Zurich International Life: The expat pensions gap – Peter Cox

Compared with most established markets, the Middle East is ambivalent towards pensions. The region relies on the end-of-service gratuity to compensate for the lack of a corporate retirement savings culture. What impact is this having on expatriates? And are the attitudes of multinationals with subsidiaries in the region finally changing? Finance Director Europe gets the answers from Peter Cox, head of international pensions at Zurich International Life.

It seems like a reasonable expectation: an expatriate that works for a multinational wants their benefits to be the same wherever they work. After all, why should an employee of a company headquartered in Europe, have their hopes of retiring in comfort damaged by moving to an emerging market?

Unfortunately, in today's global economy, benefits are not always harmonised as well as they should be. In the past, when working in emerging markets was transient, this might not have mattered so much. But now, with many expatriates staying for years and many hoping to retire overseas, a proper pensions and savings plan has become crucial.

"When employees move overseas they want to see their benefits mirror home-country provision," says Peter Cox, head of international pensions at Zurich International Life. "Expats moving from mature markets have an expectation of a corporate savings and retirement plan so are usually surprised to find that pension provision is not a high priority in the Middle East."

Tax legislation has held things back. "In the UAE for example, savings are not tax incentivised because expats don't pay taxes - a big difference to most places in Europe," explains Cox.

The key differential between the Middle East and Europe is the end-of-service gratuity. Legislation underpinning the gratuity goes back to the 1980s when it was designed to compensate expat workers for the fact that no government scheme existed for them to build up basic retirement savings. The amount of gratuity payment depends on the employee's salary and length of service at the time they leave employment. It is therefore a defined benefit.

A pensions shortfall

For years, the majority of employers in the Middle East have viewed the gratuity as an alternative to the provision of a corporate retirement plan. But in some jurisdictions, such as the UAE, the gratuity is capped at a maximum of two year's basic salary, hardly a life-changing sum for someone hoping to retire in comfort.

"We commissioned YouGov in July to undertake a survey in the UAE and found that 83% of individuals don't believe the gratuity provides enough to cover retirement expenses," Cox says. "Looking specifically at responses from Westerners, it was actually 91%. So from an individual's point of view, gratuity entitlement is not enough to settle their retirement expenses; it's not enough to live on."

Another side of the problem lies with the chief financial officer - the funding of this defined benefit liability. In the Middle East, there is no legal obligation for a company to set aside the funds required to pay out their employees' gratuity liabilities. But this liability is growing fast.

An unfunded liability

In the UAE, the average length of service has risen from four years and seven months to six years and ten months between 2008 and 2014, while the average salary has gone up from AED10,120 ($2,755) to AED14,380 ($3,910) a month over the same period. This increase in service and salary equates to a 140% increase in the gratuity entitlement.

Yet, these increasing liabilities largely remain unfunded in the region. In a recent survey from Towers Watson, 84% of companies indicated they settle employees' benefits as they become due from company assets. This is a concern as often companies have to pay out the gratuity obligation at a time when they can least afford it, such as a headcount restructure to reduce overheads.

Employees in the region are also calling out for change. In Zurich's YouGov survey, almost two thirds of respondents (58%) said that they would be more inclined to stay with their current employer or join another company if they were provided with a corporate retirement plan. The figure among Western expat employees is even higher at 71%.

"Our research clearly shows that employees want their employers to provide a retirement-savings plan as the gratuity is not an adequate retirement-savings vehicle. Employers that listen to this demand will find they are rewarded with greater loyalty," says Cox.

Sharpening a blunt retention tool

The good news is that attitudes are starting to change. The Middle East, and particularly the UAE and Qatar, is undergoing an economic recovery boosted by Qatar's 2022 FIFA World Cup and the 2020 Dubai Expo. This is leading many companies to rethink their benefits strategy to ensure they can recruit and retain the best talent.

"Employers in the region are beginning to realise that simply using salary is a blunt retention tool, which provides no real control over the benefit once it's paid. What you need is a way of rewarding an employee while retaining some control. This is where pension plans can play a part," Cox says.

"You can incorporate the existing gratuity obligation within a more structured savings vehicle that can act as a retirement fund. Then you could add a contribution structure; a matching basis or vesting rules that are dependent on the years of service completed, which makes it a more effective retention tool."

Establish a solution

Setting up a proper pension scheme creates challenges for HR departments, and global compensation and benefits managers. So what can be done?

Using funds that exist within the country of work is problematic as local pension schemes often lack portability, explains Cox. For expats that spend a considerable proportion of their time moving around the world, it creates an awkward legacy of deferred pension options spread around the globe.

"Many expats would be building up benefits in a country and a currency different from where they intend to retire, and there might also be issues around how they access their benefits within a local arrangement."

For Cox, the solution is to have an international pension plan; a scheme that can overcome the complex differences in tax, local employment law and pension legislation.

"What international pension plans do is enable HR to have a globally consistent approach to benefits," Cox says. "For career expats, it simply doesn't make sense to put them in local plans. Setting an IPP means employees can move from location to location while their pension benefits remain in one place. It's far more convenient."

For employers, ensuring the welfare of their employees is important wherever they work. But in the Middle East, with businesses thriving and further economic growth on the horizon, getting the right pensions strategy in place, is only going to get more important.

Peter Cox, head of international pensions at Zurich International Life.
Working in the Middle East to get the right pension plans in place is only going to get more important.