructure projects (many of which are in HR). Growing demand for key workers to achieve project delivery. Expatriates changing to wider industries and as a consequence staying for longer periods. 35

36 Typical Reward Structure Middle East (GCC) Base pay Bonus Allowances Housing Transport Car (business need) Schooling (seniority) Flights home Benefits Risk (Life, LTD, AD&D) Medical (family cover) Vacation Termination indemnity Mobile (business need) Career development 36

37 Innovations and Developments in benefits in the Middle East Growth in the introduction of long term supplementary savings plans / pension plans Wider investment choices Institutional charging structures for larger plans Demographic appropriate funds for the GCC Shariah for Muslims Indian equity for Indians Guaranteed funds for Asians/Central Europeans Multi-currency options Incorporating End of Service Benefits sections, where this is allowable (e.g., excludes Turkey) Multi-country provision Improvements to supplementary medical Often driven by labour law requirements, e.g., Abu Dhabi Increasing risk benefit cover levels for senior managers up Company negotiated financial products (e.g., loans) Greater flexibility around work hours 37

38 Overview Medical Insurance in the Middle East Demand for quality healthcare in GCC rising Improving regulation and management (e.g., health authorities, licensing of insurers) Importing healthcare expertise (e.g. academic institutions, Dubai Healthcare City cluster) Medical tourism consumer to Provider WHO ranking of world health systems 190 countries Country Ranking France 1 Oman 8 Cyprus 24 Saudi Arabia 26 UAE 27 Israel 28 USA 37 Source: World Health Organization Increasing mandatory provision (e.g., Abu Dhabi, Saudi Arabia, Qatar, and now Dubai) Improving standards of care 38

39 Overview Medical Insurance in the Middle East Spectrum of financing options (e.g., traditional insurance, self insurance, TPAs, multinational pooling, captives) Patchy service levels (e.g., insurers and insurance brokers) International, regional and local players active Hospital networks widening giving greater choice Federal expenditure reducing as private sector grows 39

40 Overall Market Observations Middle East Importance of attraction and retention in the GCC has led to a growth in differentiating benefits; Qatar TW Oil & Gas bespoke survey indicates 50% of Oil and Gas companies provide a savings/pension vehicle Multi-country regional savings/pension plans ESB companies setting up savings/pension vehicle to fund ESB, to receive employer top up and employee AVC s Risk benefits multiples slowly rising from twice towards three times salary Enhancements to supplementary medical plans Increasing demand in Takaful insurance and Shariah investments Allowances not necessarily keeping up with associated costs High housing costs mean that companies may now only be contributing towards housing rather than fully covering housing costs 40

41 Benefit Trends drawn from Towers Watson CompSource Report UAE Provided Benefits 2011 (% of surveyed companies) General Industry 2013 (% of surveyed companies) Pension 27% 28% Death in service 95-98% % Disability Short (term) Long (term) Medical Spouse/partner and children covered 62-72% % 100% 70-96% 71-83% 89-92% 100% 74-96% Perqs Mobile Lunch (canteen/vouchers) Transportation Sports clubs 17-86% 1-12% 5-52% 5-22% 27-85% 2-15% 9-32% 11-22% Leave (over statutory) Annual Maternity 6-16% Negligible 7-16% Negligible Other Training (internal/external) Up to 79% Up to 79% 41

42 Important notice Towers Watson has prepared this presentation for informational purposes only. In preparing this report we have relied upon data supplied to us by third parties. While reasonable care has been taken to gauge the reliability of this data, this report therefore carries no guarantee of accuracy or completeness and Towers Watson cannot be held accountable for the misrepresentation of data by third parties involved. This document is provided to the recipients solely for their use, for the specific purpose indicated. This document is based on information available to Towers Watson at the date of the document and takes no account of subsequent developments after that date. It may not be modified or provided to any other party without Towers Watson s prior written permission. It may also not be disclosed to any other party without Towers Watson s prior written permission except as may be required by law. In the absence of our express written agreement to the contrary, Towers Watson accepts no responsibility for any consequences arising from any third party relying on this document or the opinions we have expressed. This document is not intended by Towers Watson to form a basis of any decision by a third party to do or omit to do anything. This presentation has been issued by Towers Watson. Towers Watson is authorised and regulated by the United Kingdom Financial Conduct Authority.. 42