GCC Organizations Urged to Safeguard Gratuity Funds to Mitigate Risks Associated with Growing End-of-Service Liabilities

Investing in Funds for End-of-Service Benefits Protects Both Employers and Employees, says Nexus Group

DUBAI, United Arab Emirates: Organizations in the region that do not protect their end-of-service liabilities risk facing legal consequences in the future, according to finance experts.

“All employers have gratuity liability for their staff based on the number of employees they have hired, their salaries, and the time they have spent at the company,” says Duncan Crerar, Head of Employee Benefits at Nexus Group, one of the largest financial advisory firms in the region.

“A company has this ever-growing liability in its books where they know that on a future date they will owe a certain amount to their employees. However, if for some reason a company is unable to provide a leaving employee with his or her legal right to gratuity, that company then becomes legally indebted.”

Gratuity funding, in which a company invests money to match its gratuity liabilities, can protect businesses in the event they are unable to fund their employees’ end-of-service benefits.

“Companies are not mandated to make this investment, but it is deemed best practice because it protects them from future liabilities,” Crerar said.

“Not doing so presents a considerable risk, because the company is assuming that it will have the cash flow to make this payment down the line. If for some reason it does not, then the company is strapped with this debt and this can become a serious legal issue.”

In a 2014 end-of-service benefits survey by a global professional services firm*, 84 per cent of the surveyed organizations in the Middle East indicated that they do not fund end-of-service benefits, but settle employees’ benefits as they become due from company assets. GCC employers collectively face a total end-of-service benefits liability of about USD 15-16 billion, according 2010 figures from the global firm.

Regional businesses are also advised to consider offering pension or corporate savings plans to their employers. Although such plans cannot replace gratuity, they not only protect an employee’s financial security in the long-term, but can also be an important retention tool for employers.

Companies are beginning to recognize the benefits of offering such plans to their employees, says Crerar.

“Pension plans and corporate savings plans are important because they help ensure that employees have the money they need to survive post-retirement,” he said.

“From an employer perspective, such tools enhance a company’s brand and reputation as an employer of choice, and are also proven to increase employee satisfaction because of the financial security such plans provide.”

The GCC’s tax-free economy offers a favourable environment for setting up a pension plan, which in the region can be likened to a long-term corporate savings plan, Crerar added.

“Unlike the UK or the West, where tax regulations influence pension plan pay-outs, there is a certain degree of flexibility here,” he said. “Traditionally pension planning is all about taxation. For example, in the UK you get tax relief on contributions going into a pension, but the trade-off is that you don’t get the money until you reach retirement age.

“Because there is no tax relief or benefit here, there are no restrictions on how you get the money either. That is why most companies offering pension plans in the UAE will allow employees immediate access to those funds should they decide to leave the company. This flexibility can work to the benefit of both employers and employees.”