The majority of companies in the UAE don’t separate cash to cover their employees’ end of service benefit liabilities from their working capital, according to SEI Investments. The problem is being compounded by the many expats now choosing to stay in the UAE longer, it warns. This means companies have to find even more money to cover the payment, which people are legally entitled to receive once they have completed at least one year’s service. Samer Kader, the head of SEI Investments, reveals more about the company’s End of Service Benefit Scheme, first set up in the UAE in 2012, to address the issue:
How does your scheme work?
The first step is that we separate the liability from the balance sheet. In some cases some companies know exactly what their liability is. In some cases they don’t. Either way we calculate that for them. We set up a separate offshore trust account that has a board of trustees who oversee this scheme and they more or less insure that the employees get paid their gratuity under any circumstances. They then transfer the money to the account. On an ongoing basis we have employee data and we tell them how much they need to top up into this trust account to make sure it is fully funded.
Where is the offshore account based?
Jersey. It’s tax-free and has trust laws dating back to the 18th century.
This is a scheme for companies but it benefits employees. Is that correct?
Exactly. It’s a business to business scheme which seeks to both protect employees and improve the corporate governance standards of the employer.
You also design retention schemes based around end of service liability. How do they work?
Employers are being turned off paying bonuses. They really want to come up with schemes which reward long-term performance rather than pay out a cash bonus and have the employee leave as soon as he gets paid his bonus. Companies can’t afford to do that anymore. So we work with them on having these sort of back-ended deferred bonus and retention schemes that are based on end of service liability, so the longer you stay with a company the higher your payout will be whenever you leave. The law requires that you need a minimum but obviously you can offer over and above that. For a lot of cases it will be based more on the executives because continuity of business is very important on the executive level.
Is this becoming more popular?
It’s definitely becoming more popular. I wouldn’t say at the moment that there are huge numbers of companies converting into this but it is definitely something that is being more widely accepted. I think given the fact that the regulation hasn’t changed for the past 30 years, companies have just been doing this the same way for a long time. So really a lot of work has to go into education and things like that. You really have to change the culture.
How many clients do you have who protect the end of service benefit?
I can’t disclose the numbers. It’s not a huge number unfortunately but it is definitely growing year on year.
Have you come across any companies that don’t have enough money in the balance sheet to cover their end of service liability?
Yes, I think a lot of them are in that situation. One prospect that we talked to had that amount set up – it wasn’t separated, but they did know what it was and they had a cash account with the employee end of service benefit. Then they got this massive project and they had to use that Dh1 million to help fund that project. We alerted them to the fact that they were severely underfunded and they didn’t have any cash in their balance sheet for their liability. So over time they did set up an account and they started to fill that gap until it was fully funded.
Are you aware of any plans in place to overhaul the gratuity system?
When we talk to companies they say there has been noise about the government looking to change the regulation and we heard that something is going to be done imminently. It is difficult for us to speculate because no one really knows what discussions are happening. I think the key thing is that there are measures companies can do now to improve the corporate governance standards that they have around end of services schemes. Obviously changes would be welcome, especially ones which would help protect employees.
Follow The National’s Business section on Twitter