How A Corporate Savings Plan Helps Businesses Remain Competitive
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A strong employee benefits package is vital to remain competitive in the UAE business environment. It not only helps attract the most talented employees but can help your business hang on to them as well. The ultimate challenge, though, is delivering this solution while keeping costs under control.
The problem for many companies is profit. Not the making of it but relying on it to pay for their multitude of benefit schemes. This can cause a number of problems.
So, let me take a few minutes of your time to explore in more detail why this type of business strategy is unsustainable, why a corporate savings plan can help ease the pain, and how you can start to implement one.
The ticking gratuity time bomb
Most companies in the UAE do not save money into a separate pot to pay for their benefits. Instead they rely on yearly profits to cover the cost. We know this because a wealth of surveys repeatedly reveal the problem, especially when it comes to end of service benefits (EoSB). A survey from 2017 found that 65% of 220 companies in the UAE account for these benefits in their local books. The story was similar in a survey the year before in which 83% of companies admitted they didn’t set any assets aside to pay for EoSB. This is a problem because in general the highest EoSB pay-out is going to come at times of financial stress, such as when a company loses a big contract and needs to cut staff numbers to save money.
Not all companies fall into this trap. Some do set aside money to pay for these liabilities. But many don’t invest this money, preferring instead to leave it as a bank deposit in cash. A 2017 study found this was the case with 37% of those surveyed. This is perfectly understandable because cash is a safe investment, but it’s not necessarily advisable.
Why? In short, because most cash accounts accrue minimal interest. Salaries rise, inflation rises, the cost of benefits rise, but that pot of money stays almost the same. So when the times comes to pay out, there is a shortfall. Once again the company turns to its profits.
How can the gratuity bomb be diffused? Put aside a pot of money into a corporate savings plan that invests wisely. I suggest looking at fixed interest or equity options. Interest rates in the UAE have been 1% for the majority of the last 10 years, only recently rising. The vast majority of cash saving plans will offer less than this. If we look at the longer term (over 30 years), the UK one-month Treasury Bills annual rate of return would be 4.8%.
Put another way, US$1 would have grown to $4. With global equities, the story is very different. Yes, year-on-year the returns are much more variable -and some years there are bound to be losses- but by spreading the risk some good long-term gains can be made.
As an example, over 30 years by spreading your risk around the world with an option such as the MSCI World equity index, you will have made 8.6% per year over the past decade ($1 would have grown to $11). Much better. Even better would have been investing in Dimensional global large value index with a rate of 10.5% ($1 would have grown to $18. Performance is back tested.)
Investment through other means is always worth considering in this scenario, and consideration of Dimensional Fund Advisors (DFA) is a wise thing to do. Currently in the UAE, the AES team are the only ones permitted to use this exceptional investment medium. Dimensional investing is oriented towards accessing higher return portfolios in a manner that is affordable to the investors and their clients. This combination of a long-term, strategic investment decision and lower fees is the key draw, and an enticing one at that. It is known amongst businesspeople and entrepreneurs that UAE long-term savings can be difficult and costly where charges are concerned– in some cases to the tune of 5% per annum. By comparison, AES charge only 1.25%. It goes without saying that this is a significant difference.
The smash and grab workers
I’ve called them ‘smash and grab’ because those workers who stay only a short amount of time, but receive a large amount in benefits, are doing exactly this. Intentionally or not, they are benefiting from a system that doesn’t pay to hang around.
Losing employees is also costly. A report by the US Bureau of Labor Statistics estimates that the average cost of replacing an employee stands at $13,996. That’s a lot, but even more if your staff turnover is high, which in the UAE it generally is. The Gulf region may have great appeal for workers –the World Economic Forum’s Global Competitiveness Report 2016–2017 puts it in 16th place out of 138 countries– but it relies heavily on expatriate labour, which can be volatile.
The figures are clear. A 2016 survey found that of 748 employees surveyed in the Middle East, 38% intended to leave their employer in the next two years. Even back in 2013, a poll by Bayt.com, Employee Retention in the MENA Workplace, found that 60.2% of those surveyed said that, compared to previous generations, employee retention in the Middle East was lower. So this problem is clearly not a passing one.
Having a corporate savings plan can actually help companies retain staff. If invested right then there will be excess returns. Sure, this can be kept by the company but I would suggest it’s better spent by being reinvested into staff in some way. Excess savings returns can be used to offer new types of benefits, especially ones that are attractive over the long-term, as well as training programs.
How can smash and grab workers be nullified? Once a savings plan is in place and making good returns, reinvest the money into benefits that have vesting rights. That is, a benefit that only pays out if the staff member remains at the company for three to five years. This could be a bonus, a month-long sabbatical, or share rights, for example.
Whatever you choose, it’s a win-win for your company. The money remains in the savings pot for longer, accruing even more returns, and the employee stays so that’s a reduced turnover loss. If the money is used to pay for a higher salary or commission instead, then the gratuity liability increases and the company loses the savings.
Rewarding long-term thinkers
While on the topic of improving staff attraction and retention, as well as EoSB, it pays to take a look at how a savings plan will be directly beneficial to employees too. Traditional company pensions like those received by US and European counterparts are few and far between in the UAE. Of the 185 companies that responded to a 2017 survey, just 25 of them enhanced the offering with a defined contribution long-term savings plan.
This leaves those workers who do have spare cash to save turning to private investments instead. But there are potential pitfalls here. As mentioned above, many workers in the UAE are expats who are likely to invest in offshore savings plans. Some of the most common ones are not entirely transparent with their fee structure –such as hidden eye-watering early surrender charges– or are inflexible when it comes to length of investment.
Indeed, AES International looked at ten of the most popular traditional offshore funds used by expatriates and found something quite startling: Only one of the funds could be classed as good value.
Part of the problem is a lack of knowledge about the types of investment available. As an example, the average fund charges worldwide are high, although at around 1.16% they don’t sound that high to an inexperienced investor. Invest $10,000 and $2,607 will be lost in fees over the next decade. But some of the best performing funds are those that track indexes, such as Vanguard’s Total World Stock exchange-traded fund. This charges 0.10%, so over ten years that $10,000 will cost just $236. It’s worth noting that there would also normally be additional charges to advise on setting up and administering the corporate savings plan.
How can long-term thinkers be helped? If the company has already taken the time to find a good savings fund, with low fees and good returns, then there is nothing to stop the employee from investing too. This low-cost environment is a perfect way to offer a cheap and simple benefit to workers. In fact, a 2010 research article published in the journal of Finance found that of 44,649 employees in a French bank, a whopping 91% of them invested in the plan when it became available.
Even for those currently not looking to invest long-term, the simple fact the option exists may encourage such behaviour and increase employees’ financial stability. This is in itself beneficial to a company because financial worries can seriously affect performance. Research suggests employees with higher levels of financial worry have more days off work than those with no money problems. And stressed workers are costly for employers: for example, according to UK government statistics, the annual cost of work-related stress, anxiety and depression in Great Britain for 2014–15 was GBP 5.2bn.
Ultimately, the net result of all this is that a corporate savings plan done right will actually save your company money. Its long-term interest will likely top inflation. Its ability to be used flexibly to enhance benefits, or be used as one in its own right, can lower costs, through lower staff turnover and less need to dip into profits.
In fact, there are so many benefits to setting up a well-thought-out corporate savings plan that I’m often astounded at the number of businesses that don’t. If this speaks to you then the time is now to put things right. Opt for low-charging plans, opt for flexibility, and opt for taking advice. Seek out reputable financial planners, but just as with saving funds, avoid the ones with high fees or excessive commission. It really does pay to save.