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Thu 24 Sep 2009 07:17 AM

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Retirement prospects

Callum Burns-Green on why GCC employers are starting to look at retirement plans for staff.

It may not be so obvious just now, but a transformation is starting to take hold in the Gulf over the way expatriates are preparing for their financial future.

Of even greater interest, is that employers – not their employees – are at the forefront of reform.

Over the past decade the Middle East has experienced a wholesale demographic makeover with the unprecedented inflow of expatriate workers. Yet while economic growth and diversification at unprecedented rates (until recently) has kept the need for expatriate skills and experience high, local firms alert to recruitment and on-boarding costs are leaning more towards keeping expatriates for longer.

Take oil and gas, where management is more interested in developing talent organically through training and development (regardless of nationality) and retaining employees over longer periods.

For those on the young side of thirty five a few more years away from home might not be too much of a concern. But others are starting to realise that the potential gap between their pre-and post-retirement income levels is widening.

Many are blocked from participating in home country social security plans while working abroad, and host country social security plans, in the Gulf, are off-limits for them as well. Few expatriates remain in home country employer sponsored retirement plans and often have previously earned benefits in such plans frozen when they leave.

Furthermore, the end-of-service benefit or gratuity – often cited in the past by employers in the Gulf as a substitute to a retirement benefit, is judged to hold minimal value with employees and its security is tied to the health of the company.

In Western economies, as an example, it is a general rule of thumb that retirees should target approximately two-thirds of their final year’s income if they are to maintain a similar standard of living in retirement.

If we apply this rule in the Gulf, with a set of market-related assumptions, employees who remain with employers for reasonable periods of time might expect closer to 10% of their gross salary (made up of 60% basic salary and 40% allowances) with the end-of-service benefit. The gap left to fill is considerable.

Those who have explored the notion of creating an individual retirement plan here (or offshore) often find the providers too few and setup costs too high.

But a change in the retirement landscape is under way. From virtually nil at the start of the decade, the number of companies starting to offer retirement savings plans to their employees is climbing slowly but steadily. According to Mercer’s 2008/2009 Total Remuneration Survey 13% of companies offered retirement plans, nearly double the number from the year before.

Under current laws, retirement plans can usually be set up in two ways (subject to local labor laws): where the plan benefit is paid on top of the statutory end of service benefit, or where the plan benefit offsets the statutory benefit. In this latter case, only plan benefits that are attributable to employer-paid contributions can be offset against statutory end-of-service benefits.

Employers and their workforces are starting to see these plans as both flexible and versatile. Benefits are paid when the member leaves their employer rather than only at retirement and they are being added to firms’ human capital toolkits to help attract and retain talent, keep and reward more experienced or older employees (especially in industries with long learning curves), and even to part-fund the end-of-service benefit liabilities and reduce potential cash outlays from work force reductions.

At a time of uncertainty we’ve helped a number of companies develop business cases for establishing a plan aimed at potentially reducing their long-term cash outlay – either by reducing turnover or by using investment returns to offset part of their accumulated end-of-service benefit liability.

Employees get low-cost access to quality (and vetted) investments through a retirement plan, and many use it as a top-up personal savings plan. The fact that their retirement savings benefit are held away from their employer - and untouchable by an employer’s creditors – are seen by many as an added bonus.

The steps to setting up a retirement plan that fit company and employee objectives can be guided by an experienced consultant. Creating a “best fit” plan that meets company objectives can be a challenge when different parts of the organization have different views and conflicting goals. Discussions between stakeholders, therefore, need to be structured and focused on the optimal design from a range of perspectives covering the employer, employee, best practice and the acceptable level of cost.

Implementation is usually contingent on the design elements and as different plan designs lead to different providers being more suitable than others, it is important to understand all factors involved in selecting the right provider. By breaking down the steps and asking key questions relating to all elements of a plan design and the selection of the right provider, companies can maximize the value of their plan while maintaining a close linkage to business strategy and human resource objectives.

With many GCC expatriates unwilling to “go back home” because the economic situation there might be worse than what they have now, they are beginning to re-calibrate the long-term value proposition of staying on in the Gulf. And this time, their employers are part of the conversation.

Callum Burns-Green is head of Employee Benefits for Mercer in the Middle East. The views expressed in this article are his own.

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