Companies in the UAE should be better prepared to issue end of service (EOS) payments to employees who resign or are terminated from their position, according to experts at global financial planning firm Guardian Wealth Management.

While the timing of staff resignations and/or terminations is uncertain, the value of their EOS liabilities can easily be predicted by an employer, said Joseph Borders, financial planner at Guardian Wealth Management.

The attitude of some businesses to gratuity varies between choosing to cover payments out of cash funds as they arise, to setting aside an amount at the end of each year in anticipation of future costs, he explained.

“The first method is the most expensive and is out of line with UAE Commercial Companies Law because, as of last year, International Financial Reporting Standards (IFRS) must be fully implemented (specifically, IAS 19 applies to this part of the business),” added Borders.

“The second method is better than nothing, however, setting an amount aside each year implies that the funds are kept in an unproductive account instead of generating modest returns.”

Instead, Borders advises that companies should calculate the present value of gratuity liabilities and set this amount aside to be invested in a bespoke portfolio of low-risk assets, with a respected custodian in a well-regulated jurisdiction.

Stable, reliable growth will greatly discount, if not eliminate, the need to spend additional funds on EOS commitments and protect cash/working capital against unforeseen changes in the market.

“Guardian Wealth Management can take the assets and liability off balance sheets, which may immediately improve performance ratios and KPIs,” said Borders, adding that the goal is to effectively reduce a company’s future EOS expenses to zero, or as close as possible.

“Gratuity funds are run through a third-party custodian in a safe jurisdiction, thus removing the risks of dealing in emerging market financial systems and increasing internal controls by ensuring that none of the parties involved can misuse the assets.

“Using a third-party trustee ensures that funds earmarked for gratuities cannot be misused for any other purpose. Guardian Wealth Management will not have direct access to cash other than to monitor investment performance. Only authorized signatories from the client company will be permitted to request withdrawals for gratuity payments,” he added.

The benefits of planning ahead for EOS payments oppose to doing nothing and covering costs with cash funds are clear.

“If a company experiences a contractionary phase, it can comfortably pay gratuities without affecting operations. In an expansionary phase, no additional funding will be required until new hires become eligible for benefits,” said Borders.

Given the transitory nature of the UAE’s expatriate workforce, Borders suggests companies consider a strategy to make gratuity payments work as a means of retaining employees and encourage loyalty among staff instead of rewarding service.

“In the UAE staff turnover can be high with sourcing, hiring, and training of talent often proving expensive. An opportunity exists to use gratuities as a retention tool,” said Borders, who suggested making EOS payments clearly visible to employees each month.

“If companies simply add one extra line to pay slips to state, for example, ‘current end of service gratuity’, employees would be able to watch that figure grow month on month and begin to feel as if they are invested personally in the company.

“The continued growth of this amount could help to create a psychological barrier against resignation as doing so would mean starting from zero at another firm.”

Another option could see employees opt to make contributions to their end of service payment out of their monthly salary.

“A 10 per cent of base pay, for example, would greatly increase the feeling of loyalty while salary expenses would be reduced, and employee loyalty would increase,” he added. – TradeArabia News Service