More companies in the Middle East are providing end-of-service benefits (ESB) to employees as countries move to make the gratuity payment model mandatory, according to a new survey by global advisory company WTW and professional services provider Equiom.
About 78 per cent of companies polled in the survey now pay ESB to staff, saying it was required by law in their countries of operation.
Companies that do not yet provide ESB said it was either not mandatory or they provided retirement and savings benefits in lieu of the payment.
“Ninety per cent of companies provide employees with ESB upon termination, while 10 per cent said they provide the benefit at more frequent intervals, for instance, annually,” WTW said.
The survey polled 121 multinational and domestic organisations in the oil and gas, banking and finance, manufacturing, and pharmaceuticals sectors.
End-of-service gratuities are lump-sum payments that all employed residents are entitled to after completing at least one year of service. Gratuity payments are covered by UAE labour law and the sum depends on an employee’s length of service and basic salary.
Sheikh Hamdan bin Mohammed, Crown Prince of Dubai, launched a new savings pension plan for non-Emirati employees working in the Dubai government, which took effect on July 1, with the scope of expanding it into the private sector at a later date.
Foreign employees working in Dubai’s public sector are enrolled in the pension scheme by default. The employer will contribute the total end-of-service gratuity to the plan from the date of joining, without including the financial dues for previous years of service.
On average, 45 per cent of companies in the Middle East expect employees to stay for five to 10 years, while 23 per cent expect them to stay for 10 years or longer, the WTW survey found.
“The implications of longer expected future service combined with higher inflation and rising salary costs is likely to signify a sharp increase in future ESB liabilities,” according to WTW.
About 66 per cent of companies in the region provide enhanced ESB to all employees, WTW said.
A minority of companies only offer enhanced ESB to specific categories of employees, such as local non-nationals, international assignees and top management.
Forty-seven per cent of companies cited “industry best practice” as the most common reason for enhancing benefits this year, followed by 44 per cent that chose “retention of key talent” and 38 per cent that highlighted “local best practice”.
Companies provide enhanced ESB in a variety of situations: 84 per cent offer it when an employee retires, 81 per cent when staff are made redundant or when a worker dies, 63 per cent for resignations and 44 per cent during termination, the survey said.
Companies that provide enhanced ESB through the defined benefit formula most commonly use an employee’s length of service to determine the pay out, according to the survey. Other factors include job grade, equalisation of benefits between countries and early retirement.
Offering a separate defined contribution (DC) pension or long-term savings plan remains the most popular way of enhancing ESB.
About 24 per cent of companies in the region offer a DC retirement or long-term savings plan to their employees.
Long-term savings or retirement plans are most frequently offered in Egypt, Qatar, Kuwait, the UAE and Turkey, according to WTW.
The Dubai International Financial Centre was the first entity in the UAE to set up a new gratuity system when it introduced the DIFC Employee Workplace Savings (Dews) plan in February 2020, offering ESB to people working within the financial centre.
The scheme allows participants to choose a plan that is in line with the type of investment risk they are willing to take.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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