End-of-Service Benefits in Saudi Arabia are compensations entitled to employees upon the termination of their service. These benefits are calculated based on the employee’s final salary and years of service in accordance with the Social Security Law. The rules and standards related to End-of-Service Benefits are outlined in the Saudi Labor Law. Below are the key details:

Eligibility Conditions for End-of-Service Benefits

1. Resignation:

   • If an employee resigns after serving between two and five years, they are entitled to one-third of the End-of-Service Benefits.

   • If the resignation occurs after five to ten years, the employee receives two-thirds of the benefits.

   • If the resignation comes after more than ten years of service, the employee is entitled to the full amount of the End of Service Benefits.

2. Contract Termination:
   If the contract between the employee and the employer ends without renewal, the employee is entitled to the full End-of-Service Benefits.

3. Dismissal for Legitimate Reasons:
   If the employee is dismissed for reasons justified by the labor law, they may not be eligible for End-of-Service Benefits.

How to Calculate End-of-Service Benefits

For the first five years of service:

• Half a month’s salary is calculated for each year of service.

For any years beyond the first five:

• A full month’s salary is calculated for each year of service beyond the fifth year.

Example

If an employee’s final salary is SAR 10,000 and they worked for 7 years:

• First 5 years: 5 × SAR 5,000 (half of the monthly salary) = SAR 25,000

• Following 2 years: 2 × SAR 10,000 (full salary) = SAR 20,000

• Total End-of-Service Benefits: SAR 25,000 + SAR 20,000 = SAR 45,000

Actuarial Valuation of End-of-Service Benefits

The actuarial valuation of End-of-Service Benefits involves using statistical and mathematical techniques to estimate the future financial obligations associated with these benefits. This process provides an accurate picture of the potential costs and ensures that financial resources are available when obligations become due. It helps companies determine their long-term liabilities based on several factors such as years of service, salaries, turnover rates, and other demographic variables.

Elements of Actuarial Valuation

1. Demographic Data:

   • Includes age, gender, and employee joining dates.

2. Financial Data:

   • Includes current salaries, projected salary increases, and bonus policies.

3. Discount Rates:

   • Used to estimate the present value of future liabilities based on interest rates.

4. Turnover Rates:

   • Estimate the proportion of employees expected to leave before retirement or before becoming eligible for End-of-Service Benefits.

5. Actuarial Assumptions:

   • Include assumptions about economic growth, inflation, and future salary increments.

Importance of Actuarial Valuation

• Financial Planning: Provides a clear vision of future financial commitments and supports strategic financial planning.

• Legal Compliance: Ensures that the company adheres to laws and regulations related to End-of-Service Benefits.

• Financial Reporting: Facilitates the preparation of accurate and transparent financial statements that reflect the company’s financial status and outstanding obligations.

Steps of the Actuarial Valuation

1. Data Collection: Gather all relevant employee and salary data.

2. Assumption Setting: Define necessary demographic and financial assumptions for the calculations.

3. Model Application: Use mathematical and statistical models to estimate obligations.

4. Results Analysis: Analyze outcomes and provide necessary reports to management.

In conclusion, comprehensive financial auditing procedures, combined with the tools and standards discussed, can help provide accurate and reliable estimates of End-of-Service Benefits. This significantly enhances an organization’s ability to engage in sound financial planning.