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International Benefits Committee October 16, 2003 Outlined below is a summary of the meeting. Participants included representatives from: AIG AllNet Aon Consulting Avon Black Mountain Group Bristol-Myers Squibb BUPA International Equant General Electric Generali Gillette GMAC-RFC Hewitt Associates Honeywell Johnson & Johnson Mastercard International NCR Prudential Financial Swiss International Towers Perrin Watson Wyatt Wyeth XN Holdings Open-Forum Discussion Topics discussed included: Benchmarking competitive practices in foreign operations Pension plan COLA adjustments; challenge of overcoming entitlement mindset of employees Review of global procurement of benefit services and insurance Governance: process and oversight procedures (plan design, investment management, trustee training) Process management: establishing regional shared-service centers Challenge following acquisitions of identifying plan features, liabilities, assets, opportunities for cost savings Impact of new mortality tables on pension plans which produce lower benefits combined with DC plans where assets have been reduced by poor stock performance has resulted in lower than intended benefits South Africa: new legislation which focuses on pension plan surpluses that now require benefit recalculation for employees who left company from 1980 forward and who may be difficult to locate Use of benefits plan analysis software helped not only determine programs in current locations but also a tool during cross-border acquisition due diligence Offshoring of service activities to India, the Philippines, and China Terrorism and other catastrophic risk coverage may have local limits; combined with reduced capacity in marketplace, requires attention to risk exposure Benefit plans for expatriates who retire in a country other than their original home country Managing local health care costs which are rising at up to 20% p.a. (Brazil) FAS 132 requires greater disclosure perhaps as early as late December 2003 Employee benefit and compensation value statements for employees around the world Mexico: introduction of flexible benefits Post merger benefit plan harmonization 1 International Benefits Committee October 16, 2003 Challenge of “underwater” stock options Japanese pension plan redesign to address challenge of current plan where liabilities are two times assets; may evolve into two part plan (cash balance and DC); can fund the DC over 4 to 8 years to cushion the initial cost Question about Housing Allowances for mid-level managers in the Middle East and Africa Eastern Europe as an active area of business growth increases the need to understand/develop benefit plans for local national employees Spain: Update on Corporate Benefit Plans Arturo Fisher of Hewitt Associates described Spain’s progress during the last ten years in catching up economically with other European countries. In Spain, a major challenge is how low birth rates will affect the future financing of pension benefits. He reviewed government- and employer-provided retirement benefits. In March 2004 there will be national elections so not much social insurance reform will occur until after then. Currently the national social insurance system does not have a deficit, but that will change in the not too distant future if current demographic trends continue. The government is considering ways to reduce its liability, i.e. by requiring longer participation in the system. Employer-provided pension plans fall into two tiers: (1) qualified plans and (2) insured plans. The insured plans allow greater design flexibility, especially for higher paid employees. In Spain, the trend for the last few years has been towards DC plans. Unlike in the US, in Spain employees do not have an investment choice. The focus is moving towards plan administration and investment performance. India: Update on Benefits and India Monica Nawal of Towers Perrin described current trends, which vary by industry sector and by job level. GDP growth for 2004 is projected to be at 6% (second highest in the world). Of the one billion Indian nationals only 10 million have college degrees, so there still is a relative shortage of educated workers to draw from. 2 International Benefits Committee October 16, 2003 Monica reviewed the traditional approach to compensation and benefits and the current trends within high growth sectors such as IT. The demand for tailored benefits or compensation is rising. There is a need to understand the key elements of Cost to Company expenses (base salaries: 30 – 40%; cash allowances: 30 – 35%; variable bonuses: 5 – 25%; perquisites: 25 – 35%; benefits: 30%). One trend is to move to non-financial rewards such as on-site health clubs and short-term international assignments. IT sector employees actually have lower total compensation than their counterparts in Financial Services and Consumer Goods where there is a smaller pool of qualified employees. Monica then described the growth of the Business Process Outsourcing (BPO) industries and how BPOs are expanding into new cities. She also pointed out that staff turnover within call centers is relatively high at 35 – 40%. For 2004, salaries are expected to grow about 7 – 12% in most industries. France: Update on Benefits Plans Erwin Janush of Aon Consulting described the new tax-advantaged pension account, the Plan d’Espagne Retraite Populaire (PERP). Most employees currently receive primary retirement benefits through the national social insurance system. However, private retirement plans are emerging. The PERP is the first significant attempt to encourage individuals’ savings towards retirement. Under the PERP, 10% of gross income can be saved (up to 23,500 euros). Note: there is a requirement to test interaction with other plans for tax efficiency. While the legislation has been passed, the administrative regulations are yet to be promulgated. Erwin then described trends in executive and general employee retirement planning. In France there are not many tax advantaged opportunities for employees. Potential solutions will be reviews of options for executives vs. general employee groups. 3 International Benefits Committee October 16, 2003 Risk Management Facilities for Globally Mobile Employees Ed Pazicky and Anthony Alberico described XN Holdings, which was formed in 2001 to provide expatriate-related risk management services. They assist employers in providing a full range of insurance and risk products and services, with considerable flexibility for the employers and the expatriates in plan design, options, and cost-sharing. The next meeting of the International Benefits Committee will be in New York City on February 25, 2004. For information about the International Benefits Committee, contact Bill Sheridan at 212-399-7128 or [email protected]. 4