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Big potential in gratuity funds rejig, says report.

By Santhosh V. Perumal/Business Reporter

The Gulf employers' end of service benefits (EOSB) to employees is estimated to grow more than five-fold to $75bn by 2020; thus requiring a critical restructuring, a move that could offer vast potential for fund managers, pension funds, life insurers and independent financial advisers.

"It is estimated that the combined liabilities of all GCC (Gulf Co-operation Council) employers for EOSB is around $16bn and is projected to increase to $75bn by 2020," said a new report issued by strategic research company, Insight Discovery.

Examining employers' EOSB obligations, payments and balance sheet provisions, the report 'Beyond the End of Service Benefit', outlined the issues faced by many GCC companies.

In spite of legal provisions, the present EOSB system faces numerous challenges including the effective safeguarding of employee interests, according to the report.

"Most expatriate employees in the GCC receive a one-off lump sum payment in the form of EOSB or gratuity as opposed to the occupational pension schemes of many other countries," Nigel Sillitoe, chief executive officer, Insight Discovery, said.

However, it observed an increasing momentum for desired change as some companies adopt innovative schemes to attract and retain key talent along with maintaining healthy

balance sheets.

"If any regulatory framework is drawn, it will present itself with tremendous opportunities for fund managers, pension solution providers, life insurance companies and independent financial

advisers," the report said.

Balance sheets could be "adversely" affected if large EOSB payments are not allocated and planned properly, particularly in situations such as high numbers of employees departing at the same time, it said.

It found that EOSB payments and allocations are seen to be used by many companies for other business purposes and not to safeguard the employees' legal entitlement.

"Unlike other markets where there is a huge move towards defined contribution schemes, the situation in the GCC is not under-funding; it's rather non-funding," the report said.

The EOSB system may be looked upon by some as the GCC version of pension schemes in other countries, but it lacks the sophistication and transparency of provident and pension programmes of other countries, and more needs to be done in this context, the report added.

"If the EOSB system is restructured innovatively, it could result in more employer sponsored schemes offering greater benefits through economies of scale and could serve as a low-cost vehicle for employee savings and

investment," it said.

"An important aspect of GCC countries' continued growth is the need for expatriate labour. However, each country competes to employ and retain a labour force which is increasingly demanding greater employee rights and benefits offered by competing jurisdictions for their talent," Damian Hitchen, director, Falcon Private Bank, said, adding there are interesting cases of GCC companies adopting creative ways within the current system for the greater benefit of both employers and employees.

Gulf Times Newspaper 2012

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Publication:Gulf Times (Doha, Qatar)
Date:Jul 3, 2012
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