Safer saving

Written by: Richard Willsher Posted: 05/08/2019

BL63_ISPs_illoJersey and Guernsey have stepped up efforts to regulate their employee benefits sectors. as a result, Both islands are seeing lively interest for their offerings

Saving for the future is one of the most valuable things an employer can help its employees to do.

For most, that comes in the form of a workplace pension. When your employees are based in one jurisdiction, and with you for the long haul, setting up and administering an occupational pension scheme according to the laws of the land is a fairly easy task. 

But what happens if you’re a large multinational with a cohort of highly globally mobile employees who may only stay with you for a few years before moving on to their next employer? Whose pension laws do you adhere to? And does it even make sense to make such a long-term commitment to an employee who may have moved on in two to three years? 

From the employee’s perspective, having to wait until retirement to access the savings pot may not be a particularly attractive benefit.

To address such concerns, multinationals have traditionally turned to international finance centres to help set up vehicles such as non-charitable purpose trusts or employee benefit trusts, which enable them to provide some form of savings for their employees without having to commit to long-term pension investments. 

The problem with this, says Julia-Anne Dix, an Associate at Mourant Ozannes, is that such arrangements are often not government approved, affording employers and employees little protection. 

Jersey’s ISPs

In January of this year, Jersey introduced a solution – International Savings Plans (ISPs). While pensions can only be accessed at a pre-agreed retirement age and there are restrictions on the level of contributions that can be made, ISPs have no such funding limits. In addition, money can be drawn down for life events when it’s most needed, such as buying a house or paying to put children through university. 

Beyond this savings element, ISPs, which are only available to those employed outside Jersey, can also be structured to incorporate a pension and share scheme. 

Importantly, the plans, which must be established as irrevocable trusts and have a regulated trustee, are approved by the Comptroller of Taxes, and any income or gains accruing from the plans are tax-free. 

“You can now place your funds in a well-regulated jurisdiction, the government is aware of the product and you have asset protection,” Dix explains. This statutory status gives employers and employees added peace of mind.

Although ISPs appeal to large multinationals with a globally mobile workforce, one of the product’s main target groups are employers in the Gulf Cooperation Council countries of the Middle East, which are subject to a mandatory requirement to provide end-of-service benefits to their employees when they leave employment. 

However, as Nancy Chien, a Partner at Jersey law firm Bedell Cristin, points out, they don’t need to physically put the money aside in order to meet the liability. “The risk for the employee is that when they leave, he or she will have no recourse against the employer,” Chien explains. 

“This is how ISPs can help. Employers will actually physically put money aside, which will be properly managed and invested, so that when end-of-service benefits are due for payment, they can use the funds to meet those payments.”

Guernsey’s offering

Guernsey’s savings regime offers employers similar options, although the labels are different – end-of-service benefits are provided via ‘gratuity schemes’, for example – as is the approach to regulation. 

While Jersey regulates the scheme, Guernsey regulates the professionals who set up, run and advise on pensions and gratuity schemes, explains Angela Calnan, Group Partner at Collas Crill in Guernsey. 

Since amending its Regulation of Fiduciaries Law in 2017, such activities can only be undertaken by licensed trustees, who must regularly report to the Guernsey Financial Services Commission (GFSC) on any schemes they administer. 

The changes in the law have given the GFSC supervisory jurisdiction over the schemes and, for the first time, it has enabled the regulator to collate statistics about the industry (Jersey doesn’t have pensions regulation or a pensions regulator, although it is currently debating whether to give such a responsibility to the Jersey Financial Service Commission or to create an entirely new body). 

According to Calnan, the 2017 changes in Guernsey have attracted more employers to the island, with its pensions and savings industry increasing by £0.5bn between 2017 and 2018. 

In 2019, Guernsey’s income tax law was amended to exempt gratuity schemes from paying tax, making the jurisdiction even more attractive for such business. 

Middle East interest

Both islands are seeing a lively interest from the Middle East for their respective versions of ISPs. Providers have targeted the region, speaking at conferences and liaising with multinational and local businesses with mobile employees. 

Indeed, there are some jurisdictions in the region that have experienced difficulty in attracting talent and so a good package of employee benefits, including long-term provision of pensions and ISPs, can be an aid to recruitment. 

Lisa Barnett, Managing Director of RBC Guernsey, says that her firm has been involved in this business for about 20 years. She adds that, alongside the Middle East, RBC Guernsey is also getting a lot of interest out of the US, Hong Kong, Singapore and the UK.

Guernsey’s and Jersey’s ISPs bring multinationals and their employees long expertise in managing pensions, which, apart from the differences in triggers, essentially require the same investment management skills.

Also, as Peter Culnane, Head of Pensions at independent fiduciary group Fairway, explains, they can “plug in to a jurisdiction that ticks just about every box from a regulatory, security, accountability and reputation perspective. 

“You’ve got the infrastructure as well... and from a board perspective, wherever a company is based, they can actually manage the provision of all of their staff wherever they are in the world.”

An important point to note is that ISPs are not a tax-structuring vehicle. Chien points out: “An ISP is in no way an arrangement which is used to mitigate, avoid or circumvent any tax payments or tax reporting obligations. That is absolutely critical. It’s not a tax-driven product at all. It’s a product that’s driven purely by market demand, without any tax element. 

“So, if there’s a reporting obligation under FATCA [tax legislation in the US] or the Common Reporting Standard, then the employers and the employees have to satisfy those.” 

Drawdown triggers

Both the Guernsey and Jersey ISPs allow for scheme members to take their benefits before retirement age, so what is a valid trigger for drawing funds? “A very common US requirement is a hardship withdrawal,” Barnett explains.

“So, if a member specifically needs that money, as long as the employer consents, they can take out their money on the grounds of hardship. This could be redundancy or ill health, but looking into the future, it could be for life events – to buy property or fund a wedding, for example. 

"I think it’ll be more life events; that’s how we see it going forward. It’ll be a lot more flexible, in terms of being a savings vehicle provided by the corporates, with moral values behind what they offer to their employees.”

What about the integrity of drawdown triggers? Could an ISP member simply like the idea of buying an expensive car or jewellery, say, and call upon the plan trustee to release funds? Katherine Neal, Counsel in Jersey for law firm Ogier, says there are rules to guard against such risks. 

“The funds are held in a discretionary trust,” she says, “so any payments out will be subject to the discretion of the trustees. At the point that they formed the trust, employers will have set out what the triggers and guidelines are. If there are no triggers and guidelines, it will be trustees’ responsibility to decide what qualifies. So, you rely on the general discretionary principles of the trust and the trustees’ obligation to act in its best interest.” 

Main attraction

This, however, typically does not work against the underlying main attraction of ISPs: their flexibility. “Employees are now more likely to work for a number of employers in their working lives,” says Lisa Springate, who leads the Technical Team at Jersey Finance.

“They want a saving scheme that offers flexible rules as to when benefits can be paid out. They want access to their savings on termination of employment or when and if a life-changing event occurs. 

“Life-changing events in the modern world include divorce, children going to university, children getting on the property ladder and hardship events that could see them lose their home or livelihood. 

“The flexible nature of these schemes means that employers can decide what they want to offer employees – for example, a hybrid scheme so that some of the savings are a traditional pension and the rest is part of a savings plan.”

RBC Guernsey’s Barnett concurs, adding that the boundaries of International Pension Plans and ISPs are now blurring. The demise of defined benefit pensions is one reason for this. “I’d say 95% of our new business isn’t a true pension plan. It’s an end-of-service gratuity plan,” she says.

Early days

Although Jersey’s ISPs have been available for six months now, Nick Marshall, Senior Associate at Collas Crill in Jersey, says it’s still early days for the product. “I think everybody is still finding their way to see how best it can be used for employees,” he explains. “I’ve been having discussions with a number of local trust businesses, and with a particular clearing bank, to decide exactly how it would operate in practice.” 

One key consideration is how to invest the underlying fund to be able to make more regular drawdowns than a pension scheme. The frequency and degree of drawdowns will depend on who the employer wants to set the scheme up for – a small number of high-net-worth senior executives or a larger number of employees at different levels of the organisation, for example. The costs of running the scheme also need to be factored in.

Marshall adds: “Because ISPs are so flexible, it’s important that the rules are drafted very specifically and carefully for each employer at the time that they want to set one up, and the expertise we have on the island is paramount for that.”

In the wider context of the changes in working practices, ISPs may very well be in the sweet spot. The days of jobs for life are long past. Fixed-term contracts, jobs in the gig economy, increased global mobility and the war for talent all dictate that remuneration is more closely tailored to employees’ career journeys. 

With the provision of flexible structures that can be shaped to meet the interests of both employees and employers, and with funds professionally managed in well-regulated jurisdictions, the Channel Islands look well placed to attract a lot of ISP business in the coming years. 


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