Cost of Living Allowances

Mercer’s 2016 survey sees Brexit fears carry through into results

cost of living survey 2016

Mercer’s 22nd annual Cost of Living Survey indicated that fears of a potential Brexit had weakened the value of the Pound against the Dollar and Euro, causing UK cities such as London and Birmingham to plummet in the rankings over the last year.  With Brexit now a reality, it remains to be seen what the impact will be on the Cost of Living Allowances (CoLA) for expats to and from Britain in both the short and long term.

"Whilst currency fluctuations will always cause a major impact on costs, local conditions like high property prices can counterbalance the impact of currency movements." Ellyn Karetnick, Mercer

“While most Western European cities have remained stable in this year’s rankings, UK cities have fallen,” said Kate Fitzpatrick, a Senior International Mobility Consultant at Mercer.  “However the drop is not as large as to be expected, with steep rental prices keeping UK cities up.  In the past year we’ve observed strong rental accommodation prices increase in Aberdeen, and to a lesser extent in Belfast. Although there has been only a slight increase in the average rental price in London, this cost remains at the higher end of the scale when compared to cities worldwide.”

“Although the value of the Euro has remained steady against the US dollar, the Pound has fallen, largely due to Brexit fears,” explains Ellyn Karetnick, Head of International Mobility at Mercer.  “But whilst currency fluctuations will always cause a major impact on costs, local conditions like high property prices can counterbalance the impact of currency movements.  It is important to understand local costs when deploying employees in countries across the world and we use the Mercer International basket of goods to help calculate rankings and packages.”

Few organisations are prepared for the challenges world events have on their business, including the impact on cost of expatriate packages.  This year’s survey again proves that factors including currency fluctuations, cost inflation for goods and services, and instability of accommodation prices contribute to the cost of expatriate packages for employees on international assignments.

Mercer’s survey takes into account 375 cities throughout the world; this year’s ranking includes 209 cities across five continents and measures the comparative cost of more than 200 items in each location, including housing, transportation, food, clothing, household goods, and entertainment.

According to the 2016 survey, Hong Kong tops the list of most expensive cities for expats, pushing Luanda, Angola to second position.  Zurich and Singapore remain in third and fourth positions, respectively, whereas Tokyo comes in fifth, up six place from lst year.  Other cities appearing in the top 10 of costliest cities for expatriates are Shanghai (7), Geneva (8), N’Djamena (9) and Beijing.  The world’s least expensive cities are Windhoek (209), Cape Town (208) and Bishkek (207).

Nathalie Constantin-Métral, Principal at Mercer with responsibility for compiling the survey ranking, said, “Despite some marked price increases across the region, several local currencies in Europe have weakened against the US dollar which pushed a few cities down in the ranking. Additionally, other factors like recent security issues, social unrest, and concern about the economic outlook have impacted the region.”

“Cost of living allowances are intended to help protect the purchasing power of international assignees, and can go up or down depending on inflation levels in the home and host location, and the movement of exchange rates.”

Two European cities are among the top 10 list of most expensive cities.  At number three in the global ranking, Zurich remains the most costly European city, followed by Geneva (8), down three spots from last year.  The next European city in the ranking, Bern (13) is down four places from last year following the weakening of the Swiss franc against the US dollar.   Several cities across Europe remained relatively steady due to the stability of the Euro against the Dollar.  Paris (44), Milan (50), Vienna (54), and Rome (58) are relatively unchanged compared to last year, while Copenhagen (24) and St. Petersburg (152) stayed in the same place.

Brussels meanwhile has climbed the rankings quite significantly, coming up 16 places (from 102 to 86) this year.  Nathalie Constantin-Metrál believes the rise in utility costs in Belgium has a large part to play in this as goods and services  in general increased only slightly.

When we enquired about the expected impact of the impending Brexit Kate Fitzpatrick said “Cost of living allowances are intended to help protect the purchasing power of international assignees, and can go up or down depending on inflation levels in the home and host location, and the movement of exchange rates. Generally speaking, the requirement for any sort of cost of living adjustment increases for assignees from a location with a devalued currency (e.g. UK outbound assignees), while the reverse is true for assignees into such a location (e.g. UK inbounds), as the home country currency now goes further and therefore requires less of an adjustment to maintain purchasing power in the host location than in the past.

That said, organizations take many different approaches to the exchanges rates used to calculate such allowances, the frequency with which they review them, and the thresholds at which they would make any off-cycle interventions, so there will be a range of ways for companies to manage this over the coming weeks and months. It is also important to remember that currency movements – even moderately significant ones – are not uncommon, and many multinational companies will have defined mechanisms for dealing with such volatility.”

Mercer produces individual cost of living and rental accommodation cost reports for each city surveyed. To purchase copies of individual city reports, visit:
www.imercer.com/products/cost-of-living.aspx

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