According to The World Bank, by 2050 the global population of individuals over age 65 will double from 10% to 20%. In other words, one in five individuals will be of age to retire. The reality is, many workers are not prepared for retirement for a variety of reasons. One of those reasons is arguably due to the fact that the mechanism for retirement savings moved to an individual orientated savings plan (such as the popular 401(k) in the United States). By not having a centralized plan, many workers failed to save enough; however, there is a resurgence in pensions as a method for ensuring retirement security for the workforce.
Pensions are a concept that seems almost antiquated for U.S. employers, yet elsewhere in the world they are required as an employee benefit. Employers with workers in other countries need to make sure their global pension policy covers each of these instances in order to not only remain compliant with international laws, but also ensure the financial wellness for the people that make up their workforce.
The 401(k) is the tool of choice for U.S. based employers to encourage saving, because it is heavily dependent on employee contributions. The United Kingdom in contrast has a mandatory pension system, and that’s just one example key differences in international pension laws.
During the recent Global HR Practices research study, issues with compliance were commonly identified by respondents. In many cases, simple ignorance of legal requirements is enough to push a company out of compliance with local regulations. Therefore, the following is a sampling of international pension laws to help illustrate the variety of regulatory requirements that exist.
The United Kingdom has a law in place requiring employers to offer a workplace pension scheme ever since October 2012. In this system, employers must automatically enroll workers in a pension scheme and make contributions on their behalf. Workers must earn at least £10,000 per year, work in the UK, and be between 22 and the state pension age to be eligible to participate.
Under this system, the big benefit for workers is the level of transparency–employers are required to not only tell the type of scheme and who runs it, but also how much the employer will contribute, what the employee must pay in, and how to leave the system if desired.
China also maintains a required pension contribution system. One of the key revisions in recent years has been to improve portability of funds, which has been an issue for some time according to Dezan Shira, an international legal and tax firm specializing in China. “The lack of transparency for individuals relating to treatment of their pension often dissuades them from transferring to jobs outside of the city they are living in. This in turn reduces the overall mobility of labor, which is a major problem in a society that lacks sufficient skilled workers across the country.”
As far as the future of the pension system, China has outlined plans to coordinate the patchwork of pension schemes throughout the country. Currently, pension contributions are regulated at a provincial level, leading to gaps for employers depending on the location. For example, premiums are 20% for employers in Shanghai, but just 14% in Guangzhou. Premiums are expected to be lower overall upon the implementation of the new plan.
The United States, as mentioned previously, has no current requirement for pensions other than the federal Social Security program. Most employers offer 401(k) defined contribution plans instead of more traditional defined benefit pension plans. However, the conversation is changing because of continued poverty, individual retirement shortfalls, and other social challenges that arise when individuals hit retirement age with insufficient savings.
With the current administration, it’s unlikely to see government-mandated retirement schemes established. That doesn’t mean a more pro-employee leadership won’t change that in the coming years to align with some of the other countries mentioned here. One proposed approach would map closely to that of Australia’s system, requiring employers to deposit a percentage of the worker’s compensation into an individual account for safekeeping.
Of the countries profiled here, Brazil’s system is in the most need of reform. That is why the President announced a short term option for supporting the system, limiting full access to pensions to allow time for the system to recover. In addition, the system will gradually increase the eligibility mark from 2017 through 2022 to ensure the funds exist to support its citizens in the coming years.
The country’s entire pension scheme depends on three pillars: a public,mandatory pay as you go system; a pension system for government workers, and a private pension system. Workers contribute between 9% and 11% of their earnings while employers contribute 20% of payroll to a long-term social insurance program.
France maintains a tiered system for workplace pensions. For the first €35,000 a worker earns, or the “first tranche,” a portion of employee money and an employer contribution are both set aside to fund the pension. This amount varies by job and by age, but the first tier is anywhere from 1.5% to 4.5%. Money above that threshold (the “second tranche”) is saved at a higher percentage, reaching from 4.76% to 12.6%, depending on the worker’s age and profession.
One interesting element that France exhibits is that companies hiring workers over age 55 receive special tax breaks, or subsidies, in an effort to help bridge the gap for these workers until they are ready to retire.
Planning for this level of complexity is a considerable challenge. One common thread for countries around the world is the continued struggle with rising costs of living and increased life expectancy. Those two factors alone can crush many private pensions, which is why each country mentioned here has a separate state-funded pension program, including the familiar example of the Social Security system in the U.S. In many other ways, from contribution amounts to eligibility and more, these programs can differ greatly around the world, and they also create additional compliance requirements for both employer and employee contributions. If you’re interested in exploring this topic more deeply or want to examine a country not covered in this blog, Papaya Global’s CountryPedia has the information you’re looking for.
Setting up and running a global pension policy is not a simple prospect. It’s enough to handle one country’s approach, but many employers aren’t equipped to manage the various nuances of another country’s requirements. It’s best to ensure that the payroll solution has the capability to handle global compliance requirements, including hiring a global payroll company, because the cost is high for noncompliance.