Reform end-of-service liabilities, survey finds

Majority of employers do not set aside assets to cover end-of-service benefits and settle on a pay-as-you-go basis

Staff report | GN Focus
12:41 April 4, 2016
More than four-fifths of chief financial officers in the Middle East think it would be helpful if the government introduced a mandatory requirement that end-of-service benefits be properly funded, according a recent survey by Zurich Global Life, Middle East & Africa. 
Zurich's research found that the majority of employers do not set aside specific assets to cover their end-of-service benefit (EOSB) liabilities and rather settle on a pay-as-you-go basis. 
The report, ‘Exploring the end-of-service benefit dilemma’, highlights the challenges associated with end-of-service benefit (EOSB) payments that are made to expatriate workers when they leave an employer. The survey was conducted in September-November 2015. About 106 respondents, who are CFOs and finance managers, mainly from the UAE and a few from rest of GCC, including Saudi Arabia and Qatar, took part. 
It is estimated that the average EOSB payment has risen by 140 per cent over the past six years. This is because the typical length of service has increased - from just less than five years to nearly 7 years - and the associated rate of salary growth over that period.
"The EOSB dilemma is an inconvenient truth," says Peter Cox, Head of International Pension Plans at Zurich in the Middle East.  "Although 83 per cent of companies don't fund their EOSB liabilities, 85 per cent think it would be a good idea if they did. This is a surprising response, bearing in mind it should be within their control to do so. Companies in the Middle East struggle to see the prudence of de-risking an ever growing financial issue."
Surprisingly, some 72 per cent of companies do not expect that the government will take steps to introduce a mandatory funding requirement. This is in spite of the fact that the sums of money are significant. In previous reports on the subject, Willis Towers Watson, an international consulting group, estimated that the aggregate liabilities across the GCC could rise to $75 billion by 2020.
"Expatriate workers across the region have a real need for attractive workplace savings solutions, which could include the EOSB entitlement," says Cox. "Those employers who facilitate workplace savings will find that they become an employer of choice with significantly improved recruitment and retention results. Such plans will also help CFOs who are looking to introduce a funding programme to address increasing EOSB liabilities."