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Thu 12 Nov 2009 11:40 AM

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GCC gratuity bills seen rising 500% in next decade

Research says end of service payments to make up 63% of Saudi wage bill by 2020.

GCC gratuity bills seen rising 500% in next decade
GRATUITY PAYMENTS: Watson Wyatt predicts a huge surge in payments over the next 10-15 years in the Gulf region.

Gulf organisations could see liabilities for gratuities, or end-of-service benefits (ESB), increase fivefold over the next 10-15 years, according to new research by consultancy Watson Wyatt.

Combined ESB liabilities in the Gulf region is currently estimated to be around $15bn said the firm, which is specialised in managing employee benefit programmes.

"In Saudi Arabia the ESB is estimated to balloon to 63 percent of the wage bill by 2020, from around $7bn to $41bn," said senior consultant Michael Brough.

Typically, ESBs are unfunded in the region with only a minority of companies having a separate funding vehicle in place.

Most organisations pay the ESB payments from cash reserves when they become due.

But the larger than usual number of employee layoffs caused by the economic downturn has forced organisations to pay out more ESB than usual at a time when cash flows have been depressed.

This has prompted organisations to review how they fund for ESB in future, the company said.

ESB grow over time and are calculated based on the length of service of an employee and often their final wages at the time of their leaving. The statutory amount of ESB differs from country to country in the GCC, with a minority of countries having a cap applying.

The Gulf region is known for its high staff turnover, research in 2008 showing an estimated turnover in the UAE of around 21 percent.

If turnover reduces with employees choosing to stay longer in one job, the size of ESB liabilities will increase.

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