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The majority of Middle East businesses have not set aside funds to cover end-of-service benefit (EoSB) liabilities despite the fact that the potential burden facing companies has risen 140 percent in the last six years, according to new research from Zurich Global Life.
Rising salaries, combined with the longer tenures, means the EoSB burden on Middle East companies is increasing. The report, published on Monday, found the average length of time employees stay with an individual employer has increased from four years, seven months to six years, 10 months.
"The average gratuity payment has therefore increased by 66 percent, based on service alone. Adding in salary increases, and the average gratuity payment has risen by about 140 percent, so liabilities have increased but the willingness to set assets aside in a prudent manner is still not in evidence, " Peter Cox, head of international pension plans at Zurich in the Middle East, said in the report.
He said that research conducted by Towers Watson in 2010 estimated that the combined EoSB liabilities of employers in Gulf Cooperation Council (GCC) countries could increase to $75 billion by 2020.
"However, unlike Western countries, the problem faced in the GCC is not one of under-funding, it's non-funding," he added.
As part of its research, Zurich hired consultancy firm Insight Discovery to carry out a survey of 106 chief financial officers (CFOs) and finance managers in the United Arab Emirates (UAE), other Gulf states such as Saudi Arabia and Qatar, and some countries in the wider region such as Jordan.
Of those surveyed, 51 percent were CFOs representing mid to large-sized firms with over 1,000 employees, a spokesperson from Insight Discovery said.
Despite the growing burden, 83 percent of survey respondents said their company had not set aside any assets to cover EoSBs, while 88 percent believed their company grossly underestimated how much funding it would need to cover the payments.
Mandatory funding
The lack of clarity and motivation over the issue has led some commentators to call for governments to make it mandatory for companies to set aside funds to cover EoSB in their liabilities.
"The support for the introduction of mandatory funding of EoSB liabilities is significant. The government of the UAE could take the initiative and differentiate the country from others in the GCC region," Rebecca Ford, partner at law firm Clyde & Co, was quoted as saying in the white paper.
According to the UAE labour law, employees can claim 21 days basic salary - known as gratuity - for each year of service for the first five years, and 30 days pay for each subsequent year.
"It is not surprising that so many respondents want the government to take the initiative and make it mandatory to fund EoSB liabilities. That outcome would provide more clarity and certainty," Sanjay Jain, a director of insurance at accountancy consultancy firm EY, was quoted as saying in the report.
Despite the call for the introduction of governments to act on the issue, the survey showed that 72 percent of respondents found it unlikely governments would issue any regulations related to EoSB liabilities.
Of the remaining 28 percent of respondents, the majority believe regulations related to EoSBs could be introduced within the next five years.
(Writing by Shane McGinley)
Related Podcast: Discussion on end of service benefits
© Zawya 2016
