In the 1950s and 1960s, American companies initiated ambitious plans to expand business outside the United States. Such expansion also meant exporting American methods of doing business, including employee benefit plans.

The original thinking was simply to offer the same or similar benefits to native employees in Europe that U.S. workers enjoyed.

However, in addition to encountering the complexities of multiple currencies and ever-changing cultural values in other nations, U.S. multinationals also hit roadblocks in their efforts to export American employee benefit plans.

Currency concerns

Differences in currencies meant that valuing benefits in European countries would require changes in the programs. Should U.S. companies link the value of local plans to the American dollar? This seemed to be the most equitable solution, giving everyone has the same benefits, regardless of changes in currency.

But what happens when foreign currencies strengthen and weaken against the U.S. dollar?

European employees either have higher or lower benefits relative to their U.S. colleagues, thus defeating equality. Moreover, employers needed to select the appropriate mechanism for linking local currencies to the dollar and decide who got to administer it.

In addition to problems linking local currencies to the dollar, each European country's currency varied in relation to the others.

After the euro was introduced in 1999, there finally was a common currency for pricing goods and services in Europe, even though it didn't — and still doesn't — cover all member countries of the European Union (including the United Kingdom and Denmark), it does cover 16 members of the "Eurozone" (currently Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain).

Benefits distinctions

U.S. multinationals also discovered that U.S. plan design was not universally acceptable in other countries. This continues to be the case, of course, due to labor and tax regulations, which strongly influence employee expectations.

For instance, U.S. group life insurance plans deliver lump-sum death benefits, but such benefits are not tax-favored in the Netherlands, where employees expect survivorship annuities to spouses and children in the event of death in service.

U.S. firms also place a high priority on health care benefits, whereas many European countries have government-sponsored health care arrangements that differ in design in each country.

While there is room for employer-sponsored private plans in many countries, it is clear that one size will not fit all. Additionally, in some countries, employer-paid private medical plans are considered taxable income to the employee.

Insurance obstacles give way to pooling

U.S. multinationals also learned that U.S.-based insurers were not prepared, or even permitted, to insure employee benefit plans covering workers in Europe (or any other non-U.S. location, for that matter).

Therefore, group insurance covering these plans needed to be negotiated with locally admitted/registered vendors, including terms, conditions and costs reflecting only coverage for foreign locals.

That meant discounts on premium rates would only reflect the group's size in each location, if the group met the minimum number of lives eligible for a group contract at all.

Minimum group sizes vary by country and/or provider (ranging from one life in the Netherlands to 25 in Italy). The U.S. parent company could not use its global purchasing power for insurance covering local benefit plans, giving birth to multinational pooling.

Over the past 50 years, multinational pooling — contracting with local members of an international insurance network — has been the most cost-effective method for covering and managing local benefit plans.

However, in 1994, the Third Life Directive paved the way for a single market for insurance products and services throughout the EU.

This means insurance companies licensed in one EU country can offer their products and services in other EU countries if they receive permission from the regulatory authority where their headquarters is based.

It also means consumers in the EU have the freedom to purchase insurance from any EU-based insurer, including group insurance contracts covering employee benefit plans in each member country.

Does the euro, plus using a single insurer to issue group insurance covering an employer's benefit plans in several EU countries, amount to the foundation for pan-European plans?

Is this the end of multinational pooling in the Eurozone?

Technically, yes!

It is now possible to cover the following in one group insurance contract in a single currency (the euro in the 16 Eurozone member countries), regardless of plan design:

• Death in service (lump sum or survivor annuity).
• Accidental death.
• Disability (lump sum or income payment).

Local health care plans differ widely in the EU and are intrinsically tied to government-sponsored or mandated programs.

It's not practical for U.S. employers to include employer-provided medical benefits to European workers until there is more harmonization of government plans.

What about retirement plans?

The latest development in the EU sets the stage for pan-European retirement plans. The Institutions for Occupational Retirement Provision Directive was signed by the European Commission in 2003, requiring local compliance by September 2005.

IORP creates the potential to offer the following central services for employer-sponsored pension plans, regardless of local plan design:

• Investment management.
• Recordkeeping/administration.
• Assistance with financial planning.
• Communications.

All EU members now have passed legislation enabling the formal adoption of the IORP Directive, and the next step is writing detailed regulations in each member country, taking place now.

Since regulations must incorporate tax, social and labor laws, this will take some time.

Perhaps the biggest obstacle is the tax issue since, in order for a pan-European plan to be workable, each member country must recognize the tax status of a pan-European retirement plan in the same way it recognizes a locally based plan.

For example, a member state that exempts tax to employees on employer contributions and investment income, and taxes employees only on benefits received for locally registered plans (so-called EET tax treatment), must provide the same treatment for contributions and investment income on employer contributions for those employees made to a pan-European plan registered in another EU member state.

PERPS and PEPS

We surveyed eight international insurance networks about products their member companies in Europe offer to cover pan-European risks plans and pan-European Pensions.

Only one of the eight — Generali — provided information about a PERPS product. Four insurers responded with information about PEPS products: Aegon, Allianz, Fortis and Generali.

The most common feature offered by all four insurers is asset pooling.

Asset pooling is the comingling of assets from local retirement plans in several countries into a common fund in another EU country (e.g. Luxembourg, Ireland, Netherlands and Belgium) under legislation that offers tax, governance and cost advantages.

The local retirement plan does not look any different than it would without asset pooling; each plan retains local design, tax treatment and guarantees. The difference is that all plans can utilize a common investment strategy to meet funding objectives.

Moreover, plan sponsors can realize greater purchasing power, resulting in lower investment management and custodial fees. Asset pooling may not be available from EU insurers in every country.

One company offers asset pooling only in Austria, Belgium, France, Greece, Germany, Italy and Spain. Another offers asset pooling in all EU countries that adhere to the IORP Directive.

One insurer, Generali, reports offering a PEPS plan that, in addition to asset pooling, includes recordkeeping, administration, financial planning assistance and communications, and is available in all EU countries.

Serfinac, a unit of IGP partner Fortis Insurance Belgium, offers full services to pension funds located in Belgium, and operates pension plans under the new Organisation for Financing Pensions (OFP) legislation.

Plan design and employee mobility

The EU is moving in step with the global trend toward defined contribution retirement plans, which supports cross-border employment. While PEPS can accommodate defined benefit plans, particularly with regard to asset pooling, they are certainly more appropriate for DC plans.

The 27 EU countries are witnessing employment migration that demands portability in retirement plans, and every country has adopted legislation to support DC plans in some form to meet the needs of mobile employees.

As a result, DC plans and employee mobility are driving the progress of PEPS to meet the demand of employers for more efficient plan recordkeeping, administration and asset management.

The EU has made great advances toward pan-European risk and retirement plans, but the Holy Grail remains illusive and a work in progress.

Multinational pooling of risk-based insurance products will continue to be the most effective means for realizing greater purchasing power and potential for managing group insurance contracts covering varying local employee benefit plan designs.

Asset pooling offers economies of scale that can lead to reduced asset management and custodial fees for funding local retirement plans.

Pooling for both risk and retirement plans will meet the needs of smaller multinational employers who are always in last place when it comes to obtaining the best terms, conditions and costs for employee benefit plans.

Even better arrangements are forthcoming as the EU moves toward greater harmonization in regulations that will help create truly pan-European plans.

Paul M. Shimer is founder and principal consultant of Tallwood Global Benefits LLC. He has been professionally involved with international benefit programs for over 30 years, with extensive expertise with expatriate and local national employee benefit plans, and multinational pooling of group insurance contracts.