Does end-of-service gratuity have a future?

Enhanced benefits are increasingly popular among employers, but not everyone is convinced

It’s a retention tool that has served businesses well for decades, but there is an increasing clamour for GCC organisations to move beyond the traditional end-of-service gratuity (EOSG).

A recent survey by Willis Towers Watson suggested that the need to hang on to talented professionals in the face of greater global mobility has prompted growing numbers of employers to go beyond mandatory benefits, offering supplemental defined contribution savings or pension plans.

Just under half (49 per cent) of the organisations surveyed said they were enhancing end-of-service benefits because of the need to retain top talent or, in some cases, to keep up with local or industry best practice – a 4 per cent increase on 2015. However, many of these enhancements are currently only for high-level management.

One of the main issues is that an EOSG alone is not enough to retire on. It is also seen as a high-risk benefit, as many businesses keep employees’ gratuities in the corporate bank account and use the money as working capital until it is due to be paid – which means the risk of an organisation not having access to the gratuity when it is required is very real.

And the EOSG will depreciate if it is not put aside as an investment, which is why financial advisers advocate trust funds, pension schemes or contribution schemes to help employees save.

But not all companies are enhancing gratuities. “Some firms are keen on the current model because, rather than being required to invest money to safeguard future employee benefits, they can utilise that money for their own gain,” says Sam Instone, CEO at AES International, a financial advisory company to expatriates. He says the reason a different model doesn’t exist yet is because it is only expats who are affected: “It hasn’t really come to the attention of those who can force change.”

Hannah McDermott, HR director at Gerson Lehrman Group and People Plus Middle East, says there are other reasons companies are sticking with the traditional gratuity. “While there are alternatives that may prove to be beneficial in the long term, a change to a pension would require a very large cash outlay all at once – and few organisations are sitting on sufficient cash to pay all employee gratuity today,” she says.

However, with current market conditions, McDermott believes employers would be wise to provide an enhanced EOSG. “The UAE remains a transient workplace, with the majority of companies not veering away from the legal minimum. But encouraging loyalty through enhanced benefits is one way to protect business operations and should be factored into annual business plans,” she says.

While the working population of the GCC remains comparatively transient, mobile professionals are now generally staying longer, which may make it more worthwhile for employers to offer additional benefits. But although the EOSG is very similar across GCC countries, there are some minor differences. “In Bahrain, unlike the UAE where there is a formal statute allowing for pension plans to replace EOSG, the trade-off of EOSG versus a defined contribution or defined benefit plan with future payout is not expressly recognised,” says Steve Brown, managing attorney at Al Ruwayeh & Partners in Bahrain. Even where pension schemes or contribution systems are permitted, a pension can be very difficult to administer and police because of the transient population who will eventually return to their home country, he says.

“We believe that a move away from EOSG in Bahrain and the GCC may be unlikely except in relation to high-level employees at multinational companies,” says Brown. “The nature of expatriate work in the region – usually for limited stints of two to five years – and the risks associated with retirement being linked to the GCC economies, which are foreign to the workers served, would make such plans unpalatable to most workers. If a GCC-wide expatriate pension programme were established, this may assuage some of these fears, though the economic concern would likely persist. However, mobility of a pension entitlement back to the workers’ home countries would be instrumental in the success of any such programme.”

While there are risks involved in the security of employees’ EOSGs, Instone says there are rumours that Dubai’s International Financial Centre is “contemplating the introduction of regulations to force companies to invest to fulfil end-of-service liabilities… If successful, such regulations could then be rolled out into the federal zones.”

Businesses across the wider region would be encouraged to follow the same path, says Instone: “At the moment, where there is no legal obligation on an employer to ringfence assets to meet liabilities – in Dubai and Qatar, for example – employees are vulnerable.”

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