Gratuity bill: $16bn... and counting

A new report estimates the combined end-of-service liabilities of all GCC employers at around $16 billion, and estimates it to soar to $75 billion by 2020.

The UAE’s current gratuity bill is estimated at more than $4 billion – something that puts a huge strain on the companies’ balance sheets.

There is a critical need to restructure the GCC’s End-of-Service Benefits (EOSB) system, according to a new report issued today by Insight Discovery, a research company.

The report, titled ‘Beyond the End of Service Benefit’, outlines the issues faced by many GCC companies in meeting their EOSB obligations.

It says that, in spite of legal provisions, the present EOSB system faces numerous challenges including the effective safeguarding of employee interests.

The report also discusses the evolution of the present system, its possible replacement and subsequent implications for the financial services industry.

“Most expatriate employees in the GCC receive a one-off lump sum payment in the form of ‘End Of Service Benefit’ or gratuity as opposed to the occupational pension schemes of many other countries,” said Nigel Sillitoe, CEO of Insight Discovery.

“Leading financial, consulting and legal experts have raised concerns about this present system, its issues and challenges for both employers and employees. Understanding the issues that surround the EOSB system and its future evolution is of vast importance to all employers in the region. It is indeed a very topical subject as it affects the majority of expatriates and the implications of changing this system are considerable,” he added.

According to Sillitoe, some Gulf government are actively seeking effective ways to replace the current system but maintains that a solution must come from the private sector instead.

“While some GCC governments are looking into the problems of the present system, we think that the most likely and innovative solutions will be developed by the private sector,” he said.

“If any regulatory framework is drawn, it will present itself with tremendous opportunities for fund managers, pension solution providers, life insurance companies and independent financial advisors,” he added.

Acknowledging the EOSB system as a key issue affecting employers and employees in the GCC region, Insight Discovery organised a consultative roundtable on the issue last month.

The key protagonists at the roundtable, which was organised in partnership with Falcon Private Bank and Royal Bank of Canada, and included representatives from Clyde & Co, Emirates Airlines Group, Mercer Consulting and SEI, identified the important issues on which this strategic report is based upon.

Key highlights of the roundtable report: 

 -          Balance sheets could be adversely affected if large EOSB payments are not allocated and planned properly, particularly in situations such as high numbers of employees departing at the same time; 

 -          EOSB payments and allocations are seen to be used by many companies for other business purposes, and not to safeguard the employees legal entitlement; 

 -          Unlike other markets where there is a huge move towards defined contribution schemes, the situation in the GCC is not underfunding – it’s rather non-funding;  

-           In spite of EOSB being legally binding, increasingly the number of issues and problems are rising and more legal cases are seen to be filed; 

-           Awareness and education is seen to be a key aspect, both for employers and employees about the EOSB system and its inescapable legal liability; 

-           The EOSB system may be looked upon by some as the GCC version of pension schemes in other countries, but it lacks the sophistication and transparency of provident and pension programmes of other countries, and more needs to be done in this context; 

-          If the EOSB system is restructured innovatively, it could result in more employer sponsored schemes offering greater benefits through economies of scale and could serve as a low-cost vehicle for employee savings and investment 

-          The provident scheme of Emirates Airline Group is seen as one of the possible models which are seen to be safe, secure and flexible that employers could adapt or customise to suit their needs and ultimately use it as a tool to attract, reward and retain employees.

“It has been estimated that the combined EOSB liability of employers in the UAE alone exceeds $4 billion,” said Simon Stirzaker, Senior Manager - Development & Strategy, Royal Bank of Canada.

“This combined EOSB liability is growing exponentially and critically needs to be managed accordingly,” he added.

“An important aspect of GCC countries’ continued growth is the need for expatriate labour. However, each country competes to employ and retain a labour force which is increasingly demanding greater employee rights and benefits offered by competing jurisdictions for their talent,” said Damian Hitchen, Director of Falcon Private Bank.

“There is already a growing debate amongst stakeholders and this issue will become increasingly critical as GCC markets become more sophisticated and integrate closely with the global economy,” he maintained.

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