END OF SERVICE BENEFITSJuly 5, 2016
Companies in the GCC are generally required by law to pay an amount to employees who are leaving the company and are not citizens of the country in which they are working in. This is in lieu of the government provided pension that is paid to citizens on retirement.
In most companies the End of Service Benefit (EOSB) is accrued on the balance sheet as a liability, however is used as part of the company’s normal working capital. EOSB value that is not adequately ring-fenced is at risk should a company be sold or liquidated. During times of recession, when cash resources are tight, a company may not be able to afford to lay off its employees. As the subsequent EOSB payment cannot be funded, the company’s resources are further drained at a time when cost control is essential.
BENEFITS OF USING AN EBT TO HOLD AND MANAGE CASH RELATING TO EOSB
Setting aside all or a part of the EOSB accrued into an Employee Benefit Trust (EBT) will enable a company to meet its EOSB debts as they fall due and retain a pool of cash / assets against which to draw on in times when a higher number of leavers are anticipated. EBTs are a simple and cost effective way of holding and managing cash and assets relating to EOSB payments.
Benefits of using an EBT:
- Assets are held off balance sheet therefore employees gain comfort knowing that the value accruing for their benefit has been ring-fenced away from the company’s books and potential creditors.
- The company can hedge the cost of funding the EOSB liability so assets can be managed to better returns.
- Having professional governance in place so that both the company and its employees can take comfort in dealing with a regulated and experienced trustee.
- The company has powers under the trust deed that can be agreed to retain some control, for example, the power to direct investment.
- Being a tax neutral trustee jurisdiction, cash and investments held in the trust are not subject to capital gains taxes or income taxes on the growth in value over time.
- Acts as an employee retention and motivation tool to remain competitive and attract the best employees. An EOSB plan that delivers a guaranteed value is a key factor in employment decisions.
- The terms of the trust deed and related documents can be tailored to suit each company’s requirements and one EBT can be used to manage more than one type of employee incentive plan, for example an occupational savings scheme or deferred bonus scheme.
OUR SERVICES AND TECHNOLOGY
We are experienced in setting up and managing EBTs for the use of EOSB plans and Classic Awards is our online system that we utilise and offer to manage EBTs of this nature.
The system enables us to provide clients with transparent, up to date information on asset values compared to contribution values, historic data and access to key documents and plan information 24/7. For more information view our flyer or watch our demonstration video.