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28 March 2024

Regional firms need to plan for gratuity payments

FPI hopes to strengthen its commitment to the region starting with the UAE, said Trevor Mathews. (SUPPLIED)

Published
By Sandi Saksena

Trevor Mathews, Chief Executive Officer of London-based Friends Provident International (FPI), was in Dubai recently to oversee the present and future operations of FPI Middle East's head office in Emaar Square.

Looking relaxed and fresh, considering he has been more on a plane than on land visiting FPI operations around the world, Mathews said: "Just shy of my first 100 days, it is clear that I have taken charge of a solid and sound business with exciting prospects."


Critics say life assurers' financial strength is reliant on the value of their investments in equities. As those have fallen foul to the stock market meltdown, the argument goes their solvency levels will be affected just like the banks.

The collapse of life assurers' share prices amid fears over their solvency is irrational.

Shares in the sector have fallen sharply amid concerns it may be the next to be hit by the credit crunch. What is going on here is some sort of panic. Banks have been caught out by the practice of funding long-term loans with money borrowed short term on the money markets.

Life companies are not like that. They are long-term savings institutions. They have plenty of liquidity and lots of cash on hand. In fact, in the UK we have more stringent regulations and solvency protection programs. Our offshore operations in the Isle of Man have the Policy Protection Act. People should not be worried about life companies.

Much of the panic has been sparked by the crisis at US insurer AIG, which lost billions of dollars on products that pay out if businesses default on loan repayments.

We don't do any of that – we are just boring life and pension companies, with little exposure to "toxic assets". FP is defensively positioned having sold equities back in 2007.

FP is financially strong and well set to ride out the current financial turmoil. Our estimated surplus at 30 October remains around £1 billion (Dh5.4bn), there are no equities in our shareholder funds, and our bond portfolio is 97 per cent investment grade.

What is your opinion on the global market crisis and what about the various markets where FPI has a presence?

At a recent conference on how and what to do and when will we see the light at the end of the tunnel, I heard the crisis described as being either an L, U or V shape in terms of next steps and recovery. We hope it won't be an 'L', that is a drop and prolonged stretch, we think it will be a 'U'. However, we are fervently hoping it will be a 'V'.

Global market conditions will remain challenging for some time but we expect our strengths in our core propositions to persist. Friends Provident International is delivering strong growth, year-on-year, and we continue to evaluate opportunities to extend our international presence.

UK conditions remain understandably tough for protection business. Our existing group pension schemes are growing well, and good work is under way to regain our strong position for attracting new schemes in our chosen segment.

How has your sales been affected?

We have seen some slowing in sales in Asia after four consecutive strong quarters. During this time, the Hong Kong market has provided opportunities for FPI to grow strongly through a combination of excellent products backed by high service standards. Going forward, we expect some impact on this market from investment market uncertainty. We have continued to develop our presence in Singapore over the last quarter, and are working to expand our product range.

Sales in the Middle East have more than doubled on 2007, supported by increased business through distribution agreements with banks. Further developments in the third quarter has been the establishment of a larger regional centre in Dubai and the launch of Optus, a group savings product based on Friends Provident's UK group pensions platform. Both of these developments position us well in this region. In Europe, the driver for growth is the German pensions proposition. We expect further year-on-year growth in the fourth quarter.

What is FPI's vision and strategy for the Middle East?

Central to FPI's growth strategy in the Middle East will be the identification and development of new distribution channels. The Middle East "vision" for FPI is to transform from a Western intermediary centric model into a leading provider in the region, with multi-channel distribution.

Under one per cent of the adult population in the GCC have life insurance, this is much lower than take up rates in more established markets such as the US, where it is reaching double digit and in the UK, which is close to nine per cent.

Our research and market studies reveal that people in the Middle East require access to high quality, affordable products that have been specifically designed for the region.

A significant issue for many firms in the UAE right now is protecting gratuity payments during an economic crisis and the attraction and retention of staff and finding ways to build loyalty that do not unduly impact on staff cost or bottom lines. In the UAE, employee gratuity is a compulsory provision, that results in the individual receiving a lump sum at cessation of employment at any age.

So what do you plan to do to change this scenario?

FPI has found that few employers realise the extent of the potential exposure gratuity provisions place on their balance sheets and often fail to plan, leaving their company open to financial risk if a number of employees choose to leave employment within a similar timeframe or a long-term employee leaves.

This is the time when companies need to think about protecting their investments and ensuring that their resources are not vulnerable to external factors. One aspect of staff remuneration that can be enhanced without increasing costs is the provision for gratuity.

Strengthening our commitment to the region starting with the UAE, we have adapted the UAE Optus scheme from its UK product, where it is a corporate group saving scheme. The scheme is designed to allow companies to make provisions for employee gratuity liability with the option of providing additional occupational benefits for employees.

It adds value for both the company and the individual. The Optus group savings scheme will not only help with corporate balance sheets, but can also increase employee loyalty.

FPI has a fully-resourced Dubai team to support employers using Optus on an ongoing basis. Optus can be denominated in UAE dirhams, US dollars, euro and sterling and boasts a range of more than 120 funds – including several Shariah-compliant funds.

How does FPI propose to manage the expectations and continued service to large corporate?

We are committed to investing in technology. Applying technology, including e-commerce to enhance distribution will not only improve service but reduce costs in the long term. Friends Provident's IT strategy is to focus on the effective use of technology, where it can best add value to the organisation. We have been an early adopter of new technologies and products.

We now have a new web-based portfolio planning tool, Dynamic Portfolio Planner international (DPPi),to support and enhance our multi-channel distribution network.

DPPi is an innovative new solution that improves the process of portfolio construction and is specially tailored to the offshore marketplace. It enables the user to build a robust investment strategy backed by rigorous statistical research at the touch of a button using web-based technology.

For our corporate clients who have Optus this will provide secure online access, which will enable an employer to update scheme member details, prepare illustrations for prospective members, allocate contributions to members' accounts with upload data from payroll, switch funds and redirect contributions. These is an entirely bespoke and secure IT platform allowing employers to plan for their gratuity exposure and contribute monthly payments with the potential for return on investment to cover the final gratuity payment when the employee leaves the firm.

Our primary objectives include customer service, excellence and reducing costs using business process automation wherever possible.


PROFILE: Trevor Mathews Chief Executive Officer, Friends Provident

Matthews joined FPI from Standard Life Assurance Limited, where he was Chief Executive from 2004 to July 2008. He was previously President and Chief Executive Officer of Manulife Japan from 2001 to 2004 and Executive Vice-President of Canadian Operations and Chairman of Manulife Bank from 1998 to 2001.

Prior to this, Trevor was General Manager of Personal Finance Services for National Australia Bank between 1996 to 1998 and Managing Director of Legal and General Assurance Holdings Australia Limited between 1989 and 1996.

Trevor was appointed President of the Chartered Insurance Institute on July 16, 2008 (he has been Deputy President from 2007). In 1997 he was President of the Institute of Actuaries of Australia (Centenary Year).

He is on record as saying he intends to return to Australia where he still has a house overlooking Sydney harbour when he is 60, in four years time. "That is the game plan," he says. "Hopefully by that stage we will have got FPI up to the next level so it will be firing on all cylinders."