Protection of UAE end of service gratuity ‘changing slowly’

Financial services experts say companies should safeguard end-of-service benefits as a managed asset to ensure employees do not lose out.

Editorials in The National have long argued for contributory pension schemes as an alternative, similar to the provident funds common in Asia. Duncan Chard for the National

It's more than three years since The National reported on the collapse of the Hastie Group, the UAE subsidiary of an Australian contractor forced to close suddenly in the aftermath of the global financial crisis and the Dubai real estate crash.

About 250 expatriate workers ended up without their salaries and end-of-service gratuity as the company’s remaining cash was clawed back to Australia in its final moments. This was one of the few cases of such losses to staff reported at the time. But there were many others that went unreported in the Great Recession as the UAE real estate boom went bust.

In many countries, staff would at least have had the equivalent of their end-of-service money rolled up into a third-party provident or pension fund. That would have helped those laid off by the Hastie Group. But little has changed since then, although the authorities are said to be actively looking at how to reform the end-of -service gratuity.

Editorials in The National have long argued for contributory pension schemes as an alternative, similar to the provident funds common in Asia. Here a small amount per employee is put aside each month and taken off the company balance sheet into either a private fund or a government entity.

This money is then invested into either a basket of financial products or infrastructure projects, and later withdrawn when required.

Members of the UAE financial services community continue to campaign for a change.

“Things are changing but at a very slow pace,” says Lynda O’Mahoney of Capita Asset Services, a global pension fund manager. “The majority of local companies should be addressing these issues and they are not.”

Last month the law firm Stephenson Harwood Middle East staged a seminar attended by 120 finance professionals at the Dubai International Financial Centre entitled “Gratuity – a managed asset or a black hole?”

So how safe is that “managed asset” as an alternative? Could the new scheme not also end up as a black hole and the members the victim of another kind of financial scam?

Emphatically “no” says Simon Fielder, the managing director of Ryland Gray, a local administrator of provident schemes for local blue-chip firms. “Currently all the terminal gratuity of every staff member is invested in one single company, ie their employer. Now that is a risk.”

A few of the UAE’s most favoured employers already have such schemes, for example: Emirates Group, Jumeirah Group, Johnson & Johnson, Hilton Hotels and Serco.

“The objective of our approach is to take that cash and liability off the employer’s balance sheet by placing it into trust, specifically an employee benefit trust,” explains Mr Fielder, who has been a pioneer in the sector for the past 15 years. “This is a similar vehicle to a 401k or work-based pension plan. None of that is at any sort of risk. Where risk comes in, is in the investment management of the funds.”

Mr Fielder says the employer and the trustee have to set the parameters of risk, return and time within which the fund manager is expected, or even contracted, to comply. “There is no need to expose this trust fund to excessive risk,” he adds.

In addition, for the staff paying their end-of-service gratuity into these schemes there is no risk as the employers are still liable in the unlikely event that the fund fails to meet the legal obligation that the employer still carries to pay the end-of-service benefit.

Enlightened employers have realised the benefit of offering a better solution to their staff: a motivational benefit and a way of moving what can become a considerable liability off their balance sheet.

“Finance directors are usually very shocked when we show them models projecting this accumulated liability,” says Ms O’Mahoney. “For smaller companies this liability can be the difference between survival and business failure.

“Imagine if a small company’s highly-paid finance director is killed in an accident on the Sheikh Zayed Road and it suddenly has to find US$500,000 to pay out. It’s in a much better position if a trust has to pay this money.”

Philip Goodchild, a pensions partner at Stephenson Harwood, says provident schemes protect both companies and employees.

“There is always funding available for end-of-service commitments and redundancies,” he explains. “It’s good for recruitment as a staff incentive.”

How much better it would have been for the Hastie Group’s 250 workers if their end-of-service money had been held in such a trust. But how long will it be before this becomes mandatory in the UAE with a structure covering all expatriates?

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