Its Time To Plan Your End Of Service Benefit (EoSB) Liabilities Efficiently!

From a cash flow and de-risking perspective, employers need a structured program in place to fund the liabilities they are accruing. This means both setting assets aside and investing them in a way that will keep pace with gratuity inflation over the long term.

“Today, expatriate employees are staying longer in the region and average service with one employer is, therefore, increasing. The rate of salary increases in the region has also exceeded expectations in recent years because of a strong need to attract and retain the best talent.”

For your employees, doing more than simply staying afloat through retirement means making financial preparations during their working life. However, UAE employers’ ambivalence towards addressing the need for retirement savings means employees will have to fend for themselves, assisted to some extent by the end of service gratuity. So, in the absence of employer-facilitated savings, will they sink, swim or get eaten alive by the increasing cost of living in retirement?

Government intervention


It seems most companies want the government to take control but far fewer expect it to. EoSB liabilities are a growing financial issue and government intervention would give employers a reason to focus on and address it.

Case Study Managing Gratuity Liability


We were approached by a Law firm in Dubai who have approximately 20 partners in Dubai and a similar number in Abu Dhabi. With their associates and admin staff, their total Gratuity Liability amounted to just over $3m.

They have been very prudent over the years and have set funds aside to
partially cover this liability and currently have $1.5M on deposit with a local bank obtaining a small return of 1.25%.

They are looking to add to their existing provision and ultimately have
all their liability covered via a specific asset.

Our solution was to construct an investment portfolio using one of the
world’s leading Discretionary Fund Managers. This was tailored to their
appetite towards investment risk (very low) and is managed on a daily
basis by a full team of specialists. The average returns seen on this type
of portfolio over the last 10 years is in excess of 6% net per annum with
fund management costs of 1% per annum.

The portfolio is accessible without penalty in the event of someone
leaving the firm and needing their end of service payment and they are
free to add more capital to it when they desire.

The returns provide them with a real return on their assets whereas the
term deposit did not keep pace with inflation and saw the value reduce
in real terms.


What we are finding is that the length of service of individual employees is growing. As a result, the EoSB liabilities are becoming very substantial. In situations where companies are looking to dismiss employees the EoSB liabilities are increasingly becoming an important factor to take into account.


- Rebecca Ford, Partner, Clyde & Co”

THE financial reality for employers

The issues around end-of-service benefit (EoSB) liabilities are not going away and need to be recognised and properly accounted for by employers. From a cash flow and de-risking perspective, employers need a structured program in place to fund the liabilities they are accruing. This means both setting assets aside and investing them in a way that will keep pace with gratuity inflation over the long term.

HR and the CFO have common goals

Enhanced end-of-service benefits are attractive to employees and could therefore be an effective way to differentiate the company when attempting to recruit and retain talented people in a competitive job market. This could prove to be a worthwhile investment if appropriately funded over the long term.


Case Study Attracting and Retaining Talent in a Competitive Marketplace


Following one of our Wealth Summits, we were asked by a firm from the oil and gas industry to advise on setting up a scheme where they were able to provide some additional benefits to their middle and upper
management to increase staff retention and reduce attrition.


They appreciated the competitiveness of the industry and had, historically, seen employees leave to competitors who were offering marginal pay increases. This was after the firm had invested considerably in their
recruitment and training and saw this as a cost to the business that they could ill afford at a time when the industry saw margins fall.


They are looking to add to their existing provision and ultimately have all their liability covered via a specific asset.

Essentially, they wanted to provide a loyalty benefit to their key employees to reduce attrition and the costs associated with re-recruiting replacement staff.


The solution was to provide a group savings programme, which allowed members to contribute monthly out of payroll using institutional rates rather than the more expensive retail products offered through individual consultations. The scheme was opened to a specific group of specialist staff with a matched contribution offered allowing the company to also contribute up to 5% of the individual’s salary on a matched basis.


They then added a 5-year retention rule meaning the employers contribution would only become payable after 5 years’ service, thus retaining key individuals who were reluctant to leave the business and lose the
employers value.

I always look at EoSB as a pension – whether it is or whether it isn’t. I want my staff and my managers to think about it that way… they generally do not understand the value of the EoSB.


- Nuria Gonzalez-Martin , Head of HR, Food Fund International

HR and the CFO have common goals


"


Enhanced end-of-service benefits are attractive to employees and could therefore be an effective way to differentiate the company when attempting to recruit and retain talented people in a competitive job market. This could prove to be a worthwhile investment if appropriately funded over the long term.


Anna Olson 

Recruiter - Standard Chartered Bank


HELLO! MY NAME IS...
Graeme Field

As Head of Corporate Services for Credence International,
I  predominantly look after the financial needs of SMEs
in UAE, such as gratuity liability management, group savings
and medical schemes, together with the potentially more complex personal needs of executives and upper management.

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