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The pension plan: How to make careful investment choices in the ever-changing pension environment
As an expat working abroad, it’s not always possible to stay in your home country’s statutory pension scheme. This scheme is pillar 1 in the five-pension formats outlined by the World Bank. It may be possible if you are seconded for a period of up to five years, and your home and host country have a social security treaty or are both EU or EEA countries. Otherwise, you will probably have to join your host country’s pension scheme. There may be minimum requirements for you to actually have a right to benefits at pension age, for example a minimum period of contributions.
If you are a diplomat, you can usually stay under your home country’s regime. EU civil servants have their own pension system, which makes things easier, especially for those who remain EU civil servants for the whole of their career or at least for 10 years. Nato and other international organisations have comparable pension plans.
For expats working in companies, the subject of their company pension scheme (pillar 2) may be more complicated than that of their statutory pension. Laws and regulations on taxation are generally different country by country at all three moments of taxation: putting money in the company pension scheme, earning interest on money in the account, and when it pays out. These taxation differences make it difficult in terms of compliance to stay in the same company pension scheme in one country when you change countries for work. A pension promise from the employer may help, but this is not easy to manage.
Fiscally facilitated private pension schemes (pillar 3) are often organized country by country. Given the conditions linked to their fiscal advantages, it often does not makes sense to step into local schemes if you do not plan to contribute for at least five years. In practice, the transferability of pension reserves to other countries is not easy, and may in fact be almost impossible. Of course, saving for your future pension is also a good initiative to help cover any potential shortfall in income.
With life expectancy rising and the birth rate in many countries decreasing, quite a few countries are struggling with their pension obligations. As such, we see the retirement age increasing, the conditions surrounding pensions becoming more strict and sometimes even the pension pay-out going down. With current low interest rates in many countries, the growth in capital from bonds and term or savings accounts is very low. For potentially higher, but not guaranteed returns, you need to take risks. Shares or real estate are the most typical examples of risk assets. Pillar 1, 2 and 3 pension schemes are regulated and will often not be allowed to invest all their money in risk assets, nor anything in the even riskier assets such as derivatives or cyber currencies.
All in all, pension reserves are not growing as quickly as they were 10 years ago. As such, future retirees have to consider receiving lower pension payouts or to work longer. Indeed, retiring at 60 with on average more than 20 years ahead of you requires significant sums of money to maintain a standard of living. In the later years of retirement, care can become very expensive.
Companies as well as individual retirees need to adapt to the new pension reality. There may well be an increasing number of older employees who want or need to keep on working. Their expertise and experience are of course valuable, but an older workforce may require training to be kept up to date in a changing business environment.
Furthermore, in countries like Belgium, employers have to guarantee a minimal return on their company pension schemes (pillar 2). Due to low interest rates, group insurance companies can often no longer guarantee that minimum return, at least on new schemes. If there is a shortfall, the company has to add that from its own income or reserves.
The pension environment has changed significantly over the past decade and both employees and companies must change too. Indeed, the likelihood of interest rates going up again in the near future look very slim. As such, lower payouts or working longer may become necessary. Putting aside some private savings for your later years is one consideration to make.
This article first appeared in ING Expat Time