Amalgamating employee benefits across borders makes good financial sense for companies with branches in different countries, yet many firms that could benefit are still not aware of the advantages of the system, argues Jim O'Driscoll.
Multinational pooling has been available since the 1960s, though today many multinational companies still fail to recognise the opportunities and advantages it offers. As a result, many do not consider it when reviewing their benefit arrangements.
In effect, multinational pooling allows any multinational company with offices to link together insured employee benefits to form a pool. This allows the cost of employee benefits to be reduced via multinational dividends so the arrangement acts essentially as a global profit share.
It is therefore surprising that multinational pooling has not become more mainstream among eligible companies. After all, what other vehicle exists that allows the client to participate in the profitability of its employee benefit arrangements across subsidiaries in various countries?
There are some ground rules to pooling, such as the different types of benefit that may be included within a multinational pooling arrangement. Benefits eligible for pooling in the UK include group life assurance (both lump sum and dependants death-in-service), pensions, group income protection, group critical illness and group private medical insurance. The benefits available for pooling vary around the world, with some countries allowing, for example, insured retirement plans and dental cover to be pooled.
Each subsidiary continues to insure its benefits with local insurers and therefore benefits from local terms and conditions, including pricing. This means the intermediary will continue to review the market every two years, as they would do for non-pooled business. At the end of the accounting year, the pooling administrator prepares a multinational account that identifies the premiums paid in each country, the administration and commission charges, interest charged and earned, and claims paid. Once compiled, this account shows if there has been a surplus or loss resulting from the year.
The result of this second tier account (the first tier being the standard scheme accounts produced by each local insurer) will be a surplus or loss from the combined multinational subsidiaries; any excess will be distributed to the parent company in the form of a multinational dividend.
The parent company may retain this dividend or distribute it to the participating subsidiaries in proportion to the premiums each pays. This can be a contentious point in that local companies may object to the parent company retaining multinational dividends, but this is a matter that should be agreed by the multinational company and its subsidiaries when arranging the pooling facility. Where the dividend is distributed to the local subsidiaries, the cost of cover is reduced in effect, while loss is either carried forward against future profits or written off, depending on what basis on which the pool is established.
As the example of savings (see box) shows, at the end of that particular year £86,500 is available for distribution as a multinational dividend, which will in all likelihood reduce the cost of cover significantly for the year in question. Estimates by advisers on multinational pooling suggest that over a period of years an 8% to 15% reduction in local premium costs can be achieved. In good years the dividends can be even more substantial. However, the very competitive nature of the UK group life market has had a knock-on impact on such rates of return.
The possibility of receiving a dividend is a great benefit, though there are other advantages available for those involved. Firstly, there is no additional cost involved in joining a pooled network and the risk of any insurance schemes is rebroked in the normal way, thereby achieving a competitive market rate. Often, enhanced free cover is also available through pooling, particularly where there are small numbers of employees in particular countries.
There are many areas of the world where local employee benefit levels are modest compared with those in the US and UK. In such countries, the benefits necessary to encourage the secondment of staff from the UK can be put easily in place when the employer benefits from the substantial free cover limits are available from a well-developed multinational pool. The improved free-cover limits alone are often viewed by employers as sufficient evidence of the value of establishing a pool.
Clients using multinational pooling still benefit from local contract terms and conditions. In addition, there is the potential for considerable cost savings via the multinational dividend where experience is favourable. If losses are incurred, the client is not required to settle these.
Losses can be treated in a number of ways:they may be carried forward to be offset against surplus arising in future years or covered by the participating insurers on a stop-loss basis. The precise action in the event of a loss will depend upon the basis on which the pool was established.
It should be borne in mind that pooling can also assist multinational companies in dealing with the growing interest in cross-border benefit arrangements. It allows benefits to be placed in local markets with local insurers while ensuring that the results and costs of pooled benefits are not greater than necessary to meet the claims and administrative expenses. In this way, pooling can help accelerate the employer's plans.
Intermediary benefits
The points above will go some way to show intermediaries how a UK-based multinational company can benefit from such a scheme. It is important that intermediaries are aware of these benefits so they can recommend such an arrangement to the appropriate clients, who may have needs this innovative approach would fulfil.
Intermediaries can ensure the cost of benefits are kept to a minimum by using the normal UK rebroking process and, within a matter of years, the client should see the direct benefit of the arrangement in costs that have been reduced by way of the pooling dividend.
By establishing a multinational pool for its UK client, the inclusion of a group of employees in the UK can help to achieve an improved spread of risk when smaller overseas subsidiaries are added. This also reduces the administrative costs of pooling, a further advantage to pass on to the client.
At the end of the accounting year, a summary of the pool results is produced which identifies the results achieved and provides the company with an additional schedule of its pooled benefit costs across the subsidiaries. This is often the only source of such information and can be of considerable value to the client.
Multinational pooling undoubtedly offers great benefits to both intermediaries and their clients. Pooling gives intermediaries the opportunity to add value to their client relationships and also reduce the ever-present threat from competitors by offering a more specialised service.
A well-established pooling arrangement can lead to the intermediary being asked to look after subsidiary companies in order to include them in the pool. As such, it will become a much more mainstream arrangement in coming years as intermediaries become increasingly aware of the arrangement and more multinationals realise the benefits it can bring their businesses. n
Jim O'Driscoll is group underwriting director at Canada Life Group Insurance
