Here’s a tip on end of service gratuity (EOSG)
Opinion 4 minute read

Here’s a tip on end of service gratuity (EOSG)

28 April 2022

Retirement and end-of-service planning in the Middle East is coming of age, and now is the time for employers to prepare to meet their lump sum payment obligations.

Gratuity = a sum of money paid to an employee at the end of a period of employment. ‘An end-of-contract gratuity of 20% of the total pay received’ (Oxford dictionary).

Employers in the Middle East are legally required to pay an EOSG, to all workers at the end of their contract, whether at retirement age or not.

The end of service gratuity (EOSG) is traditionally unfunded and simply an actuarial calculation on the employer’s balance sheet. 

The amount that can be accrued by an employee is therefore not particularly generous, and there is normally no facility for employees to accrue additional ‘gratuity’ or any type of individual savings.

An employee with five years’ service leaving on an EOSG-based salary of US$100,000 can expect a lump sum of just US$28,769 (US$69,863 after 10 years), assuming the employer has not gone bankrupt in the meantime and has sufficient cash reserves to settle the liability when it becomes due. A contribution to a funded savings plan of 7.5% per annum with a 5% investment return (assuming the salary had escalated at 3% per annum) would have given a fund of US$48, 215 (US$83,224 after 10 years).

Not enough to retire on but a step in the right direction.

However, in the current economic climate, many companies are struggling to settle their liabilities as they themselves go into liquidation, leaving employees with uncertainty as to when, or possibly if, they will receive their EOSG payments. Redundancies are also a growing concern amid the global downturn and company balance sheets are in a mess.  

Changes in the pensions/savings/EOSG world rarely come quickly and often with pain, delay and teething problems.

Years after rumours first started in the DIFC and with the expected initial pains and delays – not to mention Covid-19 – the DIFC introduced the DIFC Employee Workplace Savings (DEWS) plan in 2020. Effectively, this replaced the unfunded EOSG liability with a funded plan whereby actual contributions are made into a defined contribution savings plan. Employer contributions are paid at a minimum rate of 5.83% of salary over the first five years of employment, rising to a minimum 8.33% thereafter. There is also the ability for employees to add personal contributions to this plan. While DEWS is the default scheme set up by the authorities, it offers limited investment choice and is only available to DIFC employers and their employees. There are, however, regulations which allow employers to opt out into qualifying alternative schemes.

The one potentially contentious issue is what happens to the historical accumulated EOSG. Does this liability remain on the balance sheet of employers? Will employers be encouraged to actively fund ‘off balance sheet’, or will employees be encouraged to accept a cash equivalent transfer of their accrued EOSG? Is it advisable to give up a known defined benefit promise for an unknown investment return?

On 3 February 2020 the FTSE 100 stood at 7,326. Where is it today?

Retirement planning in the Middle East is coming of age. DIFC took the plunge and it is expected other financial centres in the UAE and around the Gulf will quickly follow, including on-shore. Employers outside of DIFC should look at what is coming down the highway and prepare.

There are several options available to employers:

(a) Prepare to take the EOSG liability off the balance sheet and into an employee trust. This can be done all at once or on a phased basis. With appropriate ongoing contributions driven by actuarial valuations and suitable investment advice, this fund should meet future liabilities.

(b) Set up a voluntary (salary deduction) savings plan for staff in advance of legislation requiring employer funding to replace EOSG.

(c) Set up a Master Trust plan for all employees across various borders and design a scheme with your employee’s wellbeing in mind. This scheme should be portable to another jurisdiction should the employee change location and/or employer.

The main consideration for an employer is to act in advance, to avoid the choice of solutions being limited due to short deadlines. They should complete a search of the market and design something which works for both employer and employee.

Talk to us

With in-country experts in more than 85 jurisdictions and 16 regulated trust offices, including ADGM (Abu Dhabi Global Market), TMF Group is best placed to help employers in their quest to find the right EOSG payment solution for their business.

Find out about our employee benefits services or make an enquiry with us.

Insights and updates delivered to your inbox.

Sign up now